INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000707450001-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 29
• Document Creation Date: December 22, 2016
• Document Release Date: July 14, 2010
• Sequence Number: 1
• Publication Date: March 22, 1985
• Content Type: REPORT

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International
Economic & Energy
Weekly
-Secret
DI IEEW 85-012
22 March 1985
s n = Intelligence
Directorate of
Copy 6 81
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International.
Economic & Energy
Weekly F_~
Synopsis
1 / Perspective-LDC Countertrade: An Increasing Constraint on Free Trade
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11 /LDC Oil: New Countertrade Currency
Energy
International Finance
Global and Regional Developments
National Developments
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19 USSR: Short-Term Outlook for Oil Production
23 Key Developing Countries: Trends in Economic Performance
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Comments and queries regarding this publication are welcome. They may be
directed to Directorate of Intelligenc 25X1
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22 March 1985
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International
Economic & Energy
Weekly
Synopsis
1 Perspective-LDC Countertrade: An Increasing Constraint on Free Trade
The rapid growth of countertrade in recent years raises the question of
whether linked transactions-counterpurchase, barter, clearing accounts, and
offsets-represent a move away from free trade.
11 LDC Oil: New Countertrade Currency
In recent years LDCs have turned increasingly to countertrade in the hopes of
boosting sales of nontraditional exports. Crude oil and petroleum products
have now joined this list and are being bartered in substantial quantities
Production of Soviet crude oil and condensate slipped by 100,000 barrels per
day (b/d) in 1984, its first decline since World War II. If larger production
shortfalls materialize in 1985, the USSR may be unable to satisfy domestic oil
requirements and maintain exports to Eastern Europe without some cutbacks
in exports for hard currency.)
23 Key Developing Countries: Trends in Economic Performance
We estimate that real GDP for 25 key LDCs grew 3.2 percent in 1984 from
near stagnation in 1983.
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DI IEEW 85-012
22 March 1985
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International
Economic & Energy
Weekly
22 March -1,985
Perspective LbC Countertrade: An Increasing Constraint on Free Trade
The rapid growth of countertrade in recent years raises the question of
whether linked transactions-counterpurchase, barter, clearing accounts, and
offsets-represent a move away from free trade. Much of this increased trade
reciprocity reflects the private sector's efforts to adapt to LDC restrictions on
trade, including foreign exchange controls, import limits, and cartel pricing
agreements. For their part, Third World governments are also turning to
countertrade to finance imports and expand exports in the face of foreign
exchange shortages and rising debt service payments. In addition to balancing
trade on a transaction-by-transaction basis, this policy aids some governments
in discouraging imports, disguising export subsidies or dumping, and covertly
discounting prices on certain commodities.
Historically, these practices have reduced trade and increased inefficiency. In
the 1930s rigid bilateral trade agreements in Europe practically brought trade
growth to a standstill. Modern clearing account agreements within Eastern
Europe have also slowed trade expansion; intra-CEMA trade (excluding the
USSR) as a share 'of world trade shrank by one-third between 1960 and 1980.
Certain industries such as petrochemicals, which expanded as a result of
industrial compensation agreements or "buy-back" deals in the 1970s, are
operating at under 70 percent of capacity. Countertrade adds to distortions by
attempting to balance trade commodity by commodity or transaction by
transaction.
Trade practices that undermine the multilateral free trade system may be
particularly damaging to LDC trade growth. Under GATT a system of trade
rights and preferences was established to put smaller countries on an equal
footing with large countries. Increased dependence on bilateral trade arrange-
ments will give smaller LDCs less leverage with industrial countries and large
multinationals.
Even with the rapid growth in recent years, countertrade still makes up a
relatively small share of world trade. Surveys indicate that some 60 to 70
LDCs and Communist countries have initiated countertrade arrangements.
Even if such deals comprised one-fourth of their total imports, it would equal
just 5 percent of total world trade. Moreover, most LDCs turned to counter-
trade as a temporary measure to bridge liquidity problems or to address trade
difficulties in certain sectors.
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DI IEEW 85-012
22 March 1985
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22 March 1985
On balance, we believe economic recovery in the OECD and renewed growth
in world trade will reduce the pressures for linked transactions. The sharp
increase in US imports has already given LDC exports a big boost. Neverthe-
less, countertrade warrants continued monitoring. Further growth of this
practice or a shift toward more permanent, comprehensive countertrade
regulations could impede or further distort international trade. Policies tying
investment to trade through offsets or buy-back arrangements could create
greater distortions because of their size and duration.
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OPEC February
Oil Production
Energy
OPEC crude oil production in February rose to 16.8 million b/d, 1.1 million
b/d above January's output and 800,000 b/d above the revised production
ceiling agreed upon last October: Unusually severe winter weather in Europe
during the first two months of the year and 'a cutback in Soviet oil deliveries
contributed to stronger-than-anticipated 'sales by OPEC members. Saudi
output jumped 500,000 b/d, primarily to replenish crude reserves held outside
the kingdom. Heavy demand in February led to sales. of an estimated 15
million barrels from the Saudi offshore stockpiles: Nigerian production rose
300,000 b/d following a voluntary slowdown for the January'OPEC meeting 25X1
and a strengthening last month in the European market for lighter crude oils.
Iran was able to produce an additional 200,000 b/d in February as problems
on its Khark Island to Sirri Island crude oil shuttle were ironed out and as ex-
ports from the southern Persian Gulf'picked up. FI 25X1
OPEC: Crude Oil Production,
October
Quota
Year
. Average
Fourth
Quarter
December ~ January
February
Total
16.00
17.7
16.6
16.6
15.7
16.8
Algeria
0.66
0.7
0.7
0.7
0.7
0.7
Ecuador
0.18 .
0.3
0.3
0.3
0.2
0.2
Gabon
0:14
0.2
-0.2
0.2
0.2
0.2
Indonesia
1.19
11.4 .
-1.3
1.3
1.3
1.3
Iran
2.30
2.4
2.1
2.3
2.1
2.3
Iraq
1.20
1.2
1.3
1.3
1.3
1.3
Kuwait
0.90
0.9
0.9
0.9
0.9
0.9
Libya
0.99
? :.1.1 ,
1.0
1.0
1.0
1.0
Neutral Zone
a.
0.5
0.4
0.4
0.5
0.5
Nigeria .
1.30
1.4
1.6
1.7
1.4.
,.
1.7
Qatar.
0.28
0:4
0.3: ? .
0.3
0.3
0.3
Saudi Arabia
4.35
4.4.
3.8
3.5
3.3
3.8
United Arab. Emirates
.0.95
. 1.2
1.2
1.2
1.1
1.1
Venezuela . . .
1.56
,?: 1.7.
.1.6
1.6
1.6
1.6
a Neutral Zone has no production quota; output is divided evenly
and added to Saudi and Kuwaiti totals.
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22 March 1985
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1udis Cancel Two The Saudi Petroleum Ministry has terminated two Aramco refinery projects at
efinery Projects Qasim and Ash-Shuqayq, according to US Embassy reporting. The move
fl
h
f S
d
ff
d
re ects t
e severity o
au
i e
orts require
to cope with lower oil revenues
and to meet the King's stated goal of balancing the forthcoming budget and
has sent new tremors throughout the already-depressed construction industry.
Canceling the refineries-planned for 160,000 and 165,000 barrels per day
respectively-will save about $2 billion in construction costs and as much as
$2 billion in operating and other expenses in the next five years,
Moreover, the Ministry refuses to reimburse the Aramco
major cities.
capital fund for the $200 million already spent at Qasim. US and Japanese
contractors will be paid an indemnity for their canceled orders. Both refineries
were once politically favored projects to spread industrialization outside the
London To Eliminate, London has unveiled legislation to eliminate the British National Oil Company
State Oil Trading (BNOC) after concluding that the company can no longer contribute to short-
Company .. term stability in the world oil market. The plan would end the government's
government access to emergency oil supplies.
role insetting oil prices-a role the government never acknowledged. A new
small agency will maintain security of oil supplies-BNOC's primary func-,
tion-through royalty rights and the option to take oil through participation
agreements in an emergency. BNOC formerly took 51 percent of North Sea
oil through these agreements. Recent action by BNOC to prevent oil prices
from falling has cost BNOC millions of dollars-which the government
recoups in part through oil taxes-and has generated fierce criticism of the
government's oil pricing policies by a parliamentary committee. Critics of
Thatcher's policies also will demand assurances that the new agency guarantee
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oroccan-IMF
Accord-Pending
Secret
22 March 1985.
International Finance
Moroccan and IMF negotiators have agreed on the main points of a new
standby loan, which is expected to be approved in May. Devaluation of the dir-
ham is the final sticking point, with the Fund pushing for a 10- to 15-percent
reduction. The two-year package provides for $85 million in new financing this
year with assistance for 1986 to be negotiated in November. Even if food
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'anion IMF
T
ego;lotions ,
subsidies are abolished as planned and foreign debt is rescheduled under
similar terms of previous agreements; Morocco still facesa sizable financing
gap in, 1986., King Hassan will-be hard pressed to avoid renewed-urban -unrest
.-if he"goes through with the devaluation, subsidy cuts, and other reductions.in
French .Buyinglnto
US. Technology
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I
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government- spending.
concluding a standby agreement.
To end. its long-running stalemate with, the IMF, Tanzania has offered to
increase producer prices by 5. to 10 percent and take additional unspecified
reform measures in June as part of its 1985-86-budget. The IMF, however, is
seeking an immediate devaluation on the Tanzanian shilling of 50 percent; Dar
es Salaam is willing to discuss only 28 percent, spread out over several months.
President, Nyerere, who steps down"in October, has been 'a major obstacle to
Global and Regional Developments
In,a shift away from Mitterrand's policy of self-reliance, French electronics
firms are securing equity participation in US high-technology firms. CGE and
its subsidiary, CIT-Alcatel, have formed a $160 million venture capital
partnership with a US firm to invest in small, high-tech US firms. CGE, in a
similar move, recently formed a joint venture with Fairchild Industries to
.develop,space communications equipment'. In addition, Rhone-Poulenc, also a 25X1
nationalized company, has acquired controlling interest in a US software firm
and has formed a joint venture with a US firm to produce silicon ingots and
wafers, Despite massive amounts of public funding, the French electronics
sector continues to lag the United States.and. Japan 25X1
EC Position on The EC Council on Tuesday endorsed Community participation in a new
rade Talks round of GATT multilateral trade negotiations but refused to commit the EC
to the timing of the talks. The Ten said EC support for-launching the new
round is contingent on the participation of the developing countries and a
firmer consensus on the agenda, and that it would not be explicitly linked to
progress on international monetary reform.-The Council signaled EC willing-
ness to discuss-trade in services and counterfeit goods, but its declaration
-contained no reference -to high-.technology trade. The Ten also declared the
fundamentals of the EC's Common Agricultural Policy off limits. EC policy
remains at odds with stated US intentions regarding the schedule and focus of
the new round. -France has been 'the main advocate of the trade-money-link,
but Paris may have softened its position.in turn for the more cautious EC ap-
proach to. the timing and focus ofthe trade talks.'
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22 March 1985'
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1
Eases Demands for
urbs on US Corn
Gluten Exports
probably will renew its demands for import curbs.
An EC Commission official last week said that the Community would not
press.for import restrictions on US corn gluten feed. The EC has argued that
cheap imported feed substitutes aggravate EC dairy overproduction and
displace domestic grain. The volume of US corn gluten exports to the EC fell
by over 16 percent in 1984, however, largely because of the strength of the dol-
lar and the impact of new EC dairy production quotas. As a result, the
Commission has apparently decided to let the issue lay dormant. If US corn
gluten exports pick up or EC grain overproduction worsens, the Community
uwaiti Aid to Iraq war relief payments to Iraq by producing oil on Iraq's behalf (about 248,000
Vu11-0 WA Val 1., -JV J- A11V 11N Vr VVllllaVl 1J 1V1 VIi ycal ucb'1111u11s 1 1 GUl ualy
1985, with Iraqi repayment deferred until January 1988. Saudi Arabia also
exports between 85,000 and 110,000 b/d from its own production on
Baghdad's behalf. Kuwait was reluctant initially to renew the agreement of
1983 because of its own increasing financial strains. Since 1981-Saudi Arabia
and Kuwait together have given Baghdad at least $17 billion. Iraq probably
will be unable to start repayments in 1988.
S apish-EC
egotiations for
Membership
of contention at the EC Summit at the end of March.
US Embassy reports indicate Spain's chief negotiator supports settling
quickly and renegotiating the membership terms once Spain is in the EC. Even
if Madrid yields to EC demands, Spain's target entry date of next January will
not be guaranteed. To overcome Greece's threat to block enlargement, EC
members still have to reach an agreement with Athens on funds for special
Mediterranean aid programs. These programs probably will be a major source
National Developments
Developed Countries
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panese GNP Up
in Fourth Quarter
Boosted by a surge in foreign demand, Japan's GNP expanded at a 9.6-percent
annual rate in the fourth quarter of last year-ensuring that Japan will reach
the government's projection of 5.3-percent growth for the fiscal year that ends
31 March. Imports for the quarter declined, and exports jumped at an annual 25X1
rate of over 20 percent. Private plant and equipment investment, which has
been the strongest sector of the domestic economy, was up by over 17 percent
at an annual rate. Private consumption increased at only a 1-percent rate.
Growth for calendar year 1984 hit 5.8 percent, the best performance since
sraeli Economic
Package
1:11985/86 Budget
Criticism of the current wage-price agreement is sharpening since the
announcement that February's consumer price index increased by 13.5
percent-more than double the rise in January. Double-digit inflation is
expected again this month because of recent subsidy cuts. Some of the sniping 25X1
by labor leaders reflects posturing as union confederation elections approach.
The agreement is slated to last at least until June, but continued squabbling
could prompt modifications earlier. 25X1
The Thatcher government plans to cut its budget deficit from more than $10
billion in the fiscal year ending 31 March to $7.7 billion next year. Overall re-
ductions in real spending will include a freeze in real defense expenditures and
a 6.6-percent cut in capital outlays. The reductions pave the way for tax cuts of
$825 million, but less than half of what Chancellor Lawson had promised last
fall. Although the new budget reflects Thatcher's goals of keeping inflation 25X1
down, restoring confidence in the pound, and encouraging a fall in interest
rates, it will do little to combat unemployment in the short term. Lawson
rejected widespread appeals to increase spending on jobs programs and instead
introduced tax reforms to lower the cost of hiring additional low-income
employees and promised an expansion of the youth training program if the
private sector carries the major burden of the cost. He also held out the hope of
future tax reductions by announcing a study on possible reforms to the
personal income tax system. 25X1
New Zealand Economic Dissension at the first of the Labor Party's regional conferences last weekend
Policy Disputes underscores the tenuous hold of Prime Minister Lange over economic policy.
.:-, According to the US Embassy, the meetings were held behind closed doors to
avoid publicizing the degree to which Lange's policy reform efforts have 25X1
angered the party's left wing. Resolutions were passed against Finance
Minister Douglas's proposed goods and services tax and his market-oriented
government budget. We believe the passage of the resolutions will increasingly
strain the deal reportedly struck by Lange with the left at election time last
July-conservative economic policy in exchange for antinuclear foreign policy.
Lange must now break leftist opposition at the remaining five regional
conferences or face a party mandate-similar to the one that convinced him
last year to bar nuclear-capable warships from New Zealand ports-to
construct "a truly socialist economy." 25X1
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udi Budget Cuts
V e cts of Argentine
rain Port Explosion
More Libyan -
Belt-Tightening
Less Developed Countries
if current oil prices and production levels remain the same.
Government spending for the fiscal year that begins on 27 March reportedly is
to be 30 percent below appropriations in the current budget. Actual spending,
however, probably will be cut by less than 30 percent because the Saudis made
efforts not to spend all of the funds allocated for the current year. Neverthe-
less, reductions of this magnitude will be felt by large and politically sensitive
segments of the population, who thus far have been shielded from much of the
impact of falling oil revenues. The cuts will focus further attention on the
government's handling of the economy, already the subject of growing
criticism.
Oil earnings will decline by roughly $6 billion next fiscal year
The apparently accidental explosion last week at Argentina's major grain port
of Bahia.Blanca has reduced the grain-handling capacity there by 50 to 60
percent, Costs from lost grain sales and
repairs could reach $100 million.
the United States and other grain suppliers.
JThe port handles the bulk of Argentine grain exports to the USSR,
and traders report that the Soviets may have to increase their purchases from
raise petroleum production above Libya's assigned OPEC quota.
Libya has implemented a broad range of cost-cutting measures to conserve
dwindling foreign exchange reserves, currently estimated at $3.1 billion.
Development spending is to be slashed by 19 percent, as many as 400
construction projects-but not including the Great Manmade River scheme-
have been canceled, and Tripoli may postpone payment on $2.5 billion in
commercial arrears. Restrictions on the repatriation of foreign currency and
travel outside Libya also have been increased. In addition, more consumer
goods are being rationed and the quality of some items, particularly foodstuffs,
has declined sharply. Qadhafi may use the financial crunch as a pretext to
make good on his threats to substantially reduce the foreign work force or to
New Indian Central Prime Minister Rajiv Gandhi's new budget for 1985-86 features lower taxes
Government Budget for business and upper-income groups and extends-the liberalizaton of controls
on private industry. According. to press reports, business leaders are enthusias-
tic about New Delhi's plans to. free many large corporations from stringent
Secret 8
22 March 1985
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Finance Ministry officials believe inflation can be controlled.
antimonopoly legislation, eliminate licensing requirements for some industries,
and allow small businesses to expand without losing their tax exemption. An
immediate cut in corporate income taxes will be followed by further reductions
over the next two years, although some investment allowances will be phased
out. The budget also calls for higher petroleum prices to cover a large increase
in import duties on crude oil, and other proposals. will increase the cost of key
commodities such as cement, trucks, and rail services. The budget leaves a
massive deficit that will be financed by borrowing from the central bank, but 25X1
/ Cupbacks in Costa Standard Fruit Company has announced it will abandon 950 hectares of
Eiican Banana Crop banana trees and lay off 10 percent of its work force over the next'six-months
unisian Labor
Postpones Strikes
Malaysian Central
Bank Governor
Replaced
to stem losses caused by depressed world prices, high Costa Rican taxes, and
low productivity. Standard-whose parent company is facing possible bank- 25X1
ruptcy-unsuccessfully sought tax relief and loan guarantees from San Jose in
December. The cutbacks come on the heels of an announcement late last year
that United Brands-Costa Rica's other principal banana producer-is closing
down its Pacific coast production facilities. Unless world prices rebound, Costa
Rica's banana export earnings probably will drop from $240 million last year
to $200 million or less in 1985, complicating government efforts to reduce
arrearages on debt payments. In addition, the government fears that the loss of
some combined 3,000 jobs will lead to renewed labor unrest. 25X1
Members of Tunisia's transportation union have agreed to postpone planned
strike activity through April to give the financially strapped government time
to negotiate new wage agreements. Other unions probably will support the
decision in the expectation of higher wages for the first time in two years. 25X1
Prime Minister Mzali, however, has little room to maneuver under his
proposed austerity budget. Failure to make concessions on wages will substan-
tially increase the likelihood of unrest this summer when the government plans
another round of food subsidy reductions. 25X1
Malaysian Central Bank Governor Aziz, who has been at odds with Finance
Minister Daim, will resign in June, according to press reports. Aziz has
favored conservative monetary policies and tighter bank and securities market
regulation, while Daim advocates stimulating the economy through easier 25X1
credit and less regulation. Late last year Daim, with Prime Minister
Mahathir's support, overruled Aziz's policy of limiting lending for purchases
on Kuala Lumpur's stock exchange. Aziz's influence in policymaking was
further eroded last month when he was replaced by a Finance Ministry official
as chairman of the government supervisory agency for Malaysia's securities
market. According to press reports, Jaffar Hussein, executive chairman of the 25X1
country's second-largest commercial bank, will replace Aziz. ~~
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prospects for Zambian Somewhat higher copper demand and the recent devaluation of the kwacha
Copper Producers have boosted revenues and profits for Zambian copper producers, following
losses over the past year because of depressed copper prices. Copper prices this
year are expected to improve slightly from 1984 levels, and Zambia's copper
exports-which account for 90 percent of foreign currency earnings-probably
will improve as well. Gains for producers, however, may be offset by higher
wages after the current labor agreement expires this August.
C 'ina Searching
or Technology /
to Chinese students in the United States.
Beijing is making a pitch to overseas Chinese in Southeast Asia to act as
middlemen in the transfer of modern equipment and technology. Beijing
argues that overseas Chinese can bridge the gap between the West and China
through the combination of expertise in a particular technology.and sensitivity
to both cultures. Among the technologies where overseas Chinese middlemen
can play a role are food processing and electronics for optical fiber production.
In the past some overseas Chinese have assisted Beijing in illegal transfer of:
technology by giving restricted equipment to visiting Chinese delegations and
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22 March 1985
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LDC Oil:
New Countertrade Currency
In recent years LDCs have turned increasingly to
countertrade in the hopes of boosting sales of
nontraditional exports. The debt crisis and slump-
ing demand for primary commodities has led to
increasing use of traditional export products such
as sugar, tin, coffee, and rubber in these transac-
tions. Crude oil and petroleum products recently
joined this list and are being bartered in substantial
quantities. as
much 4s'10 to 15 percent of OPEC crude oil-1.6-
2.5 million barrels per day, or $16-26 billion annu-
ally-is sold under countertrade arrangements.
The exact magnitude is not known because of a
lack of comprehensive and timely data. Despite
this, we estimate since 1980 the frequency and
value of such oil agreements has risen substantially.
Key Participants
Some oil-exporting countries such as Iran, Iraq,
and Libya have been pushing noncash sales for
several years. The Iran-Iraq war, combined with
the falling oil prices, cut oil revenues in these Gulf
states and led them to offer oil as payment for
imports. Iran has publicly embraced countertrade,
and we estimate that these deals will account for
over half of its trade this year. Japan, in particular,
has come under pressure from Tehran to accept
payment in oil rather than in hard currency for its
sizable exports to Iran.
In Libya, falling
revenue and runaway spending caused Tripoli to
fall behind in payments to foreign firms for con-
struction projects, and the Libyans are now negoti-
ating payment of these debts in oil.
The bartering of oil goes against OPEC's policy of
cash-only sales, but Saudi Arabia's billion-dollar
exchange of oil for 10 Boeing jumbo jets last
Defining Countertrade
Countertrade describes trade practices where the
sale of goods and services is linked, or countered,
by a sale of goods and services in the opposite
direction. Countertrade can take many forms:
? Barter involves the direct exchange of goods 25X1
without the use of any currency. These arrange-
ments occur mainly between governments.
Among oil-exporting countries, complicated
swaps of various types of crude and product
between producers have become increasingly
common.
? In a counterpurchase transaction, the exporter
agrees to purchase products back from the im-
porter up to and sometimes even exceeding the
amount of the sale. There are two separate but
linked transactions, and foreign exchange is nor-
mally used.
? Bilateral clearing agreements between govern-
ments minimize payment in convertible currency.
Only the imbalance remaining at the end of a
specified period need be settled in cash or in
other mutually agreed form. Soviet Bloc coun-
tries are the most frequent users of this type of
arrangement.
? Buy-back agreements, sometimes referred to as
compensation, occur when an exporter agrees to
supply technology or plant equipment to be paid
for with products produced from that plant,
usually over a period of years. Offsets generally
involve military or aerospace deals where the
seller enters into coproduction, licensing, direct
investment, or subcontracting in the purchasing
Secret
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summer removed the last source of serious objec-
tions by OPEC countries. Nigeria, which had long
denied any involvement in these agreements despite
rumors to the contrary, announced a major barter
deal with Brazil last fall involving $500 million in
agricultural goods, chemicals, and construction ma-
terials, and some $200 million in automobiles.
Algeria is also showing increased interest, often
making counterpurchase demands in the final
stages of contract negotiations,
Other oil exporters still shy away from such trade
practices.Venezuela and Mexico have discussed oil
barter as part of trade agreements within Latin
America, but usually prefer to generate hard cur-
rency revenues from their oil exports. Although
Indonesia has a mandatory countertrade require-
ment for all public-sector imports, it deliberately
omitted crude oil from the list of acceptable Indo-
nesian products in order not to undercut its cash oil
sales. Malaysia is also actively encouraging coun-
tertrade, but as yet has inked only one deal known
to involve oil.
Oil importers also initiate countertrade arrange-
ments. Brazil, which had an oil import bill of nearly
$7 billion in 1984, is the most active. According to
press reporting, Brazil plans to pay for half of its oil
imports through such deals. Brasilia has negotiated
agreements totaling several billion dollars in recent
months with oil exporters, most notably Iraq and
Nigeria. Brazilian goods and services being ex-
changed include motor vehicles and agricultural
goods, as well as construction work. Brazil has
curtailed its oil imports from Iran, Libya, and the
UAE because these countries were not buying
enough Brazilian goods, although talks to resume
trade with Iran and Libya are under way.
Firms in industrial countries have also acquiesced
to countertrade demands-or even offered to make
special arrangements in advance-in order to win
contracts from oil exporters. In order to promote
sales of its Mirage fighter planes to the UAE; for
example, France has agreed to be paid in part with
oil. Together with Italian firms, the French have
accepted crude as partial payment for the construc-
tion of the $500 million Iraq-Saudi oil pipeline.
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22 March 1985
prompt payment.
The Soviet Union has increased the amount of oil it
imports as payment for arms under bilateral agree-
ments with Libya and Iraq. We estimate that the
Soviets reexport about half of this oil to hard
currency countries at spot market prices, and the
remainder goes to Eastern Europe and India under
separate bilateral payments agreements. Although
Moscow probably prefers cash arms sales, barter-
ing oil probably boosts military equipment sales to
these cash-strapped countries and also ensures
Increased use of oil in LDC countertrade reflects
various reasons:
? The poorer oil exporters, facing falling revenues
and rising debt service, perceive it as a way to
conserve scarce foreign exchange by financing
imports and promoting exports simultaneously.
Even the richer OPEC states hope to use the
policies as a brake on deteriorating trade
balances.
? Oil deals on occasion are also used as a political
tool. Iran, for example, provides oil to Syria in
exchange for its closure of the Iraqi oil pipeline,
according to press reports. To aid Iraq, the Saudis
produce oil on Iraq's behalf, part of which goes to
the Soviet Union to pay for Iraqi imports of
Soviet goods.
? A few oil exporters may view longer term coun-
tertrade agreements as a way to keep oil earnings
up in the face of falling prices.
Many oil-importing countries, with oil import bills
rising in local currency terms because of the strong
dollar, may view this trade practice as useful for
stabilizing terms of trade-the amount of oil their
exports will buy. Western firms regard it as a
necessary cost of doing business in oil-exporting
countries and as a marketing tool to outbid compe-
tition for lucrative contracts.
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Selected Countertrade Deals Since
1980 Involving Crude Oil
Oil Exporter
Trade Partner
Goods Involved
Export Value a Oil Volume a
(million US $) (million barrels)
Brazil b
Food, chemicals
600
22
Japan b
Steel, automobiles
1,500
54
Turkey
Various goods
1,000
37
Construction
600
22
Agricultural and industrial
goods
300
11
Italy
Textile machinery
100
4
West Germany
Steel products
100
4
France
Military equipment
800
29
France, Italy
Oil pipeline construction
500
20
Brazil
Automobiles
630
22
Brazil b
Agricultural products
200
7
Brazil
Water pipes
50
2
Italy
Debt repayment
300
11
Turkey b
Debt repayment
300
11
Brazil b
To be negotiated
500
18
Debt repayment
200
7
Military equipment
1,000
36
Debt repayment
25
1
Nigeria
Brazil
Food, chemicals, autos
700
25
Brazil
Petroleum products
500
20
Qatar
Japan
Desalination plant
80
3
United States,
United Kingdom
Aircraft
1,000
35
Angola
Brazil
Construction
600
22
China
Brazil
Ore, steel, textiles, tools
300
11
Malaysia
Brazil
Iron ore, various goods
30
1
a Estimated.
b Under negotiation.
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Although cash sales are still preferable to most oil
exporters, OPEC pressure to hold the line on prices
has made countertrade an attractive mechanism for
disguising discounts and boosting sales. It enables
the oil exporter to contract to sell the oil at the
official price while implicitly offering a discount by
agreeing to an inflated price for the exchnaged
goods and services. In its trade of oil for Boeing
aircraft, the Saudis argued that the oil was priced
at the official level, but the press speculates that an
implicit discount was involved because the oil was
delivered far in advance of the aircraft delivery.
Press sources believe the announcement of the
Saudi deal and subsequent large oil sales may have
disrupted the oil market last fall and added down-
ward pressure on oil prices.
The amount of discounting is difficult to determine
because details are seldom made public and stated
prices are somewhat arbitrary. The implicit price
probably compensates for the difference between
official and spot prices and covers costs and risks
inherent in these transactions. Although gaining
flexibility in pricing, there is no evidence that these
deals enable an OPEC member to disguise exports
in excess of its quota
Implications
Countertrade in oil can have advantages to both
importers and exporters. It is unlikely, for example,
that Brazil could have expanded its sales to Africa
and the Middle East as rapidly as it has without
these arrangements. For Western firms, oil barter-
ing presents only a minor inconvenience in contrast
to deals involving hard-to-sell manufactured goods
such as rataan furniture or Romanian toasters. Oil
exporters gain flexibility in oil pricing. The Brazil
deal with Iraq, for example, provides for the over-
land transportation through Jordan of crude that
had not been exported since Iraqi Gulf shipments
were blocked
The rapid growth of countertrade nevertheless is
creating new rigidities. The resulting bilateral ar-
rangements interfere with free, open, multilateral
trade. Distortion of trading patterns and reduction
of the gains from free trade can result from: (a)
obscuring true monetary prices, (b) balancing trade
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22 March 1985
on a country or commodity basis, (c) increasing
government involvment in trade, and (d) making
willingness to exchange goods a more important
criterion than being the lowest cost supplier.
Despite the superficial appeal of reducing foreign
exchange outlays for imports, we believe foregone
hard currency earnings from potential exports and
the increased transaction costs exceed the savings.
These deals can be an expedient and profitable way
to keep oil trade flowing but is regarded by most
observers as a second-best alternative.
Oil countertrade is likely to flourish as long as
downward pressure remains on oil prices. Lack of
foreign exchange to pay for imports along with a
need to revive slumping oil exports or circumvent
OPEC price agreements will provide continued
impetus for oil exporters. Last year's large Saudi-
Boeing oil set an example for other oil exporters.
Oil importers like Brazil, together with acquiescent
Western firms, will encourage this trend. If oil
prices should rise, some oil importers would take
the initiative as they try to finance a growing oil
import bill. In response, most oil producers would
become more selective and prefer hard currency
payments.
We believe oil-producing countries increasingly will
require offsets, coproduction, subcontracting, or
investments, in return for major Western contracts.
Last year the Saudis set the pace by requiring
offset investments from companies bidding for
Peace Shield defense contracts. US companies bid-
ding on radar systems, for example, will have to
plow back 35 percent of the project's value into
setting up local high-tech manufacturing enter-
prises. There is a chance that this policy will be
broadened to include other major government
defense. procurements. Other countries may also
begin to require offsets, or insist on East European-
style buy-back arrangements where foreign firms
investing in local industries agree to be paid with a
portion of the output from the plants they build.
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Mexico: Prospects for Drug
Control '
Mexican drug activity increased markedly last
year, due in large part to the country's economic
problems and a weakened drug enforcement pro-
gram. President de la Madrid appears determined
to improve Mexico's antidrug campaign and has
initiated changes in the organization and strategy
of crop control efforts
Additional measures-a more comprehen-
sive anticorruption campaign, more extensive
spraying of the numerous fields in inaccessible
areas, and prosecution of a major drug trafficker-
are needed to help stem increased opium and
cannabis production. Mexico is highly unlikely,
however, to accept a direct US role in eradication
and interdiction efforts.)
Underlying Factors
After stagnating or declining for nearly a decade,
opium and cannabis production for export to the
United States as heroin and marijuana increased
considerably last year.
Mexico's opium crop may have nearly doubled in
1984. Embassy reporting and other information
suggest that cannabis output also has risen marked-
ly. In addition, Mexico's role as a transshipment
point for Colombian cocaine and marijuana exports
has expanded.
Mexico's economic woes together with problems in
the antidrug program caused the recent resurgence
of drug-crop cultivation. The financial incentives to
produce and traffic in narcotics have increased
considerably. Farmers, for example, clearly have
found lucrative opium and cannabis production
difficult to resist when most other sources of earn-
ings have contracted considerably. Substantial peso
devaluations over the past few years have also
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During the same period when economic forces have
spurred drug-crop cultivation, several factors have
combined to considerably weaken Mexico's anti-
drug campaign:
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? Government austerity measures have limited the
availability of additional resources for crop con-
trol. Meanwhile, high inflation has eroded the
purchasing power of Mexican drug-control funds
that have been available since 1982. State De-
partment officials say that spending for the eradi-
cation program has in recent years remained at
roughly the same level of about $13-14 million
per year
? Corruption has greatly hindered antidrug opera-
tions. Some malfeasance in the control program
has existed for years
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there has been comparatively little wrongdoing,
control measures often have been poorly planned
and coordinated.
? Countermeasures by farmers-such as hiding
fields and planting them in less accessible areas-
have continued to thwart tactics Mexico had used
successfully until recent years, especially in its
aerial herbicide spray program.
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? Plentiful rain, which has encouraged production
in poorly irrigated areas, also has hampered
eradication by making flying hazardous.
Stemming the Tide
Despite recent setbacks, we believe that eradication
is still the most effective way to significantly cut
Mexican-produced drugs because of the virtual
invulnerability of the smuggling chain once opium
and cannabis leave the fields. In our view, the
infrastructure by which the crops are moved to
facilities for processing into drugs that are then
shipped to the US market is so well entrenched that
a sustained land, sea, and air dragnet would be
needed to seize a fraction of the amount transport-
ed each day.
President de la Madrid
is determined to improve the antidrug campaign.
he has begun to make
changes in the organization and strategy of crop
control efforts, such as ordering joint civilian and
military sweep operations aimed at destroying drug
crops in key zones where traffickers have thwarted
routine controls. De la Madrid also is cracking
down on drug graft, which press reports indicate
has begun to worry him greatly.
Additional Measures Required
We believe these strengthened measures, if contin-
ued, probably will go a long way toward preventing
further big increases in drug-crop production and
gradually help bring about some reductions. At the
same time, it will not be enough for the Mexicans
simply to restore the control program as currently
organized to its previous level of efficiency, which
enabled them between 1979 and 1983 to eradicate
perhaps as much as 70 percent of the potential
opium crop and a smaller but substantial portion of
potential cannabis output. To keep pace with in-
creased cultivation resulting from economic forces
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22 March 1985
and to compensate for more sophisticated planting
techniques and other countermeasures, we believe
additional, far-reaching, and-in some instances-
politically controversial permanent measures are
needed:
? A reorganization of the aerial spray campaign-
concentrating aircraft and other assets in areas of
heavy cultivation and facilitating quick realloca-
tion of resources to respond to changes in growing
areas-would make it harder for traffickers to
keep ahead of the government. Permanently insti-
tuting the recently established sweep operations
would be a good first step toward achieving such
a reorganization.
? A watchdog organization empowered to dismiss
summarily drug-control personnel found to be
colluding with traffickers could speed up efforts
to control corruption, which currently is often not
addressed until it comes to the personal attention
of the Attorney General or other senior officials.
In addition, frequent rotations of police, pilots,
and other drug-control personnel would help dis-
rupt any ties that develop between them and local
traffickers.
? Helicopters capable of carrying more herbicides
and reaching higher altitudes would enable pilots
to destroy more of the numerous small fields in
rugged, mountainous elevations.
? The prosecution by the Mexicans of a single
major trafficker and the substantial disruption of
his operations would show that Mexico City is
determined to suppress narcotics activity and!
could broaden public support for antidrug mea-
sures. Stepping up recent efforts to educate the
Mexican public to the hazards of drug addiction
also could help build public backing for strong
action against the narcotics trade.
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Secret
USSR: Short-Term Outlook
for Oil Production
Production of Soviet crude oil and condensate
slipped by 100,000 barrels per day (b/d) in 1984, its
first decline since World War II. This decline
reflects the advanced age of almost all of the
USSR's largest oilfields and may signal a longer
term trend. A decline of about 200,000 to 300,000
b/d in total Soviet production"is possible this year
with West Siberian production stagnant and output
in other regions falling. If larger production short-
falls materialize in 1985, the USSR may be unable
to satisfy domestic oil requirements and maintain
exports to Eastern Europe without some cutbacks
in exports for hard currency. Recent personnel
shakeups in the Soviet oil industry reflect leader-
ship concern over the problem.
What Went Wrong
In 1984 total Soviet oil output fell by 100,000 b/d
because the growth in West Siberian production
was insufficient to offset declines elsewhere. Out-
put in Tyumen'-the major West Siberian oil
region-rose only 140,000 b/d rather than the
planned 340,000, b/d.
A fundamental factor underlying many of the oil
industry's production problems is the increasing
age of the USSR's oilfields. The dozen largest
fields in West Siberia are now 12 to 15 years old.
As the fields age, reservoir pressures decline, reser-
voir permeability tends to decrease, and water
production rises.
Difficulties with water injection systems and sharp-
ly rising water content at Samotlor and Fedorovo,
two of the largest oilfields in the USSR, are
increasing. Severe corrosion problems, for example,
now affect Samotlor's pressure-maintenance and
oil-gathering systems. Oil flow lines leak, and
corrosion has so weakened Samotlor's water-supply
lines that full injection pressures cannot be applied.
USSR: Year-to-Year Change in Oil Production,
1951-84
iiiiiiiiiiiiiiiiiiiiiillillillifiI
-2001951 55 60 65 70 75 80 84
With the average water cut (the percentage of
water in the fluid produced from oil wells) estimat-
ed to exceed 50 percent, oil production is declining
at both fields. These conditions have led to an
escalation of well maintenance requirements, which
Moscow is no longer expecting. great things from
.the newly developed area north of Fedorovo. Soviet
press articles cite serious production shortfalls and
report that some newly drilled wells would not flow.
Many wells at the Sutorminsk field have been
switched over to pumps far earlier than planned. If
new oil deposits to the north of Fedorovo have
similar characteristics, production probably will
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Major Oil Producing Areas
Centrasia
A
West ~Sutormin
FedorovoA Tyumen'
Siberian A
Samotlor
Soviet Union
require more wells, equipment, manpower, and
time'than has been anticipated by Soviet planners.
The shortfalls from planned. West Siberian produc-
tion also reflect the lower-than =expected quality of
the reserves. Oil industry. officials -and,some Soviet
geologists have indicated that the initial Soviet
reserve'esti'Mates fon;the-Tyumen' oilfields were
exaggerated and that estimated recovery rates were
too high in view of the less-favorable geologic
conditions and lower' well flow rates being encoun-
tered.
Production has also been hurt by a shortage of
pumps and other oilfield equipment, because Soviet
Secret
22 March 1985.
planners and managers overestimated the rate at
which wells. would flow' without mechanical assis-
tance..The effect of the planning error was com-
pounded by frequent failures in equipment, elec-
tricity supply, and logistic support.
High-Level Concern
The failure to meet oil production goals in Tyumen'
Oblast over the past two years caused .consternation
in Moscow and has brought Tyumen' operations
under increasing high-level scrutiny. The continu-
ing dissatisfaction with management of operations
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culminated in the firing of almost all of the produc- USSR: Oil Production, 1950-84
tion managers and the replacement of Oil Minister
Mal'tsev. Moreover, several news articles indicate
that, in an unprecedented move to improve efficien-
cy, two major organizations that control oil opera- Million b/d
tions in the European USSR have been given 14
responsibility for three West Siberian production
directorates. 12
We believe that Soviet oil output in 1985 will be
well below the planned 12.56 million b/d and is 6
unlikely to match the 12.23 million b/d posted in
1984. Oil production in January and February- 4
11.92 million b/d-was below plan and 300,000
b/d below the 1984 average daily production level. 2
With oil output from the key West Siberian region
showing signs of flattening or possibly declining, 0 1950 55 60 65 70 75 80 84
total production this year may reach only 11.9-12.0
million b/d.
Efforts to check the decline will be progressively
more costly in terms of manpower and investment 305116 3.85
resources-a factor that affects oil exports deci-
sions. Last.year, Moscow was apparently able to
sustain exports by increasing reexports of OPEC
oil, trimming domestic consumption, and drawing
down domestic stocks. With production of 11.9-
12.0 million b/d, the USSR, to satisfy domestic oil
requirements and maintain exports to Eastern Eu-
rope, would have to cut net exports for hard
currency. Thus far in 1985, the Soviets have sold
little oil on the spot market.
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Key Developing Countries: Trends
We estimate that real GDP for 25 key LDCs grew
3.2 percent in 1984-in large part because of a 15-
percent increase in LDC exports to the industrial-
ized countries-from near stagnation in 1983.'
Following several years of austerity and economic
reverses, Brazil and Mexico-the top LDC debt-
ors-appeared to turn the corner in 1984, achieving
growth rates of 3 to 4 percent. We estimate that
average economic growth in 1985 for the group will
remain at roughly last year's pace. Nevertheless, a
number of countries are not participating in the
recovery-GDP in Argentina, the Philippines, and
several major oil-exporting countries is expected to
fall this year.
Mixed Progress in 1984
Although last year's average economic growth of
3.2 percent in these LDCs was a strong improve-
ment from the near-zero growth in 1983, not all of
them shared in the rebound.
Continued Success in Asia. East Asia's GDP
growth of 5.7 percent greatly exceeded the perfor-
mance of other regions. The regional leaders were
Taiwan and Hong Kong, two export-oriented econ-
omies that responded quickly to the burgeoning
demand in industrial countries. Similarly, Malaysia
improved its performance in 1984, achieving
growth of 6.7 percent. South Korea's expansion last
year slackened from the pace of 1983, -however,
when Seoul tightened monetary and fiscal policies
to reduce the current account deficit and slow
inflation. The weakest performer in this region was
' For purposes of this article, we have examined the top 25
economies among non-Communist LDCs. Certain countries that.
would fall into this group, such as Iran and Iraq, were not
considered because current macroeconomic data are not available
or are highly suspect. Total and regional growth rates are weighted
Twenty-Five Key LDCsa: GDP Growth
a A key LDC is defined to be one with GDP
more than $12 billion in 1982.
b Average annual.
.the Philippines where output fell as government
spending reductions and import restrictions de-
pressed manufacturing.
Signs of Recovery in Latin America. Latin Ameri-
can growth of 3 percent in 1984 represented a
substantial recovery from the 1981-83 recession
when economic activity declined an average 0.7
percent per year. The best performance was turned
in by Chile; reflecting increases in manufactured
and agricultural exports and additional government
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Key LDCs: Average Annual Percent
Growth of Real GDP a
Algeria
:7.6
4.0
4.1
7.0 . 5.5
5.0
Argentina
2.2
-6.3
-4.8
3.1 2.0
-2.0
Brazil
8.2
-1.6
0.9
-3.2 4.0
4.5
Chile
1.8
5.7
-14.3
-0.8 4.5
-4.0
Colombia
5.5
2.3
- 0.9
0.8 3.0
1.0
Ecuador
9.2
3.9
1.8
-3.3 1.5
3.2
Egypt
6.7
6.7
5.5
5.5 4.5
4.5
Hong Kong
7.9
10.4
2.4
5.9 8.5
7.0
India
3.3
5.3
1.8
7.4 4.0
4.0
Indonesia
8.1
7.1
-0.4
5.1 5.0
4.0
Kuwait
1.7
-5.3
-1.4
7.6 2.0
2.0
Malaysia
8.1
7.1
5.6
5.7 6.7
6.5
Mexico
6.9
8.0
-0.6
-5.3 3.5
3.0
Morocco
5.5
-2.2
5.6
0.6 2.0
2.5
Nigeria
3.2
-5.3
-2.2
-4.6 -1.0
-1.0
Pakistan
5.2
6.4
5.6
6.1 3.5
10.0
Peru
3.8
3.0
0.9
-11.9 3.0
2.0
Philippines
6.4
3.4
1.9
1.3 -5.5
-2.0
Saudi Arabia
10.6
. 7.9
1.7
-10.8 -4.0
-6.0
Singapore
8.8
10.0
6.4
7.9 7.9
7.5
South Korea
8.1
6.9
5.5
9.5 7.5
7.5
Taiwan
8.5
5.0
4.0
7.0 10.0
8.0
Thailand
7.2
6.3
4.1
5.8 6:0
6.0
United Arab
Emirates "
8.8
.
9.5
"-"'
-4.7
-I i.01' -2.0'
-5.0
Venezuela
4.2
-0.3
0.7
-4.8 -1.7
2.0
a The'figures in this table through 1983 generally. come from the
IMF. The 1984 and 1985 figures are,based-on,CIA estimates.
spending. Strong export .performances by Brazil
and Mexico:-led to a . sharp: turnaround. from-their,.
.GDP falloffs.in;1983. Argentine GDP, in.1984,.
however, increased at-only two-thirds.-the rate of,
198.3, -In ,Venezuela;: a: decline in.. petroleum, output
and lower world prices contributed to another year
of falling GDP.
exporter to see positive growth; even so this perfor-
mance was only one-fourth the 1983 rate, reflecting
the lingering effects of its 1982 stock market crash
and stagnant world oil demand. GDP fell in Saudi
Arabia for the second consecutive year; in the
UAE, for the third consecutive year; and in Nige-
ria, for the fourth consecutive year. Indonesia
proved to be an exception, reflecting additional
LNG output and another record rice crop.
Per Capita Performance. Those countries-mostly
in Asia-that were able to make advances in per
capita incomes during 1981-83, despite the world
economic conditions, had no trouble in maintaining
this trend in 1984. Most East Asian countries saw
improvements of between 4 and 8 percent, and
other key countries including Pakistan and India
recorded moderate increases of about 2 percent.
Despite some slight economic recovery in Latin
American and other economies that have been
depressed, growth often has not been enough to
overcome population increases. In fact, most of .the
countries where per capita income fell during 1981-
83 registered either another decline in 1984 or just
small improvements. In the Philippines, Nigeria,
and Venezuela, for example, 1984 marked at least
the third consecutive year in which per capita GDP
declined. Even if growth of per capita incomes
reached 2 to 4 percent per year, which was common
in the 1970s, per capita income would not return to
previous levels for. roughly four to five years. F_
Outlook
We estimate that average economic growth for the
25 LDCs we have examined will be 2.9 percent in
1985. Once again, most Asian countries will main-
tain high growth rates, and the pace of recovery
should,quicken in Ecuador,. Brazil, and: Pakistan.
Reflecting the slack oil market, however, the major
oil exporters, with the exception of Indonesia; are
likely to'sustain another year `of economic decline
or at.best weak growth. Other countries such.as,
Oil Exporters Set Back Again. Most of the other
key oil exporters registered low or negative growth
in 1984. Kuwait was the only major Gulf oil
Secret
22 March 1985
25X1
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Secret
Key LDCs: Changes in Per Capita
Income in 1981-83 and 1984
1981-83
1984
Increased
Declined Increased Declined
Algeria
x
X
Egypt
x
x
Hong Kong
x
X
India
x
X
Indonesia
x
X
Philippines
x
x
Saudi Arabia
x
x
United Arab
Emirates
x
x
a 1984 growth near zero; small revisions to our 1984 estimates could
move these countries into the lower grouping.
Colombia and Peru with weak economic expansions
but relatively high population increases face fur-
ther declines in per capita incomes. F
The continued poor economic performance expect-
ed in some individual countries could aggravate
existing political and social tensions. In Nigeria,
another year of economic distress will put addition-
al pressure on the Buhari regime, which already is
facing growing discontent. Economic activity in the
Philippines will fall again this year and may exac-
erbate unrest there; falling per capita income this
year in Peru and Chile will fuel opposition criticism
of government mismanagement of the economy.
25X1
25 Secret
22 March 1985
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 Sanitized Copy Approved for Release 2011/03/02 : CIA-RDP97-00771 R000707450001-9
Sanitized Copy Approved for Release 2011/03/02 : CIA-RDP97-00771 R000707450001-9
 Sanitized Copy Approved for Release 2011/03/02 : CIA-RDP97-00771 R000707450001-9
Secret
Secret
Sanitized Copy Approved for Release 2011/03/02 : CIA-RDP97-00771 R000707450001-9