INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000807620001-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 31
• Document Creation Date: December 22, 2016
• Document Release Date: August 17, 2010
• Sequence Number: 1
• Publication Date: July 19, 1985
• Content Type: REPORT

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Directorate of Seeret.
Intelligence
Weekly
International
Economic & Energy
19 July 1985
DI IEEW 85-029
19 July 1985
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L
International
Economic & Energy Weekly) 25X1
19 July 1985
iii Synopsis
erspective-OPEC: No Solutions in Sight
,Saudi Arabia: Threats To Boost Oil Output Unilaterally
atin America: Limited Prospects for a Debtors' Cartel
y LDC Debtors: Lackluster Investment Portends Problems
9
~_/
L.
,,, The Sino-Soviet Trade and Cooperation Agreements: A Step Forward
Energy
International Finance
Global and Regional Developments
National Developments
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DI IEEW 85-029
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International
Economic & Energy Weekly 25X1
Synopsis
1 Perspective-OPEC: No Solutions in Sight
OPEC ministers meet on Monday for the second time in less than three weeks
amid an atmosphere bordering on despair. As the ministers gather this
weekend in Geneva, the near term offers few promising options.
3 Saudi Arabia: Threats To Boost Oil Output Unilaterally
Shrinking government revenues have forced Saudi officials to consider boost-
ing crude oil production unilaterally. The Saudis hope their threats will prod
other members to agree to a new quota and pricing scheme, but they are
prepared to act on their own.
5 Latin America: Limited Prospects for a Debtors' Cartel
There is little near-term potential for Latin American countries to organize a
debtors' cartel, but they probably will soon begin to develop new pressure
tactics to try to ease their repayment burdens.
9 Key LDC Debtors: Lackluster Investment Portends Problems
The high investment growth that powered the economies of the key LDC
debtors during the past two decades may be a thing of the past. The fallout
from this dramatic shift in investment behavior will multiply the economic and
political problems these countries will face during the next decade
15 The Sino-Soviet Trade and Cooperation Agreements: A Step Forward I 25X1
China and the USSR signed a $14 billion five-year trade agreement and a sep-
arate economic cooperation agreement-the first such agreements in 20
years-on 10 July as part of Vice Premier Yao Yilin's four-day visit to
Moscow. Although trade levels under the agreement will be a function of
bilateral political ties, transportation problems may be the principal long-term
impediment.
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International
Economic & Energy Weekly
19 July 1985
Perspective OPEC: No Solutions in Sight
OPEC ministers meet on Monday for the second time in less than three weeks
amid an atmosphere bordering on despair. As the ministers gather this
weekend in Geneva, the near term offers few promising options. Weak oil
demand, rising competition from non-OPEC producers, and internal disarray
continue to challenge OPEC's ability to avert a major price break. OPEC's
falling oil revenues have placed financial pressures on its members and forced
them to compete against each other for oil sales.
At the early July meeting, financially strapped Nigeria, Iraq, and Ecuador
bitterly opposed a stopgap plan to reduce every member's production quota by
7 percent. Algeria, Iran, and Libya,,who have joined other members in
underselling official OPEC prices through barter deals and discounting,
argued against any adjustment in the official price structure. Such hypocrisy
contributed to an atmosphere of distrust among members, who were quick to
blame each other for the organization's predicament.
A sword hanging over Monday's meeting is the Saudi threat to cease acting as
the organization's swing producer. At the last session, Petroleum Minister
Yamani bluntly warned that Saudi output would be boosted unilaterally if the
members continue to violate established price and production guidelines.
Poorer and more populous OPEC nations have little sympathy for the Saudi's
economic plight, but they realize that a decision by Riyadh to follow through
on its threats would trigger a price war.
Pressure for a downward price adjustment has mounted in the two weeks since
the ministers last met. Mexico lowered its oil prices for the second time in less
than a month, US and Canadian producers have cut light oil prices, and press
reports indicate that Egypt will do the same. According to US Embassy
reporting, Venezuela-with exports down sharply-is waiting until after the
meeting to announce a badly needed price cut
OPEC members realize that even concerted action in Geneva will not alter the
gloomy demand outlook for its oil over the next two years:
? Oil consumption will remain steady, while non-OPEC production is expected
to rise by nearly 1 million barrels per day (b/d) this year and about 500,000
b/d in 1986.
? Substitution of other fuels for oil is occurring at a rapid pace, and
conservation efforts continue to improve energy efficiency.
As a result, demand for OPEC oil probably will be only 16-17 million b/d
through 1986, roughly one-half the 1979 level.
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Indeed, some members are seriously questioning the value of remaining in
OPEC, if it means only additional production restraint and declining revenues.
Production discipline is no longer viewed as a short-term sacrifice guarantee-
ing a brighter future, but as a long-term headache with no relief in sight.
While OPEC's most effective course of action would be to cut production
further, an allocation scheme acceptable to all members does not appear
negotiable at this time. The other alternative, price cuts, would be slow to spur
demand and would only increase pressure on revenue-starved members to
violate production quotas. Bolder initiatives-such as a central marketing
organization for OPEC crudes-may be necessary to break the deadlock but
have little support going into the meeting.
In any case, OPEC lacks the innovative leadership and resolve needed to deal
with its problems. In the unlikely event that members pull together in Geneva,
they will still have little cause to celebrate. Yet, if OPEC fails to act, July 1985
may well mark a de facto dissolution of the cartel as members attempt to solve
their problems individually.
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Saudi Arabia: Threats To Boost
Oil Output Unilaterally
Shrinking government revenues have forced Saudi
officials to consider boosting crude oil production
unilaterally if other OPEC countries fail to adhere
to production quotas and official prices. They be-
lieve they are bearing an unfair burden as swing
producer, particularly now that spending cutbacks
are beginning to affect domestic programs. Petro-
leum Minister Yamani has publicly threatened to
boost Saudi oil production if other OPEC countries
continue to "cheat." The Saudis hope their threats
to increase production will prod other members to
agree to a new quota and pricing scheme, but they
are prepared to act on their own if no new agree-
ment is reached and observed.
Riyadh's goal of a $55 billion balanced budget was
unrealistic from the outset. Despite projected
spending cuts of about 14 percent, declining oil
revenues are pushing the red ink to levels that
Saudi officials find unacceptable. Saudi output fell
to an estimated 2.1 million b/d in June, far below
the 3.8 million b/d on which Riyadh's current
budget is based. We believe Riyadh wants to avoid
having to finance a budget deficit much larger than
$10 billion because it has already drawn down its
liquid international assets from $135 billion to $90
billion in less than three years. If crude production
averages 2 million b/d for the fiscal year, at
current prices and spending levels, Riyadh would
face at least a $20 billion deficit.
If the Saudis tried to pare spending by an addition-
al $10 billion, outlays would be nearly 40 percent
below last year's level-an almost impossible feat
for both political and bureaucratic reasons. For the
first time since oil revenues began to decline,
budget cuts are being targeted toward Saudi citi-
zens. Allowances, benefits, bonuses, and other pay-
ments received by civilian employees of the Saudi
Government already have been severely curtailed,
amid loud complaints. Saudi officials are chary of
cutting broader consumer subsidies after seeing the
political disturbances that followed similar cuts in
Morocco, Tunisia, and Sudan.
The Saudis are calculating that the prospect of the
market disruption and downward price spiral that a
unilateral production increase would cause will
induce other OPEC members to maintain better
discipline. The opening gambit came during a
meeting of OPEC's Ministerial Executive Commit-
tee in early June, in which Yamani read a letter
from King Fahd stating that, if any OPEC member
cheats, they all have the right to do so. According
to the US Embassy, Yamani said that Saudi
Arabia could easily expand production to 4.35
million b/d-its implied quota under the current
OPEC agreement. Ya- 25X1
mani subsequently threatened a 9-million-b/d lev-
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A tentative agreement at the OPEC Ministers'
meeting early this month to reduce quotas tempo-
rarily by 7 percent fell through at the last minute,
The Saudis insisted
on a proportionate reduction for each member,
which would allow the kingdom to produce 4
million b/d. Nigeria, Iraq, the UAE, and Ecuador,
however, demanded that their quotas be increased.
There are risks for the Saudis if they unilaterally
boost their production. If quotas are abandoned
and a price war ensues, some industry experts
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indicate prices might initially fall to $12 to $15 per
barrel. Lower prices probably would not be trans-
lated into significantly higher demand-particular-
ly in the short run-meaning little budgetary relief
for Riyadh. For example, at a price of $15 per
barrel and Saudi output of 3 million b/d, Riyadh
would still face a $20 billion deficit in the absence
of any additional spending cuts. At that price, the
Saudis would have to boost output to 5.7 million
b/d to hold the deficit to $10 billion without
cutting spending. Only a smaller price drop or
better demand response would permit the Saudis to
stay within their deficit target
The Saudis have delayed taking any unilateral
action until after Monday's OPEC meeting. If an
agreement on quotas is worked out then, the Saudis
would probably wait a few months to see how well
it is observed. If no agreement is reached or if an
agreement is promptly violated, the odds are better
than even that the Saudis would boost output
unilaterally.
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Latin America:
Limited Prospects for a
Debtors' Cartel
Latin American debtors probably will soon begin to
develop new pressure tactics to try to ease their
repayment burdens and draw Washington directly
into efforts to solve the region's debt difficulties. In
our view, however, there is little near-term poten-
tial for these countries to organize a debtors' cartel
or formally mobilize collective action to force con-
cessions from creditors. Our judgments are based
on the results of a
simulation exercise.' Factors that could raise the
odds on collective action include a dramatic deteri-
oration of external economic conditions, an upsurge
in domestic political instability, or perceived intran-
sigence on the part of creditors. The decisive roles,
in our view, will continue to be played by the
leaders of the major debtor states, especially the
presidents of Mexico, Brazil, and Argentina.
Sentiment among Latin American countries for
collective action to obtain debt relief-including
forming a debtors' cartel-first surfaced in 1982.
The cartel threat waned late last year after the
major countries dramatically improved their trade
performance, rescheduled their debts, obtained new
lending, and saw interest rates fall.
US bank-
ers still remain apprehensive about the Latin
American debtors collectively repudiating their
debt. We believe that some governments, such as
Bolivia and Cuba, may fuel this concern by advo-
cating a cartel.
' Threats of a debtors' cartel have resurfaced, but we lack extensive
reporting on the willingness of key debtors to support collective
action. To assess the potential threat, we simulated a meeting of the
Cartagena group (Argentina, Bolivia, Brazil, Chile, Colombia,
Dominican Republic, Ecuador, Mexico, Peru, Uruguay, and Vene-
zuela), a consultative mechanism on debt organized in 1984. The
participants filled information gaps with their own analysis of the
political and economic factors that would prove decisive in new
deliberations. Through a role-playing exercise, we considered form-
ing a debtors' cartel and then discussed other types of collective
action to force repayment concessions from creditors. In this article,
the judgments attributed to individual governments represent those
The forum was a closed-door deliberation of a
Cartagena group ministerial meeting, the typical
setting in the past. Experienced analysts played
finance ministers from Brazil, Mexico, Argentina,
Chile, and Bolivia and foreign ministers from
Brazil and Uruguay. We believe this incorporated
moderate and radical viewpoints, involved the key
decisionmakers as well as maverick elements, and
struck a balance between financial concerns and
political considerations.
We believe the country analysts were good proxies
for the Western-educated elites that conduct nego-
tiations. Reliable reporting indicates that the debt-
ors test their perceptions about banker response to
their proposals. Consequently, we built in an auto-
matic feedback mechanism by including a repre-
sentative of a US moneycenter bank.
In the exercise, the participants were instructed to
defend their self-interests. The debtors viewed this
mandate in terms of reducing the repayment bur-
den while the creditors sought to protect interest
payments. Unlike a brainstorming session, the
simulation forced the group to interact dynamical-
ly. We believe we were able to consider a broad
range of variables in making policy recommenda-
tions and gauge the extent to which rhetoric influ-
enced the interaction among the participants.
Simulation Results:
A Debtors' Cartel
Our simulation persuaded us, however, that there is
only a slight possibility that such a group could
coalesce:
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? The divergence between the economic interests of 25X1
the larger, more moderate governments and the
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smaller, more radical debtors fragmented efforts
to organize a cartel. Although La Paz and Lima
argued there was little to lose, Buenos Aires
maintained that confronting creditors would un-
dermine efforts to obtain multiyear debt resched-
uling and new loans. As the simulation pro-
gressed, we saw a consensus that the economic
costs of radical action would be too high. The
largest and most influential debtors remain con-
cerned about protecting access to new credit. A
cartel, the group decided, might provoke retalia-
tion from industrial governments, resulting in the
potential loss of foreign aid and export markets.
? Mexico, Brazil, and Ecuador played key moder-
ating roles in our simulation. Mexico City-
fearing the cessation of trade credits and damage
to its improving relations with the United
States-emphasized potential losses. Brasilia ad-
vocated moderation in order to maintain good
relations with banks and to head off OECD
protectionism. Quito, a strong advocate of
market-oriented policies, philosophically rejected
outright confrontation with creditors.
Simulation Results:
Collective Action for New Repayment Schemes
According to the US Embassy in Buenos Aires, the
foreign ministers of Argentina, Brazil, and Uru-
guay recently discussed an Argentine proposal for
Latin American debtors collectively to reschedule
debt payments to commercial banks.
this would be achieved by capping
interest rates to provide fixed, lower repayments to
banks with the IMF and World Bank issuing bonds
to creditors to cover the difference. In our
simulation:
? The Latin American nations found the idea of a
fixed, predictable repayment schedule attractive
and considered raising the issue in future discus-
sions with creditors. Most were concerned, how-
ever, that collectively forcing the scheme would
alienate creditors, causing the immediate loss of
trade credit lines and new lending, as well as
derailing the possibility of future concessions.
The debtor representatives also were sobered by
the technical difficulties of formulating a specific
plan. No major debtor country currently felt that
foreign exchange strains were intense enough to
justify a unilateral reduction in interest
payments.
? Mexico, Brazil, and Chile each played a key role
in our deliberations, but their positions were
conditional on other factors. Although Mexico
prefers to maintain its good reputation with credi-
tors, it indicated that a drop in oil prices com-
bined with domestic political pressures could push
it to threaten a capping scheme. Similarly, Brazil
and Chile indicated they would reconsider their
opposition to the proposal if exports and reserves
drop markedly.
Over the past several weeks, Fidel Castro has
attempted to ally himself with the Latin debtors by
publicly speaking out on their financial plight. In
numerous speeches, he has argued that creditors
should cancel their debt; otherwise, Latin countries
should simply refuse to pay. Castro's arguments
were given short shrift in our simulation. Some
debtors were piqued by his attempt to grab the
limelight, while others pointed to his hypocrisy in
espousing radical action while privately working
out new debt arrangements for Cuba. Except for
Bolivia, the group believed his proposal would
jeopardize their good relationships with creditors
and industrial country governments.
Simulation Results:
Intensified Joint Pressure for Concessions
The option of cooperative pressure on creditors for
concessions arose spontaneously in the course of our
group discussions. It was the only proposal that all
debtors would accept, because it highlighted finan-
cial problems without jeopardizing the current good
relations with foreign creditors. This option
emerged, we believe, because Latin governments-
under domestic political pressure to restore eco-
nomic growth-feel compelled to find some course
that will gain further debt servicing concessions:
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? In the simulation, the debtors agreed to use both
the press and direct lobbying-in particular with
the US Congress and Washington bureaucra-
cies-to publicize the need for easing Latin
America's debt burden. They also opted to con-
tinue the Cartagena group as a loose confedera-
tion to provide mutual support and to share
information on successful approaches.
? Throughout the discussion, Brazil and Mexico
focused attention on the need to reduce trade
barriers and lower interest rates. Conversely,
Argentina, Bolivia, and Peru advocated high-
lighting the danger of political instability and
resulting economic chaos to nudge creditors to-
ward providing new concessions.
The Imponderables
Although we are confident of our analysis, over the
longer run dramatic changes in the economic and
political equation could substantially heighten the
prospects for a cartel or collective rescheduling. We
believe this scenario could occur as a result of any
of a number of developments:
? Deteriorating external conditions could severely
diminish debt service capabilities. Slowed global
economic growth, the spread of protectionism,
and the collapse of commodity prices-notably
oil-would reduce exports, or rapidly rising inter-
est rates would swell the burden of interest
payments.
? Foreign banks and the IMF could require more
stringent austerity in return for new money or
debt relief. In the view of debtor governments,
such policies would likely lead to political
instability.
? Domestic political reverses in one or more coun-
tries could encourage Latin civilian governments
to take firmer stands with foreign creditors.
? A leader of a large Latin debtor-Alfonsin of
Argentina seems the most likely candidate-
driven by a personal sense of destiny and ambi-
tion, may tout revolutionary changes. Other
countries could become more receptive to radical
action if a well-respected, major debtor led the
way.
? Collusion by two or more Latin countries on the
debt issue could breed wider acceptance of collec-
tive action throughout the region.
Implications for the United States
The simulation exercise complemented recent re-
porting that indicates that the views of the Latin
debtors are evolving in a more political direction.
We expect the Latin Americans to mount increas-
ingly frequent and intense joint lobbying efforts to
obtain concessions from commercial banks and
industrial country governments. Latin leaders, in
our exercise, seemed convinced that resolution of
their financial problems hinged largely on US
Government policies and actions.
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Key LDC Debtor:
Lackluster Investment
Portends Problems '
The high investment growth that powered the
economies of the key LDC debtors during the past
two decades may be a thing of the past. After an
unprecedented four-year plunge, investment in
these countries is only now beginning to recover.
Even if this recovery is sustained, we believe invest-
ment growth through 1989 will be slower than in
the past. The fallout from this dramatic shift in
investment behavior will multiply the economic and
political problems these countries will face during
the next decade. In particular, slow investment
growth will limit their economic recovery, further
aggravating existing political and economic ten-
sions. Sluggish investment growth may also place
additional strain on the international financial sys-
tem by jeopardizing compliance with IMF-support-
ed programs and eroding trade competitiveness.
Investment Slump
We believe three key factors underlie the recent
investment slump:
? Financing difficulties probably were the major
drag on investment. The pool of funds available
for investment fell by 15 percent during the last
two years. Lower domestic savings and reduced
access to foreign borrowing stifled investment by
either pushing up financing costs or, where inter-
est rate controls exist, causing a shortage of
funds.
? Economic recession produced an unprecedented
slump in aggregate demand that led to an invest-
ment decline when the expected returns from
investment projects plummeted and internally
generated investment funds dried up.
? Heightened economic and political uncertainty
also contributed to poor investment performance.
Investors found it impossible to gauge the future
returns from projects, and massive capital flight
In general, investment growth in the key LDC
debtors was impressive before the international
financial crisis shattered the two-decade-old trend.
Over the past four years, investment in these
countries declined by nearly $55 billion-a 30-
percent drop. Investment last year was well below
1980 levels in each country. (See foldout on page
13.) fn Argentina, investment plunged by nearly 55
percent during the past four years. The investment
slump was severe, but less dramatic, in Chile,
Brazil, Peru, and Mexico. At the end of last year,
their investment stood 25 to 35 percent below 1980
levels. Nigeria, the Philippines, and Venezuela
fared somewhat better, registering investment de-
clines of only 10 percent. F_~
' This article summarizes an upcoming research paper. Key LDC
debtors include Argentina, Brazil, Chile, Mexico, Nigeria, Peru,
the Philippines, and Venezuela. Investment refers to gross fixed
investment-investment in structures, machinery, and equipment.
All dollar values and growth rates are based on constant 1980 US
restricted the supply of investment funds.
Limited Investment Recovery
Our analysis indicates that investment in the key
LDC debtors will rebound during 1985-89, but it is
unlikely that investment growth will be high
enough to restore investment to its level before the
international financial crisis. We expect investment
to grow at an average annual rate of 3 to 5 percent
during the rest of this decade, a dramatic improve-
ment over the average decline of 8.2 percent regis-
tered during the past four years, but well below the
7.3 percent average growth of the 1971-80 period.
Even if these countries sustain investment growth
of 5 percent through 1989, only two-thirds of the
1981-84 investment decline will be reversed.
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Key LDC Debtors: Rankings by Key
Factors Underlying the Investment
Outlook
Ranking relative to other Key LDC Debtors
? Highest
?I
? Lowest
Demand Availability Stability of Investment
prospects of investment political- prospects
funds economic
system
Argentina
9
0
0
Brazil
0
Chile
Mexico
0
?
Nigeria
0
Peru
Philippines
Venezuela
0
0
?
In our judgment, a modest economic recovery in
the key LDC debtors during 1985-89 will lead to an
investment rebound. Rising aggregate demand
should stimulate investment by increasing the ex-
pected returns from investment projects. We fore-
see minimal improvement, however, in the other
key factors affecting the pace of investment. Slug-
gish domestic savings and limited access to foreign
borrowing suggest that the high cost/limited avail-
ability of investment funds will continue to put a
damper on capital formation. A significant im-
provement in the underlying level of political-
economic stability in these countries also appears
unlikely.
Individual Country Outlooks
Our analysis indicates that investment growth in
the key LDC debtors will vary widely across coun-
tries during 1985-89. We believe Mexico will lead
with investment growth averaging 4 to 6 percent.'
Although problems exist, Mexico's demand pros-
pects and political-economic stability are ranked
higher than those of the other countries. After a
period of harsh austerity, demand is projected by
the major economic consulting firms to grow at an
average annual rate approaching 5 percent. Al-
though opposition parties are gaining strength, the
long tenure of the government party should lead to
relative political-economic stability. Regarding the
availability of investment funds, only Venezuela is
ranked higher. Mexico's banking system is relative-
ly mature and efficient, but inflation, devaluation
fears, and capital flight will continue to dampen
domestic savings and limit the supply of investment
funds.
In Venezuela and Brazil, annual investment growth
is likely to average 3 to 5 percent through 1989.
With demand projected to grow at an annual rate
of about 4 percent, the demand prospects of these
countries are relatively good. Venezuela's tradition-
ally high savings rate, low inflation, and relatively
stable currency earned Caracas the highest ranking
for availability of investment funds. Investment
funds may be more scarce in Brazil because of
triple-digit inflation and high devaluation risk.
Given Venezuela's two decades of democracy and
the broad popular and military support for the
constitutional process in Brazil, the future political-
economic environment of these two countries
should be relatively stable.
In Peru, Chile, and the Philippines, we believe
investment will grow 2 to 4 percent a year thfough
1989. Demand prospects are considered fair-GDP
' Projections were developed by ranking each country according to
the key factors that will determine investment growth during the
1985-89 period-aggregate demand prospects, cost/availability of
investment funds, and the stability of the political economic system.
By examining these rankings, investment growth projections were
assessed and a range of average annual investment growth was set
for each country. Our projections were then compared to, and in
some cases revised in light of, the investment growth forecasts of
outside experts. Given the volatility of investment spending, our
projections should be viewed as benchmarks that indicate the
underlying trend in investment growth. As has historically been the
case, annual investment growth may fluctuate dramatically around
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Key LDC Debtors: Investment
Growth Outlook
Indicates projected range, 1985-89
? Indicates average, 1971-80
Mexico
?
Venezuela
?
Brazil
?
Chile
?
Peru
?
Philippines
?
Argentina
?
Nigeria
?
Key LDC Debtors
?
I 2 3 4 5 6 7 8 9 10 11 12
is expected to grow, on average, about 3 percent per
year. Historically low savings in Chile and inflation
and devaluation concerns in Peru and the Philip-
pines should limit the supply of investment funds.
Instability in all three countries should stifle invest-
ment growth. In Peru, the nationalistic, left-leaning
philosophies of President-elect Garcia, the Sendero
Luminoso insurgency, and a history of shifting
economic policies raise serious concerns about
political-economic stability. In the Philippines, a
country with a more stable economic system, the
Aquino assassination, the presidential succession
question, and a growing insurgency have boosted
investor uncertainty. We believe rising opposition
to the repressive rule of President Pinochet will
keep the level of political-economic uncertainty
high in Chile.
Investment growth in Argentina and Nigeria
should be slower than in the other countries, aver-
aging only 1 to 3 percent through 1989. Demand in
these countries probably will be sluggish, expand-
ing at about 2 percent per year, on average.
Historically, low savings have restricted the supply
of investment funds in these countries. This trend
should continue as inflation and devaluation risk
discourage domestic saving and spur further capital
flight. Although Argentina has recently taken bold
steps to reduce runaway inflation, the country's
economic system may remain unstable. Political
stability, however, may improve marginally under
President Alfonsin. If the economy limps along,
Alfonsin may be the first democratically elected
president since 1952 to complete his term. Nigeria,
on the other hand, with a more stable economic
system has dismal political prospects. Lagos is
plagued by divisions in the ruling military, student
dissatisfaction, and regional tension.
Even if investment grows at the highest projected
rates through 1989, only three key LDC debtors
will regain the ground lost since the international
financial crisis. Venezuela, the Philippines, and
Nigeria could have investment in 1989 that is 2 to
15 percent higher than before the crisis. Their full
recovery will be the result of less severe investment
downturns rather than to particularly rapid invest-
ment growth during 1985-89. In contrast, we pro-
ject investment in Argentina will still be roughly 50
percent lower in 1989 than in 1980. Peru and Chile
may regain more lost ground than Argentina, but
their investment should still fall about 30 percent
short of precrisis peaks. Mexico and Brazil should
regain all but about 10 to 15 percent of the ground
lost following international financial problems.
Implications
Recent and projected investment performance in
the key LDC debtors foreshadow a number of
problems. Because investment is required to expand
productive capacity, slow investment growth will
limit their rate of economic growth over the longer
term. On the heels of the drop in living standards
registered recently, any further declines would
aggravate existing social tensions. Slow investment
growth may also impede structural adjustment.
Economic restructuring may require investment
growth well above our projections. Slower structur-
al adjustment could jeopardize compliance with
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Secret
Key LDC Debtors: Investment
1970-84
Billion 1980 US S
200
IMF-supported programs and cause international
financial problems and economic inefficiency to
linger over the longer term. Slow investment
growth may also limit the flow of new technologies
to these countries thereby slowing economic growth
and hurting trade competitiveness.
If these problems develop, US relations with the
key LDC debtors could become more contentious:
? There could be increased pressure on Washington
to take these countries' needs into account during
the formulation of US monetary, fiscal, and trade
policies.
? These countries could press the United States for
increased development assistance. In a cash flow
bind, the United States may be forced into the
role of "lender of last resort."
? If debtor-creditor conflicts arise, the United
States may be caught in the middle; both debtors
and creditors would pressure Washington to sup-
port their positions.
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Key LDC Debtors: Investment by Country, 1970-89'
Billion 1980 US S
Note scale change
Brazil
60
50
40
30
20
10
0 1970
75
80
84
Venezuela
40
30
20
10
0 1970
75 80
84
aShaded area represents the projected range of investment
during the 1985-89 period, assuming our projected range of
average annual investment growth.
3985 7.85
Mexico
60
50
40
30
20
10
89 0 1970
75
80
Philippines
10
89 0 1970
75
80
84
84
Argentina
40
30
20
10
89 0 1970
Chile
10
8 0 1970
75
75
80
80
84
84
Secret
I ii
Nigeria
40
30
20
10
89 0 1970
75
80
84
Peru
10
89 0 1970
75
80
84
13
Secret
89
89
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Secret
The Sino-Soviet Trade and
Cooperation Agreements:
A Step Forward
China and the USSR signed a $14 billion five-year
trade agreement and a separate economic coopera-
tion agreement-the first such agreement in 20
years-on 10 July as part of Vice Premier Yao
Yilin's four-day visit to Moscow. Although some-
what of a breakthrough in economic relations,
bilateral trade by 1990 will still only represent less
than 5 percent of each country's total trade. The
cooperation agreement could prove more signifi-
cant in that it will result in direct Soviet participa-
tion in Chinese industrial projects. Together, the
two pacts provide a framework for continued dia-
logue and improvement in overall political and
economic relations.
Terms Negotiated Until Last Minute
The trade accord reportedly calls for rising levels of
bilateral trade, reaching $3.5 billion in 1990, for a
total of $14 billion over the five-year period. By
comparison, trade conducted during 1981-85 is
expected to total only $4 billion, with this year's
figure projected at $1.6 billion. Unlike the trade
accord, no value was given for the cooperation
agreement, although in May
that USSR participation in Chinese industrial pro-
jects could reach up to $1 billion per year by 1988.
the long-term
trade agreement sets out a general framework
within which annual protocols can be negotiated.
Two types of barter exchange have reportedly been
established. The first-as is the case for trade
now-requires the yearly settlement of accounts.
The second allows the Chinese to pay for imports of
capital goods and technical assistance over a multi-
year period.
The economic cooperation agreement reportedly
involves the Soviet supply of machinery, capital
equipment, and technical assistance to support
China's Seventh Five-Year Plan (1986-90).
the USSR wi
participate in seven new Chinese development pro-
jects-including two thermal power plants, two
coal mines, and a 1,000 kilometer rail line-as well
as the renovation of 17 existing plants. Several
smaller projects have also been targeted for Soviet
participation. This marks the first time in over 20
years that the Chinese have asked the Soviets for
assistance and technology in the construction of
new plants. During the height of the Sino-Soviet
relationship in the late 1950s, Moscow was involved
in over 200 projects in China.
Soviet deliveries of manufactured goods, chemicals,
raw materials, and transport equipment are also
likely to rise as a result of the new agreement.
Beijing will continue to need imports of such Soviet
metals as nickel and steel alloys. At the same time,
despite recurring problems with quality and tardy
delivery, China will probably want to increase its
imports of timber, industrial chemicals, and fertil-
izers.
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We expect Moscow will seek higher imports of
meat, soybeans, grain-mostly corn-and other 25X1
agricultural products. Similarly, to supplement its
own production, Soviet imports of wool, cotton,
apparel, and textiles are likely to rise. Finally if the
Chinese can increase their domestic production, the
Soviets also may try to boost their imports of such
consumer electronics as televisions and radios.
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Clearly, both sides can benefit from an expanded I
economic exchange, but the decision to formalize 25X1
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this expansion within a multiyear trade agree-
ment-after a 20-year hiatus-reflects a slow pro-
cess of improving relations since 1980:
? Regular political consultations at the deputy for-
eign minister level.
? A sharp increase in bilateral trade and a resump-
tion of scientific and technical exchanges.
? Low-level nonpolitical contacts at athletic meets,
cultural events, and the like.
Probably the most important of these moves was
the resumption of Sino-Soviet political discussions
in October 1982. Although the six rounds of "con-
sultations" to date have done little to resolve major
political and security issues, the dialogue has,
nonetheless, helped reduce tensions. Moreover, by
expanding various forms of cooperation, as well as
increasing bilateral trade, Moscow and Beijing
have helped repair some of the damage inflicted on
their relationship during the 1960s and 1970s.
Their success in improving relations, in turn, has
demonstrated to other countries that Sino-Soviet
ties are not frozen, even though the two sides
remain deadlocked on the main issues dividing
them.
Besides helping both sides to show some balance in
their ties to the United States, both countries have
individual reasons for signing the new accords. The
Soviets almost certainly look upon the new agree-
ments with China-especially the project assis-
tance-as a means of regaining some of the influ-
ence that they had wielded in Beijing before
relations deteriorated in the early 1960s. Indeed,
a number of
the USSR's top Sinologists believe that there are
Chinese officials who are dissatisfied with the
current leadership's policy of developing close ties
to the West, particularly with the United States.
According to these Soviet experts, many of the
more "hopeful" Chinese cadres were educated in
the USSR during the 1950s, and want a return to
better relations with Moscow or at least a more
balanced approach to the two superpowers. F_~
The Soviets almost certainly have tailored such
remarks to their Western audience. While the
degree of Chinese support is probably not as wide-
spread as the Soviets claim, some Chinese appar-
ently do see increased trade and economic ex-
changes-which are unlikely to evolve into
economic dependencies-as a comparatively safe
way to improve their relationship with the USSR
without compromising on more fundamental politi-
cal issues. Furthermore, the Soviets appear to be
including Chinese who, as Marxist-Leninists, ad-
mire the highly centralized Soviet planning system
(and who have reservations about China's economic
reforms), but who also have serious problems with
many Soviet policies, especially toward China.
Economic Benefits: The Soviet Perspective
In addition to political reasons, both countries had
strong economic incentives to sign the new agree-
ment. Moscow is undoubtedly anxious to boost
imports of agricultural products and consumer
goods from China. Besides reducing shortages and
saving on high transportation costs particularly for
the Soviet Far East, these increased imports also
would provide a boost to the Soviet Long Term
Consumer Goods program that is scheduled to be
unveiled as part of the upcoming 12th Five-Year
Plan.
Another positive aspect of increased trade from
Moscow's vantage is that it will allow the USSR to
acquire through barter goods that would otherwise
require the expenditure of foreign exchange. At the
same time, Moscow will be supplying goods, pri-
marily equipment, which have only limited demand
in the West. Any hard currency savings will be
relatively small, however, in comparison with total
hard currency expenditures. China can probably
supply the USSR with 1-3 million metric tons of
grain-primarily corn-and several hundred thou-
sand tons of soybeans annually for at least the next
few years saving Moscow $200-500 million a year.
Hard currency expenditures for meat-which aver-
aged $350 million in 1981-84-could be cut by
additional purchases from China; in 1984, imports
of meat from China totaled over $100 million.
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The Chinese Side of the Ledger
Increased sales to the USSR will provide China
with an outlet for its growing production of textile
fibers, fabrics, and apparel. Both the United States
and Western Europe have placed restrictions on
imports of some Chinese products-including tex-
tiles and consumer goods-forcing Beijing to
search for alternative markets.
The use of Soviet capital equipment, machinery,
and technical assistance-in addition to raw mate-
rials-will also prove beneficial to Beijing. The
Chinese have apparently decided that, for some of
those factories built originally with Soviet help, it is
cheaper to modernize using Soviet equipment. Al-
though this equipment may not be as technological-
ly advanced as that available from the West, it will
still improve industrial performance. The Chinese
probably also believe that for a number of new
projects-primarily energy-the Soviets can pro-
vide technology that is as good as in the West and
without the expenditure of hard currency.
Given these incentives, we believe the annual trade
turnover goal of $3.5 billion by 1990 is possible.
Nonetheless, even this level by 1990 would still
probably represent less than 5 percent of each
country's total trade.
Although trade levels under the agreement will be
a function of bilateral political ties, transportation
problems may be the principal long-term impedi-
ment. Even now, rail transport is so tight on both
sides that many products are shipped by sea. Port
congestion in both China and the Soviet Union,
however, has also slowed deliveries. China is build-
ing new port capacity to alleviate seagoing freight
delays, but planned improvements to the rail sys-
tem in both countries are not likely to be sufficient
to eliminate major problems.
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Secret
11-11
oviets Interested in
US and Canadian
Drilling Rigs
fAinese Offshore
Oil Developments
Briefs
The Soviet Union has narrowed the bidding on deep-drilling rigs for the
Karachaganak gasfield to three US and one Canadian firm,
The Soviets have been negotiating to purchase
54 land drilling rigs with 7,000-meter-depth capacity with a total value of
$150-200 million. Further negotiations await final Soviet funding approval
export credits.
which is not likely before late this year. each US
firm could produce the rigs at its own plants or through licensees in Canada,
France, Italy, Finland, or Japan. The decision to limit the competition to US
and Canadian firms probably reflects Soviet recognition that rigs made from
US-designed components are the world's best. If the Soviets opt for a US firm,
they may still insist that the rigs be manufactured outside the United States as
a precaution against US trade restrictions. US companies may also prefer to
produce abroad because of lower manufacturing costs and access to foreign
The first 18 offerings in China's second round of offshore oil leases drew bids
from 23 firms in ten countries, including at least five from the United States.
No date for awarding leases has been set. Four additional blocs south of
Hainan Island will remain open to bidding until September. Beijing had to
sweeten its terms after blocs auctioned in the first round yielded only one
commercial well. Two other blocs negotiated unilaterally by the Japanese and
the French have also proved commercial. China and Japan have reached basic
agreement to develop commercial production in the Bohai Bay, and will spend
$200 million to produce 9,000 b/d. Initial production is expected in 1987.
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Br zil's Difficult
,Negotiations
With the IMF
Finance Minister Dornelles believes the differences between Brasilia and the
IMF have narrowed sufficiently to permit an early standby agreement,
according to US Embassy reporting, but we believe the negotiations that
resumed on Monday could be long and difficult. To pave the way for an
agreement, Brasilia announced measures in early July to reduce by 36 percent
the projected $18 billion public-sector deficit for this year
the announced cuts were substantially smaller
than those sought by the IMF. Brasilia intends to
request from creditor banks another three-month rollover through November
of debt repayments, suggesting that the government anticipates drawn-out
talks. Dornelles continues to have difficulty selling his austerity proposals
within the Brazilian government. Not only has President Sarney become
increasingly agitated by Fund demands,
but the US Embassy reports that many of the politicians in the
PMDB-the larger of the two parties in the governing coalition-would like
nothing better than to force a break with the IMF.
Mexico
Bud t Overruns
Rising balance-of-payments problems and large budget overruns are pushing
Mexico out of compliance with IMF targets and may force the government to
seek new foreign loans. Mexico's recent oil price cut averaging about $1 per
barrel, combined with earlier price adjustments and lower export volume, will
reduce 1985 petroleum export earnings by about $1.5 billion from the 1984
level. Capital flight has doubled and international reserves have dropped by
one-half to approximately $4 billion
rIn
discussion with the IMF, the Mexicans are likely to plead extenuating
circumstances and ask for easier terms; bankers will consider loans only if the
Fund declares Mexico is in compliance with the IMF program.The deteriorat-
ing foreign payments situation will soon force Mexico City to adjust the
exchange rate. This is not likely to prevent financial problems from getting
worse, especially if oil prices continue to drop. President de la Madrid so far
has been unwilling to cut spending enough to bring the deficit near the IMF
targets. While a third round of budget cuts will be made soon, we doubt they
will be sufficient
Poland's Government Poland and the Paris Club of Western creditor governments signed an accord
Debt Rescheduled on 15 July to reschedule approximately $11 billion in overdue debt over a
period of 11 years, according to press reports. The agreement was initialed
earlier this year, but formal signing was delayed when Warsaw tried to obtain
new credits from the governments and failed to make required payments on ar-
rears from the 1981 rescheduling agreement. To implement the new accord,
Warsaw is required to sign bilateral accords with individual governments, to
Secret 20
19 July 1985
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IMF Postpones
Loans to Morocco
complete payments on arrears from the 1981 agreement, and to make interest
payments on the rescheduled debt. Poland is unlikely to cover more than half
of the $900 million due to governments if it continues to give priority to
imports and payments to bank creditors. The Poles probably will demand new
trade credits in the bilateral negotiations, but Western governments are
unlikely to commit more than minimum amounts, at best. If Poland fails to
pay, the Paris Club may demand a new private rescheduling that provides for
equal treatment of creditors~ 25X1
Morocco's efforts to secure $300 million in IMF loans collapsed last week. The
government's failure to conclude its 1983-84 commerical debt rescheduling
agreement with the London Club, large arrears on official debt to Paris Club
members, and poor performance on meeting IMF guidelines this year
prompted the Fund's decision to postpone new assistance until at least
September. Recent promises of large-scale aid from Saudi Arabia and Libya
may be a factor in Rabat's intransigence as well as the favorable terms 25X1
Morocco enjoys by prolonging the 1983 short-term credit and rescheduling
arrangements The problems with the 25X1
IMF preclude any progress on urgently needed debt rescheduling for 1985 and
1986. This latest setback also is likely to spark renewed attacks by opposition
parties who are critical of the government's financial management, bending to
creditor demands, and willingness to put the burden of austerity on the poor.
25X1
T hisian Financial Tunis is considering a number of measures to stem the rising debt burden and
Stringency Considered the outflow of foreign exchange-foreign exchange reserves of $200 million
~lncertain Future
for Somali
Standby Agreement
cover less than a month of imports. A devaluation of the dinar of 10 to 15 per-
cent is likely by the end of the year to help control import growth. In addition,
cuts in the 1985 budget of up to $100 million are being considered to trim bor-
rowing needs. The US Embassy says the government has not yet approached
the IMF for financial assistance or help with debt rescheduling, but a 25X1
continued oil market slump makes such a move likely by the end of 1986. The
current domestic political situation, however, probably will cause officials to
focus on short-term financial juggling rather than on long-term debt planning
and on the difficult choices in subsidies as well as economic liberalization-
especially in agriculture. 25X1
Somalia's failure to meet an IMF performance target criterion that calls for
the elimination of external arrears is jeopardizing financial liberalization
efforts and the adjustment program approved earlier this year. Insufficient
foreign exchange income has prevented Mogadishu from retiring overdue
obligations. Earnings have been reduced by Saudi Arabia's continued ban on
imports of Somali cattle, a switch by aid donors from cash to commodity
contributions, contractor claims, and diminishing oil grants. Somali officials,
moreover, claim that the priority given the private sector by the IMF
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payments.
agreement leaves too small a share of export earnings for the government to
meet its official obligations. The deteriorating foreign payments situation has
eroded Somali confidence in other IMF liberalization measures, such as
privatization of state enterprises and the unification of official and market
exchange rates. Development programs also have been set back as multilateral
donors cut off disbursements in response to Somalia's inability to make
Uruguay's Preliminary The four-month-old Sanguinetti government is counting on an IMF package to
IMF Agreement avoid suspending interest payments. According to press reports, IMF Manag-
ing Director de Larosiere has recently given tentative approval to an 18-
month, $120 million standby arrangement in which Montevideo pledged to
bring its fiscal deficit down from 10 to 6 percent of GDP, to lower inflation to
60 percent from the current 78 percent, and to maintain a floating exchange
rate. We believe that the IMF package is required to keep Uruguay's
financing gap manageable. Based on government estimates, capital inflows
will total 30 percent less then the projected $110 million current account
deficit through December. To cover the gap, Montevideo is approaching its
foreign commercial banks-which recently agreed to roll over principal
repayments until the end of September-for $130 million in new money, but
negotiations have yet to begin in earnest. With foreign exchange reserves
virtually exhausted, Montevideo will need to keep a tight lid on imports to re-
main current on obligations.
Global and Regional Developments
Developed Countries
Honda Complicates Honda's decision to export cars to Canada from its US plant further
Canadian-Japanese complicates Ottawa's ongoing negotiations with Japan on an auto import
Auto Negotiations restraint agreement. In the recent preliminary understanding, Ottawa agreed
to continue the 18-percent limit on Japan's share of the Canadian auto market
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Secret
anada Not
Restraining
f Korean Cars
and said it would accept a higher limit if Japan substantially increases its
investment in Canada. Tokyo, however, agreed only to avoid disrupting the
Canadian market and views anything up to 22 percent as meeting this
condition. As a result of Honda's decision, other Japanese automakers are
pressing Tokyo to seek a limit higher than 18 percent in the final agreement. 25X1
The others are unhappy at the prospect of Honda increasing its Canadian
market share-which it can do because the US-built Honda cars will not count
against the quota. Meanwhile, to make up for the US-built cars sent to
Canada, Honda apparently plans to ship more Japanese-produced cars to the
United States now that Tokyo has eased its US voluntary restraints. We
believe the final outcome likely will involve an increase in the quota on
Japanese cars in return for a Japanese pledge to modestly boost investment in
Canada. 0 25X1
Despite complaints from domestic manufacturers about a surge in imports of
South Korean Hyundai cars, Ottawa thus far is sticking to its scheduled
January 1987 date for imposing a tariff on LDC autos. Hyundai, which is us-
ing Canada as a test market before beginning exports to the United States, has
seen its Canadian sales soar 270 percent in first half 1985, as compared with
the year-earlier period. South Korea is now behind only Japan in the Canadian
auto market with a nearly 6-percent market share. The Canadian Motor
Vehicle Manufacturer's Association has suggested Ottawa is avoiding action
because it does not want to jeopardize attempts to sell South Korea a nuclear
reactor. Canadian Finance Department officials stress South Korea's willing- 25X1
ness to purchase Canadian auto parts, and especially Hyundai's decision to
build a parts plant in Canada, as factors behind Ottawa's decision to delay tar-
iff applications. Canada's resistance to demands to restrict Korean imports
may also reflect the success of Seoul's extensive lobbying of prominent Tory
politicians. F_~ 25X1
Divestiture of Canadian Potential aircraft sales have increased the likelihood Ottawa will be able to sell
Aerospace Companies Canadair and de Havilland, thereby continuing the Tory government's policy
of privatizing public corporations. 25X1
Canadian officials are telling prospective buyers that China is interested in
purchasing a number of Canadair's Challenger business jets. In addition,
recent approval of a short takeoff and landing airport in the heart of London 25X1
should prove beneficial to de Havilland, whose Dash-7 is the only airplane that
meets the strict noise and nerformance standards.
Canada must soon purchase $5 billion worth of large L~DA"I
transports to upgrade its aging commercial and military fleet. Acquisition of a
Canadian aircraft firm would give an investor a "foot in the door," and could 25X1
be used in fulfilling demands Ottawa is likely to make for partial production in
Canada. In addition to possible US buyers, a West German firm, Messer-
schmitt-Boelkow-Blohm, has expressed an interest in the Canadian companies,
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ptalian Government
/Review Focuses
on Economy
cut in British
/Interest Rates
without a mandate and increase the likelihood he will stay home
President Mitterrand told Japanese interviewers last week that economic
summits are no longer "fruitful exchanges of views" and that he sees no reason
for France to participate unless they change. Mitterrand's threat that he will
not attend the Tokyo summit next spring is not an idle one. He found the Bonn
summit-where he was generally isolated and seen as unwilling to compro-
mise-particularly distasteful, but he has been complaining for several years
that summits have become too structured and overly orchestrated. Mitterrand
wants more emphasis on exchanging views rather than on winning consensus.
If the Socialists lose the legislative elections next spring, it will leave him
a major influence on the longer run stability of the coalition.
Italy's five-party coalition government is reviewing its policies with debate
expected to focus on economic problems, particularly the rapidly growing
public-sector deficit. Last week, Rome raised its 1985 budget deficit forecast
by $5 billion to $60 billion-16 percent of estimated GDP-largely because of
higher unemployment compensation and use of the wage supplement fund. So
far, Prime Minister Craxi has been unable to win coalition agreement on
cutting the deficit, and discussions at the policy review are likely to be divisive.
Treasury Minister Goria, a Christian Democrat, has called for new taxes to
make up the expected revenue shortfall. On the other hand, Republican
Finance Minister Visentini, supported by the Socialists and Social Democrats,
insists that spending must be cut before new taxes can be considered. Craxi an-
ticipates a compromise which may include some new indirect tax measures.
The outcome of the debate will help to determine which portfolios are changed
in the widely anticipated cabinet shuffle later this summer-and will also have
unlikely.
Leading British commercial banks lowered their base interest rates to 12
percent on Monday, the lowest level since the height of the pound crisis in Jan-
uary. The banks followed the lead of the Bank of England, which had made a
one-half point cut in its money market dealing rate a few days earlier. The cut
came as a surprise to many British forecasters who had assumed that excessive
money supply growth would prevent any reduction in interest rates. London-
although pleased with sterling's recovery against the dollar-apparently
became concerned that the parallel surge against the West German mark
would threaten export competitiveness. The government also hoped to appease
industry leaders, who recently blamed Thatcher's economic policies for
damaging the recovery and demanded an immediate 2-point reduction in
interest rates. Although industry lobbies and worried or dissident Tories will
continue to press the government to make further cuts in interest rates,
London's overriding concern with inflation makes substantial reductions
Israeli Compromise A nationwide general strike was averted this week when the government and
on Austerity labor leaders from Histadrut agreed on controversial wage compensation
demands, even though negotiations continue over reductions in public-sector
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latest compromise, however, may weaken his hand in future talks.
employment. The accord eliminates wage indexation through September;
instead it awards employees lump-sum payments less than their usual cost-of-
living adjustments. The press reports that the wage talks succeeded in part
because the 14.9-percent inflation rate in June was far below what labor had
expected. The agreement is a political face saver for Prime Minister Peres and
Histadrut leader Kessar, but it is not likely to solve Israel's economic woes.
The government realizes that it needs to implement the rest of the austerity
program it adopted on 1 July-particularly the budget cuts-and eventually
supplement the program with additional tax and monetary reforms. Peres's
New Zealand's According to recently released government statistics, consumer price inflation
Economy in Trouble in June reached 22 percent at an annual rate-compared with 9 percent a year
USSR and Egypt
Deadlocked on
Military Debt
earlier. The data also show that economic growth has steadily declined during
the last 12 months-the economy actually contracting by 1 percent in first
quarter 1985, as a result of a major shakeout in manufacturing and farming
and a tight monetary policy in the face of rising prices. Nevertheless, unions
are setting the stage for a showdown with the government by demanding
immediate 15- to 20-percent cost-of-living increases. Wellington has pledged
not to award any wage increases until the next round of negotiations in
September-and then to grant only moderate pay hikes in order to promote in-
dustrial restructuring.
Less Developed Countries
No resolution of Cairo's repayment of its estimated $2.5 billion military debt
to the USSR emerged from the Soviet-Egyptian economic talks in Cairo last
week In a week of discussions, the two
sides were unable to agree on the debt's size or on whether to apply Cairo's
trade surplus funds, now frozen in Moscow, to repayment. Moscow reportedly
rejected out-of-hand Cairo's argument that the size of the debt ought to be re-
duced by the amount Egypt spent on reproducing Soviet spare parts after the
arms cutoff in the mid-1970s and by the rapid depreciation of the equipment.
The Egyptians told the US Embassy that the dispute is delaying implementa-
tion of the trade protocol agreed on in May. Major progress was probably not
achievable; even so Cairo proved to be more uncompromising than expected. It
is clearly unwilling to sacrifice on thorny economic issues for the sake of
improving overall relations. When the talks resume, probably this autumn, the
USSR's desire for closer ties may lead it to consider Cairo's proposal that the
frozen trade surplus be used to modernize Soviet-built plants in Egypt. While
Moscow may allow a small amount for this purpose, it probably will demand
that most be used to liquidate the military debt.
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Bolivia Gets Tough V The Siles administration's increasingly nationalistic investment policies will
With Foreign Investors intensify economic problems passed on to the next government. According to
US Embassy reports, the government recently canceled exploration rights for
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Shell Petroleum after it postponed oil drilling in light of current economic and
political instability. Shell-the only multinational now exploring for oil in
Bolivia-stands to lose its $22 million investment. In addition, the government
also nationalized the 38-percent US-owned Totoral Mine, the largest tin mine
in Bolivia, alleging fraudulent activities. We believe Siles's moves will worsen
the economy's downward spiral. Current operations would be paralyzed as
foreign managers leave and access to technology and essential imports is cut.
The next administration would also find it more difficult to attract the foreign
investment necessary for economic reconstruction.
Chile Eyes New Export Santiago is considering a major export assistance program to reduce its current
Promotion Measures account deficit. Despite devaluations in March and June, depressed world
demand for copper-which accounts for nearly half of export earnings-
caused Finance Minister Buchi to reduce the trade surplus projection by 30
percent to $700 million. To encourage export diversification, the US Embassy
reports that Santiago is proposing legislation to provide direct incentives to
export industries-including a 10-percent export rebate scheme, increased
export financing, and new export insurance facilities. The Pinochet govern-
ment is drafting this legislation carefully to avoid violating GATT rules
against export subsidies. Although Santiago advocates free market policies, we
believe these proposals indicate a growing state role in directing economic
activity.
Libyan pomestic An increasing number of Libyans in Tripoli are complaining about an
unprecedented deterioration in living conditions
Shortages of food, water, and electricity have become a way of
life as a result of spending cuts forced by the slump in oil revenues since 1981.
Two people were killed recently in a melee over bananas and another person
died while waiting in line for shoes, available for the first time in several
months. stenciled graffiti criticiz-
ing the regime has appeared on walls near Qadhafi's residence in Tripoli.=
there is an emerging concensus
among Libyans that Qadhafi's social experiment has failed and that change is
needed. We believe that continued austerity will further erode Qadhafi's
domestic support and exacerbate deep-seated regional tensions over distribu-
tion of scarce resources, a condition which heightens prospects for regime-
threatening unrest.
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Mozambique Projects Maputo claims it can meet only 60 percent of its grain needs through April
Grain Deficit 1986. The lingering effects of drought-especially in the southern provinces-
V/ and the impact of insurgent activity on seed and fuel distribution has severely
reduced domestic production. According to the government, local production
and foreign aid will provide about 452,000 metric tons of the 750,000 tons of
grain Mozambique requires to feed its 13 million people. Maputo probably will 25X1
seek additional food aid from US and other foreign donors to make up the
deficit. 25X1
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secret
Chrom Deposits
in Greenland
'Taiwan's Trade
Liberalization
US Chemical built ethylene plant in Nizhnekamsk. The contract calls for replacement of
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Deposits of chromite ore on the southwest coast of Greenland have been
opened to development, according to Embassy reporting. Although extensive
drilling and core sampling will be required to determine ore quality, a
Canadian mining firm, Greenex, will soon receive a nonexclusive prospecting
license for chromite and other minerals in the region. The Danish Government
said it would welcome interest by US mining firms as well. If exploitable, these
deposits could provide a new, more reliable source of supply for this strategic
mineral. The United States presently depends on imports for about 80 percent
of its chromite needs-with half coming from South Africa. Currently, South
Africa and the USSR provide over 50 percent of world production, and
southern Africa holds 99 percent of the world's known reserves.
Taiwan's 9 July decision to remove the import visa requirement on 3,000
products represents only a small concession in its highly publicized plan to
liberalize its trade barriers. The move follows a February 1985 decision which
freed some 5,000 textile and agricultural products from the same import
license requirement. The impact of these moves will likely be minimal, given
the extent to which remaining tariff and nontariff barriers continue to restrict
imports. Taiwan's trade surplus for the first half of 1985 was about $5 billion.
A Soviet trade organization has placed a tentative order with a Japanese 25X1
company for 1 million personal computers for use in schools
An initial order, with shipment desired by September, 25X1
for 7,000 to 10,000 units will be evaluated for their suitability. The USSR is
also interested in obtaining TV monitors and printers but would develop its
own software. The Politburo recently endorsed an ambitious computer literacy
program with the long-range goal of placing 10 million computers in schools.
Limitations in their own industry are forcing the Soviets to purchase foreign
computers, at least initially. The computers involved are similar to the Appl"
II and are not under COCOM controls. A purchase of this size would be
unusual, however, and Moscow may be holding out the promise of a major pur-
chase to obtain computer production technology or plants-a gambit it has
used with other Western companies. 25X1
viet Contract for A US firm reported winning a $12 million contract to modernize a Japanese-
Equipment some Japanese equipment with newer process technology, instrumentation,
and controls. The plant, completed in 1976, incorporated US technology and
some US equipment. The momentum generated by the recent Joint Commer-
cial Commission meeting and the upcoming summit in November appears to
have improved the commercial environment for US firms. This is the first
sizable Soviet order of US chemical equipment since 1982. Moscow probably 25X1
views it as a test of US commitment to expanded nonstrategic trade. The firm
expects to obtain a US export license within two weeks. Q 25X1
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S viet Interest in
apanese /
Microcomputers
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Beijing had decided to cut from 14 to four the number of coastal cities
opened last year under regulations favoring foreign investment. The decision
probably was made at a conference held in late June of mayors of coastal cit-
ies. financial
controls will be reimposed on the 10 smaller cities. Shanghai, Tianjin, Dalian,
and Guangzhou will remain open cities. The decision to modify the policy,
which has been closely identified with top leader Deng Xiaoping, probably was
made under pressure from conservative leaders, who have increasingly criti-
cized corruption, waste, and inefficiency in the open cities. The reduction-
part of an overall retrenchment in the economy-probably represents Deng's
decision to cut his losses as he prepares for a major party conference in
September. Recent press articles praising the general policy of opening to the
outside world and the fact that Beijing is pushing ahead with controversial
wage reforms indicate that the reformers are determined to keep the basic
program on track.
l ina's New Japanese China has arranged to borrow $2 billion from a syndicate of Japanese banks-
'ommercial Credit led by the Bank of Tokyo-to finance some of the development projects in its
Havana Trying To
Expand Trade With
Japan
Secret
19 July 1985
Seventh Five-Year Plan, 1986-90. The loans, which will carry an interest rate
of only 0.25 to 0.375 percentage point over the London Interbank Rate and a
10-year repayment period, can be drawn on for the next five years. This line of
credit replaces a $2 billion arrangement negotiated with Japanese commercial
banks in 1979 that expired unused last month.
The Chinese probably will continue to avoid using commercial credit
L
lines until all available concessional financing is exhausted. They are currently
seeking several billion dollars in export credits from West Germany, the
United Kingdom, France, Italy, Canada, and Austria, in addition to those
from Japan. The Chinese may buy as much as $50 billion worth of capital
goods during the next five-year plan, of which perhaps $10 billion will be
financed with long-term loans. Nevertheless, China will have no problems
servicing its debt, which currently stands at only about $6 billion.F-1
a Japanese economic delegation visiting
Havana has agreed to establish a joint corporation to promote bilateral trade.
The corporation, to be established in Japan by mid-1987, will encourage
imports of Cuban rum, frozen fruit pulp, and coffee by allowing Japanese
packaging and processing. This would further Cuban attempts to increase
exports to Japan through diversification of products. Bilateral trade volume
has stagnated over the last two years after recovering from a sharp drop in
1982 and early 1983. Although Japanese exports to Cuba have risen, imports
have declined because of decreased sugar purchases.
uba has had difficulty meeting payment schedules for Japanese goods
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