WESTERN EUROPE: ECONOMIC LINKS WITH THE SOVIET BLOC

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84S00555R000200050003-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 31
• Document Creation Date: December 21, 2016
• Document Release Date: September 19, 2008
• Sequence Number: 3
• Publication Date: May 1, 1983
• Content Type: REPORT

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Directorate of Secret
Intelligence
Western Europe:
Economic Links With
the Soviet Bloc
State Dept. review completed
Secret
EUR 83-10132
May 1983
Copy 41 1
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Intelligence
Western Europe:
Economic Links With
the Soviet Bloc
This paper was prepared by
Comments and queries are welcome and may be
directed to the Chief, West European Division,
EURA,
Secret
EUR 83-10132
May 1983
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Western Europe:
Economic Links With
the Soviet Bloc
Key Judgments Western Europe's economic links to the Soviet Bloc ` are dominated by
Information available merchandise trade. While other categories of economic relationships, such
as of 1 April 1983 as flows of services and investments, are generally extremely small, the
was used in this report.
large loans made to Bloc countries during the 1970s make some West
European banks vulnerable to a Bloc default. Although a default by a
single country probably would not cause major problems, a Bloc-wide
default might force the West European governments to intervene to protect
their banking systems.
Even the trade links to the Bloc are relatively small. Last year the Bloc's
share of exports from the NATO countries of Western Europe was only 3.2
percent,2 the lowest level in at least 20 years; over half of these exports
came from West Germany. Imports from the Bloc have held up better, due
mainly to purchases of Soviet oil and gas. The Bloc's share of total
European NATO imports reached 4.5 percent, its highest level since 1964.
Over the years the Soviet Union has accounted for an increasing proportion
of the Bloc's trade with NATO Europe. In the 1960s and early 1970s, the
Soviet share of total trade (exports plus imports) was typically about one-
third. Last year, for the first time, it exceeded one-half. On the import side,
NATO Europe's purchases were increasingly concentrated on the USSR
because of its ability to provide oil and natural gas. Meanwhile financial
problems forced East European countries to reduce'their imports and
raised the Soviet share in Europe's exports to the Bloc
NATO Europe's trade with the Bloc is largely an exchange of capital-
intensive manufactures for simpler goods. Exports to the USSR are
dominated by machinery and steel, although chemicals and foodstuffs are
also important. Exports to Eastern Europe are more diversified. Machinery
is still the largest category, but consumer goods, foodstuffs, chemicals,
steel, and other semifinished goods are also significant. Four-fifths of
imports from the USSR consist of fuels-crude oil, oil products, and
natural gas-whereas a wide range of products is imported from Eastern
Europe.
' The Soviet Bloc refers to the USSR and the East European countries of Poland, East
Germany, Czechoslovakia, Hungary, Bulgaria, and Romania.
2 All trade data presented in this paper are from Western sources. In all cases the export
data is shown on an f.o.b. basis while the import data is c.i.f.
iii Secret
EUR 83-10132
May 1983
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The importance of East-West trade for employment tends to be exagger-
ated by the West Europeans. For West Germany, where the data are best,
we estimate that in 1982 only about 0.9 percent of the labor force depended
on this trade for their jobs. The percentage in the rest of NATO Europe
was presumably even lower because these countries combined sold slightly
less to the Bloc than did West Germany.
The West Europeans still strongly defend their trade with the Bloc and em-
phatically reject any measures that suggest "economic warfare." They
continue to believe that trade with the West will tend to restrain Soviet be-
havior-although optimism on this score has declined substantially in the
wake of the events in Poland and Afghanistan. Proponents of trade with
the Bloc now tend to focus more on the economic benefits of such trade.
Economic ties between Western Europe and the Soviet Bloc are not likely
to increase substantially during this decade. Western banks will remain
reluctant to boost lending to the Bloc, and Bloc export prospects will be
limited by the sluggish economic growth expected in Western Europe.
Increased Soviet gas earnings will be offset by declining oil exports. With
its access to hard currency thus limited, the Bloc's share of Western
Europe's exports is not likely to increase.
The West Europeans may be willing to make some concessions in order to
avoid episodes such as last year's dispute over the Soviet pipeline. In
particular they might be willing to renounce an additional Soviet pipeline
as a means of meeting their gas needs in the 1990s-in part because
another pipeline would greatly increase their feeling of vulnerability and in
part because projections of gas demand are being revised downward. They
might also agree to some further tightening of COCOM rules, especially if
the United States can make a strong case that the Soviets have used
COCOM-approved material in the past to strengthen their military.
Another possibility is a broad framework accord on credits for the Soviet
Bloc, although the West Europeans will argue that not much more is
needed because of the drastic curtailment of private lending to the Bloc
and the OECD consensus agreement last July that raised minimum
interest rates on government-backed credits for the Soviets. The West
Europeans will attempt to ensure that any agreement implies equal burden
sharing among the Western countries and, in addition, does not have the
appearance of US imposition of its policies on others.
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Key Judgments
Other Economic Relationships
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Western Europe:
Economic Links With
the Soviet Bloc
General Attitudes Toward East-West Trade Figure 1
The West Europeans generally believe that increased NATO Europe: Trade With the Soviet Bloc
trade with the East is both a result and a promoter of
detente. The view probably is less firmly held than in
the mid-1970s because of the dropoff in exports late in Billion US $
the decade, the continuing Soviet military buildup, 35
and the events in Poland and Afghanistan. Neverthe-
less, most West Europeans still argue that Soviet
behavior will be more restrained if the USSR has a
large stake in the international economic system.
West European governments generally reject the use
of economic sanctions against the Soviet Bloc except
in very limited cases for the purpose of making a
political point. An example would be the very modest
trade restrictions imposed by the EC on the USSR in
response to the declaration -of martial law in Poland.
The West European rationale basically is that sane-
Lions=may hur-t tthe West-as-mush-as-the-East-and; in- --_--
any event, do not affect Soviet behavior. Underlying
this attitude is a strong feeling that the cost of
sanctions will not be distributed evenly among the
Western countries and that Western Europe in partic-
t-ri'~1'~T
0 1962 64 66 68 70 72 74 76 78 80 82
-
LL10.1 Y1111 uV0.1 a ilia 1 1
1G Ul L11G UU1 UG11.
The West Europeans nonetheless do not view trade
with the East purely as an economic phenomenon.
This is shown, for example, by the participation, of the
major_W. -est-European_governments-in 000OM
strictions on exports that could improve Soviet mili-
earnings and credits from Western banks and govern-
tary capabilities. Even here, however, they tend to ments. Since then the Bloc's share of NATO Europe's
take much=narro- - - -- v_than does-thelJnited- - exports-has-fallen_dramaticalt
States in deciding what goods fall into this category.
attempts to curb the growth of its hard currency debt.
Last year the share was down to 3.2 percent, the
lowest level in at least 20 years, as NATO Europe's
Trade Patterns exports to the Bloc declined even in value terms.
Taken as a whole, the trade of the NATO countries of
Western Europe with the Soviet Bloc is relatively The Bloc's relative. decline as a market for NATO
small. Over the last two decades the Bloc share of Europe's exports is due mainly to Eastern Europe. In
their exports usually has been in the 3- to 4-percent the mid- 1960s exports to these countries were double
range, with a peak of 4.9 percent in 1975. The mid-
1970s export boom was financed mainly by Soviet oil
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Table 1
NATO Europe: Trade With the Soviet Bloc, 1982 a
Poland
East
Germany
Czecho-
slovakia
Hungary
Bulgaria Romania Total
EE
USSR
Total
Soviet
Bloc
Exports
2,078
3,294
1,375
1,941
1,016
1,094
10,799
9,196
19,995
West Germany
873
2,538
773
1,072 .
486
368
6,110
3,936
10,046
France
442
258
108
198
106
159
1,271
1,558
2,830
Italy
167
125
109
222
163
131
917
1,529
2,446
United Kingdom
230
110
120
132
82
210
885
623
1,508
Netherlands
144
101
87
132
44
52
560
424
984
74
51
63
88
46
48
370
533
903
Denmark
48
30
24
36
7
5
150
86
236
Norway
48
9
18
20
3
15
113
97
210
Spain
40
53
32
25
32
34
216
224
440
9
14
38
13
43
64
181
135
316
Imports
2,366
4,260
1,764
1,538
630
1,883
12,441
17,658
30,099
West Germany
884
2,716
840
755
194
537
5,926
4,669
10,595
France
330
284
172
173
101
386
1,446
2,883
4,329
Italy
289
168
249
301
121
549
1,677
3,632
5,309
United Kingdom
257
242
144
73
35
92
843
1,129
1,972
Netherlands
151
209
128
83
20
99
690
2,518
3,208
Belgium-Luxembourg
106
137
55
34
27
26
385
1,456
1,841
106
159
61
35
10
17
388
333
721
97
183
36
19
1
11
347
225
572
Spain
94
105
30
20
16
112
377
495
872
Portugal b
5
11
8
2
1
4
31
96
127
Greece
47
46
41
43
104
50
331
222
553
a Because of rounding, components may not add to totals shown.
b January to November data only for Portugal.
those to the USSR, and this proportion was main-
tained in the early 1970s as the East Europeans
stepped up imports of Western goods to modernize
their economies and upgrade living standards. The
rising tide of imports was financed largely by credits,
which the East Europeans planned to repay through
improved export performance. However, systemic in-
efficiencies coupled with recession and rising protec-
tionism in the West dashed their hopes for strong
growth of hard currency sales
With their debt service obligations increasing, most
East European countries began to retrench in the late
1970s and slowed growth largely through steep cuts in
investment. Only East Germany held to a growth
policy based on rising hard currency imports and debt.
In 1981, Poland's economic decline, Romania's finan-
cial chaos, and mounting concern among Western
lenders over creditworthiness of the Council for Mu-
tual Economic Assistance (CEMA) countries gen-
erally forced all except Bulgaria to cut hard currency
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Figure 2
European NATO Countries:
Trade With the USSR and Eastern Europe
USSR
Exports Imports
0 1962 64 66 68 70 72 74 76 78 80 82
Eastern Europe
Exports Imports
0 1962 64 66 68 70 72 74 76 78 80 82
-West Germany
France
Italy
United Kingdom
-Small NATO countries
0 1962 64 66 68 70 72 74 76 78 80 82
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imports. As a result NATO Europe's exports to
Eastern Europe fell sharply in dollar terms-ending
two decades of steady growth-and the decline accel-
erated in 1982. Last year NATO Europe's exports to
Eastern Europe totaled $10.8 billion and accounted
for just 1.7 percent of total exports-barely half the
percentage recorded in 1974 and 1975
The Bloc's share of NATO Europe's imports has risen
in recent years, following a long period of decline
during the 1960s and stagnation during the early
1970s. The pickup mainly reflects increased purchases
of energy from the USSR. Imports from the Bloc
totaled $30.1 billion in 1982, of which almost three-
fifths came from the Soviet Union. The Bloc's share
of imports reached 4.5 percent, its highest level since
1964.
Higher imports from the East coupled with slumping
exports have pushed NATO Europe's trade with the
Soviet Bloc sharply into deficit. The $4 billion surplus
of 1975 had by 1981 turned into a $4 billion deficit,
and last year the deficit soared to $10.1 billion-of
which $8.5 billion was with the USSR.
NATO Europe's trade with the USSR is largely an
exchange of steel and machinery for fuels. Energy
products now account for about four-fifths of Soviet
exports to the area; roughly two-thirds of these energy
exports consist of crude oil and oil products, with
natural gas accounting for most of the remainder. By
the end of the decade most energy forecasters expect
natural gas to become the dominant commodity as
Soviet oil exports taper off and the new gas pipeline
comes into operation. Other significant Soviet exports
are raw materials, chemicals, gold, and diamonds.
West European exports to the USSR are dominated
by machinery, especially heavy industrial machinery,
and steel products, especially large-diameter pipe. In
recent years exports of agricultural products have
gained importance, accounting for more than one-
fifth of the total in 1981.
Trade with the other Bloc countries is considerably
more diversified. More than three-fourths of NATO
Europe's shipments to Eastern Europe are manufac-
tured goods-primarily machinery, semifinished
products (mainly steel and textiles), and chemicals.
Foodstuffs have gained importance as the East Euro-
peans cut back on investment and now account for
15 percent of exports. On the import side foodstuffs
and raw materials each account for more than 10
percent, fuels for more than 20 percent, and manufac-
tures for just over half of the total. About one-third of
the manufactured imports are semifinished goods,
particularly textiles and basic metals, while another
one-third consist of clothing and other consumer
goods.
The Jobs Factor
The importance of exports to the Soviet Bloc for West
European employment probably has been exaggerat-
number of West German workers that depend, direct-
ly or indirectly, on exports to the Bloc is probably
close to 250,000-equal to 1.0 percent of total em-
ployment or 0.9 percent of the labor force. While the
number of jobs is relatively small, the political signifi-
cance is magnified by the fact that the jobs tend to be
concentrated in industries that are both highly union-
ized and badly hurt by the current recession. For
example, in the steel industry we estimate that
5.9 percent of the jobs (or 15,000 workers) depend on
exports to the Bloc, while in the machiner industry
the figure is 2.6 percent (26,000 workers).
For the other NATO European countries combined,
the total number of jobs dependent on exports to the
Bloc probably is greater than the 250,000 figure that
we estimate for West Germany. Their exports to the
Bloc almost matched West Germany's in dollar value
in 1982, and the goods they sold probably were, on
average, more labor intensive than those of West
Germany. It is likely, however, that in each of the
other NATO European countries, the percentage of
total employment dependent on exports to the Bloc is
below the 1.0 percent estimate for West Germany.
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Figure 3
NATO Europe's Trade With the Soviet Bloc:
Commodity Composition
1970
Exports
Other- 1.0
Chemicals
Machinery
1980
Exports
13.7 25.7
5.5
6.3
18.5 26.2
Semifinished
mods
Other
Chemicals
Machinery
Semifinished
goods
Foodstuffs
Other Economic Relationships
Other categories of economic ties that play a major
role among Western countries-such as flows of
services and investment-are extremely small be-
tween East and West. The major exception is the
large debt that the Bloc countries ran up with West-
ern Europe, mostly during the 1970s. Although the
West Europeans now find themselves overexposed, we
believe that they could cope reasonably well with a
default by any single Bloc country. The greatest
exposure is that of West German banks to Poland,
and their nervousness has been an important determi-
nant of West German attitudes and policy on East-
West issues. Nevertheless, as of last year each of the
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six most heavily involved banks had sufficient loss
reserves to write off its Polish loans. In fact, the
stronger banks have already begun to do so. Although
it seems highly unlikely, a Bloc-wide default would
obviously be far more serious, and we suspect it would
lead to a major intervention by the West European
governments to prevent a banking crisis.
The Siberian Gas Pipeline
The acrimonious pipeline dispute arose in part be-
cause both Americans and West Europeans initially
underestimated the importance that the other side
attached to the pipeline. By the time Washington
raised strong objections, the West European govern-
ments had already committed themselves to the deal,
and contract negotiations were well under way. More-
over, the US arguments initially focused on the
question of energy dependence on the USSR-an
issue that the West Europeans said they had already
studied carefully and resolved to their satisfaction.
Given the advantages that the West Europeans see in
the pipeline deal, however, we doubt that any shift in
the timing or nature of the US objections would have
altered the outcome.
The West Europeans clearly are convinced that the
-pipeline deal is a good one for them, taking into
account their projected energy needs and considering
such aspects as the cost and reliability of Soviet gas,
the cost of their export credit subsidies, and the export
sales for West European industry that are likely to
result. And, despite less bullish demand forecasts now
than three years ago, they remain convinced that they
will need large additional gas supplies, especially in
the 1990s. The West Europeans stress that the pipe-
line will not increase their overall energy dependence
on the Soviets because their oil imports from the
USSR will fall sharply over the next few years. In our
judgment they have not focused extensively on what
the additional gas revenue might do for Soviet mili-
tary power, but they tend to argue that the Soviet
military will get the resources it wants whether or not
the pipeline is built. They are skeptical that it is in the
West's interest to cause cutbacks,in Moscow's con-
sumer-oriented and civil investment expenditures that
they believe would result if earnings from the pipeline
were reduced or cut off.
Numerous statements by West European leaders
make it clear that their prime energy goal is to reduce
their dependence on OPEC. While that dependence
has fallen significantly since 1973, a sustained OPEC
embargo would still have a devastating impact. In
searching for OPEC substitutes, the West Europeans
obviously would prefer to find energy sources in the
industrial West because of their reliability. It is partly
for this reason that they plan to expand substantially
their use of coal and nuclear power. The Soviet gas
will help reduce dependence on OPEC by substituting
for oil in home heating, and to date there have been
no alternative gas sources that could match the Soviet
offer. West European gas producers have been neither
willing nor able to expand production sufficiently in
the 1980s, or to boost exploration/development to
ensure deliveries down the line; moreover, potential
non-European sources-such as Algeria, Nigeria,
Qatar, Indonesia, Iran, or Canada-appear too unre-
liable, too expensive, or both.
The West Europeans argue further that the Soviet gas
deal is relatively advantageous in terms of security,
flexibility, and price:
? Security. The deal provides the West Europeans
with a 25-year (1984-2008) gas supply from a
partner that they clearly consider to be more reli-
able than OPEC. They have repeatedly stated their
belief that Moscow will deliver the gas on schedule
both to maintain its hard currency earnings and to
preserve its reputation as a reliable trade partner.
? Flexibility. The Soviets also agreed to significant
flexibility in gas deliveries. Numerous reports con-
firm that West Germany has a one-time option to
permanently reduce the base amount of gas in its
contract (10.5 billion cubic meters per year, exclud-
ing West Berlin) by up to 20 percent.' More impor-
tant, each purchasing country in each year of the
contract will have the right to reduce deliveries
during that year up to 20 percent below the base
amount. This option likely will be utilized during
the early years of the contract, when the West
Europeans appear to be facing a gas surplus.
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Table 2
NATO Europe: Energy Dependence on the USSR, 1980 a
Million
Percent Million Percent Million Percent Million Percent Million Percent Million Percent
tons oil
equiva-
lent
from
USSR
tons oil from
equiva- USSR
lent
tons oil from
equiva- USSR
lent
tons oil from
equiva- USSR
lent
tons oil from
equiva- USSR
lent
tons oil from
equiva- USSR
lent
Total
1,106.7
5.0
259.6
0.8
575.1
6.6
172.4
9.7
39.1
0
60.4
0
West Germany
272.2
6.1
83.5
0.2
130.5
5.5
43.3
21.0
10.1
0
4.8
0
France
198.2
6.2
35.7
2.5
109.3
7.9
21.9
12.2
14.4
0
16.9
0
Italy
142.1
9.2
13.2
5.2
93.4
8.0
23.1
21.2
0.5
0
11.8
0
United Kingdom
201.5
0.5
69.6
0
80.6
1.2
41.1
0
9.0
0
1.2
0
Netherlands
65.5
9.7
4.1
0
29.6
21.5
31.0
0
0.9
0
0
0
Belgium/ Luxembourg
50.4
5.1
13.4
1.3
24.2
9.8
9.5
0
3.0
0
0.3
0
Denmark
19.2
7.7
6.1
0.1
13.2
11.1
0
0
0
0
-0.1
0
Norway
24.1
0.6
1.4
0
9.1
1.5
0.9
0
0
0
12.6
0
Spain
75.2
2.3
15.3
0.3
49.9
3.3
1.6
0
1.2
0
7.1
0
Portugal
10.7
4.5
0.5
0.6
8.2
5.9
0
0
0
0
2.1
0
Greece
16.2
4.6
3.5
0.6
11.7
6.2
0
0
0
0
0.9
0
Turkey
31.4
0.6
13.3
0
15.4
1.3
0
0
0
0
2.8
0
a Because of rounding, components may not add to totals shown.
? Price. While the recent decline in oil prices makes
the Soviet gas deal appear less attractive than when
it was signed, recent reporting from the Paris and
Bonn Embassies make it clear that the West Euro-
pean purchasers are still satisfied. We believe that
all the contracts are patterned on the one signed by
Ruhrgas of West Germany. According to the Bonn
Embassy, this contract specifies a minimum
deutsche mark price for the gas, which, at the
1 May 1983 exchange rate of 2.46 deutsche marks
per US dollar, works out to about $4.80 per million
Btu. On an energy-equivalent basis, this corresponds
to oil at $27 per barrel. For comparison, at the time
of signing the price of oil was $34 and was expected
to continue rising. The contract also contains an
escalator clause linked to oil prices. Although the
link is mainly to heavy fuel oil and heating oil rather
than crude, the escalator clause probably would go
into effect only when the price of crude rises above
$40. At that point the gas price would begin rising
above the minimum figure, in proportion to any
additional oil price increases. The purchasers thus
seemed assured of always getting the gas at a price
substantially below the energy-equivalent price for
oil. The recent drop in oil prices, along with the
possibility of further declines, has created an unex-
pected situation. It appears, however, that the gas
contracts also contain an escape clause that permits
the purchasers to pay the prevailing market rate for
gas should it drop below the minimum price for an
extended period. In any event, press and embassy
reports agree that the companies buying the gas do
not seem to be worried by the drop in oil prices.
Two recent studies tend to support the West European
view of the security aspects of their gas contracts. A
detailed report by the US Embassy in Bonn concludes
that West Germany-usually considered to be the
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The key energy question now facing the West Europe-
ans is how they will cover their gas needs in the 1990s
and beyond. Although gas consumption has declined
for three consecutive years, most energy forecasters
believe that this trend will be reversed when economic
recovery begins and that consumption will increase by
one-third or more by the end of the century. Domestic
gas production meanwhile will fall substantially. In
particular, production in the Netherlands will drop
sharply, due to both declining fields and government
policy: The Hague wants to preserve more gas for
domestic use and thus does not plan to renew many
gas export contracts that expire in the 1990s. French
gas production also' will fall as its major fields near
exhaustion. All told, the West Europeans appear to
be facing a gas deficit toward the end of the century
that could equal the throughput of one-and possibly
even two-Soviet export pipelines.
Norway offers Western Europe's only hope of meeting
its additional gas needs from domestic sources. Nor-
wegian offshore reserves are large enough, but the gas
would be expensive because of the difficult operating
conditions. A second problem is the go-slow approach
of the Norwegian Government, which does not want
the economy to become overly dependent on energy
production. The Netherlands could produce more gas
in the 1990s than it now plans; if budget deficits
remain large, The Hague might be pushed in this
direction. Another possible option is a Dutch-Norwe-
gian gas swap, whereby the Netherlands would step
up gas output through the mid-1990s and receive
Norwegian gas in later years in exchange. We doubt,
however, that the economics of such a swap would be
attractive to The Hague. Among non-European gas
sources, only Algeria seems clearly able to supply
large additional amounts of gas at reasonable cost in
the 1990s. Buying Algerian gas would not, however,
contribute to the West Europeans' goal of reducing
their energy dependence on OPEC. Algeria, moreover,
has so far established a rather poor reputation for
reliability as an energy supplier.
most vulnerable country-could cope quite well with
an indefinite cutoff of Soviet deliveries even after the
new pipeline is completed. The West Germans would
accomplish this partly by stock drawdowns and fuel
switching, but mainly by exercising their contractual
right to step up gas purchases from the Netherlands.
In fact, according to the report, with just a few hours'
notice Bonn could boost its Dutch imports by more
than enough to offset a complete Soviet cutoff-
although we do not know how long the higher delivery
rate could be maintained. The embassy report also
states that the West German pipeline system is
capable of redistributing the gas to southern Germany
where most of the Soviet gas is consumed. A draft
concludes that through the mid-1990s West Germa-
ny, France, and Italy could all cope with a Soviet gas
cutoff. The report points to the relatively large gas
storage capacity that should be in place by the 1990s,
the large number of industrial gas users with inter-
ruptible contracts, and the surge production capacity
in the Netherlands.
Outlook
Economic ties between Western Europe and the
Soviet Bloc are not likely to increase substantially
during the remainder of this decade.'The surge in
trade that occurred in the mid-1970s was financed
mainly by increased lending from Western banks and
higher Soviet oil earnings following the 1973 OPEC
price increase; there is little chance that either of
these events will be repeated. The banks clearly do not
want to increase their exposure to Eastern Europe,
and Soviet oil exports are almost certain to fall over
the next few years-perhaps more than offsetting
increased earnings from gas exports via the new
Siberian pipeline. Bloc exports of raw materials and
manufactured goods will be restrained by the slug-
gishness of economic growth in Western Europe and
by continuing high unemployment rates in industries
such as clothing and textiles. With its access to hard
currency thus restricted, the Soviet Bloc is not likely
to increase its share of NATO Europe's exports much
above the 3.2 percent figure recorded in 1982.
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While the West Europeans are anxious to avoid a
repeat of the pipeline dispute, they almost certainly
will be adamant on several prerequisites to any agree-
ment on future economic policy toward the USSR: (1)
the burden must appear to be shared evenly among
the Western countries; (2) the measures must not be
applied retroactively, and, (3) the measures must be
aimed at Soviet military power, not at the civilian
economy. Possible areas of compromise might include:
? The second strand of the pipeline. Construction of a
second Soviet pipeline would be one way to meet
Western Europe's projected gas shortfall in the
1990s, although there are no negotiations in imme-
diate prospect. The West Europeans would be
concerned about substantially increasing their
dependence on Soviet gas. The gas needs, moreover,
perhaps could be satisfied by some combination of
other measures: conservation, substitution of other
fuels, or expanded gas production in Norway and
the Netherlands. Given these possibilities, the West
Europeans might be willing to renounce the Soviet
option.
? Tighter COCOM restrictions. We believe that sensi-
tivity to COCOM issues in Western Europe has
increased over the last year or so, in part because of
evidence presented by the United States showing
that technology transfers have contributed signifi-
cantly to Soviet military improvements. Neverthe-
less, the West Europeans will continue to take a
much narrower view of the subject than does the
United States and likely will agree to only limited
changes in COCOM procedures.
? Tighter credit terms. There is considerable sup-
port-particularly from West Germany-for ending
subsidized interest rates on Soviet credits. Paris still
strongly opposes the elimination of subsidies, al-
though there is at least some technical-level support
for the idea within the French Government. The
West Europeans are likely to argue, however, that
formal agreement is no longer necessary because
US objectives in this area have already been sub-
stantially achieved. They will point out that private
credit to the Soviet Bloc has been sharply curtailed
and that future official subsidies will be much
reduced by last July's agreement within the OECD
consensus.to raise the minimum rate on Soviet
credits to 12.4 percent. The subsidy issue has also
been defused to some extent by the decline in
market interest rates over the past year; it would
revive if interest rates turn up again. On two issues
the West Europeans are not likely to yield any
ground: (1) that export credit guarantees are a
legitimate export promotion device, and (2) that the
intent of the OECD consensus can be satisfied by
charging low nominal interest rates on export
credits and inflating the price of the goods to
compensate.
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Appendix
Policies and Positions of
Major Countries
West Germany
Basic Setting
West Germany's postwar prosperity has been substan-
tially based on foreign trade-probably to a greater
extent than for any of the other major Western
countries except Japan. In this context it is not
surprising that, across the political spectrum, most
West Germans favor relatively unrestricted foreign
trade, including trade with the East. While East-West
trade is valued mainly for its economic benefits, there
also has been a feeling-particularly during the mid-
1970s-that it could contribute to improved political
relations.
Underlying Bonn's whole approach to East-West af-
fairs is the long-term goal of national reconciliation.
The 1949 West German Constitution enjoins the
government to pursue this goal, and the aspiration is
overwhelmingly popular. Bonn's decision in 1955 to
rearm in support of Western Europe's defense was .
made in part because the United States, the United
Kingdom, and France agreed in principle to support
this German national objective.
West Germany's trade ties with the Soviet Bloc
predate Ostpolitik because of both geographic prox-
imity and historic trading patterns. Prior to the war,
the East European countries and Germany were each
other's most important trading partners. Thus, for a
number of West German firms, trade with the East
involved only reestablishing old relations disrupted by
the war or temporarily severed by the new Communist
regimes. Perhaps even more important, West German
firms were already known within the Bloc and the
high quality of West German products was well
established.
Bonn does not, however, regard East-West trade as a
purely economic phenomenon. For example, last sum-
mer the Interior Ministry publicly cautioned West
German firms to be more circumspect in their deal-
ings with Bloc countries, pointing out the techniques
Communist negotiators use to obtain technical know-
how free of cost.
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interest-free loan-by means of the "swing credit"-
although its importance has declined somewhat over
the last few years. In 1981 the amount of swing
credit utilized by the East Germans averaged about
this accounted for only.16 percent of their
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The Special Case of East Germany
The Potsdam Agreement of 1945 officially set the
stage for trade ties- between West and East Germany
by calling for Germany to be treated as an economic
unit. The Interzonal Trade Agreement of 1951 estab-
lished rules to govern the flow of goods between the
two parts of Germany and, in later years, Bonn
implemented a number of other policies aimed at
facilitating interzonal trade, including tax relief
measures, trade credits, and simplification of adminis-
trative procedures. As a result, West Germany has
become East Germany's second-largest trading part-
ner, following the Soviet Union. In 1982, sales to East
Germany amounted to $2.5 billion and accounted for
1.4 percent of total West German exports. From an
official -standpoint, moreover, trade with East Ger-
many still is not considered foreign trade, and this
special status is recognized by the European Commu-
nity in the Treaty of Rome.
Because of the unique relationship, trade with East
Germany is more broadly based than with other Bloc
countries. As is the case for other Eastern countries,
exports are concentrated in machinery, chemicals,
and iron and steel, but consumer goods and fuels each
accounted for about 14 percent of goods sold to East
Germany in 1982. On the import side, oil-mostly
East German refined products going to West Berlin-
and consumer goods each account for about one-
fourth of goods purchased.
There are also significant personal and financial
interactions between the two Germanys,
many of which benefit East Germany. For
example, the East Germans appear to receive unusu-
ally high fees for the services they provide for West
Berlin and-to Bonn's great irritation-they require
West German visitors to convert at least 25 deutsche
marks daily into East German currency. West Ger-
many also in effect provides East Germany with an
total debt to West Germany, the balance being
financed at commercial rates. As for personal con-
tacts, retired East German citizens are allowed to
spend up to 30 days annually in Western countries,
and many take advantage of this to visit friends and
relatives in West Germany. Largely as a result of this
traffic, East Germany sent 3.3 million visitors to the
West in 1981-more than the other East European
countries combined. West Germans are relatively free
to visit East Germany, and they accounted for almost
90 percent of the 5.1 million Western visitors to East
Germany in 1981.
Trade Patterns
For many years West Germany has been the main
Western trading partner for both the USSR and
Eastern Europe. From the West German side, how-
ever, the Bloc has never been a key trading partner
although it did gain in importance during the 1970s
and now accounts for over 5 percent of exports and
over 6 percent of imports. Rising eneigy prices boost-
ed imports from the USSR particularly rapidly, push-
ing their share of total West German imports from
1.1 percent in the early 1970s to 3.0 percent during
1982. The recent fall in oil prices probably will cause
that share to shrink this year.
Exports to the Soviet Union consist overwhelmingly of
manufactured goods, although foodstuffs have gained
in importance recently and now account for 9 percent
of the total. The manufactured goods category in turn
is dominated by steel and machinery. In 1982 steel
sales to the USSR exceeded $1 billion and accounted
for 11 percent of total West German steel exports.
Machinery sales to the USSR topped $1.3 billion; in,
the subcategory of metalworking machinery the
USSR took $300 million or 9 percent of the total
foreign sales.
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Table 3
West Germany: Trade With the Soviet Bloc
and the United States, 1982 a
World
(million
USSR
Eastern Europe
United States
US $)
Million
us $
Percent
trillion
US $
Percent
Million
US $
Percent
Exports
178,979
3,936
2.2
6,110
3.4
11,347
6.3
Foodstuffs
10,168
335
3.3
638
6.3
326
3.2
Raw materials
4,413
71
1.6
156
3.5
103
2.3
Fuels
6,971
21
0.3
420
6.0
14
0.2
Manufactures
152,903
3,390
2.2
4,772
3.1
10,848
7.1
Chemicals
21,709
387
1.8
1,240
5.7
1,080
5.0
Semifinished
32,201
1,358
4.2
1,350
4.2
1,833
5.7
Steel
9,761
1,056
10.8
434
4.4
1,003
10.3
Machinery
48,869
1,338
2.7
1,711
3.5
3,484
7.1
Metalworking
3,302
298
9.0
315
9.5
283
8.6
Transport equipment
35,039
242
0.7
142
0.4
3,865
11.0
Consumer goods
15,087
65
0.4
330
2.2
585
3.9
Other
4,523
119
2.6
126
2.8
57
1.3
Imports
158,093
4,669
3.0
5,926
3.7
10,602
6.7
Foodstuffs
19,865
32
0.2
757
3.8
2,261
11.4
Raw materials
12,353
357
2.9
482
3.9
938
7.6
Fuels
37,277
3,739
10.0
1,315
3.5
413
1.1
Coal
943
4
0.4
295
31.3
181
19.2
Crude oil
18,443
793
4.3
0
0
0
0
Oil products
10,727
1,428
13.3
1,004
9.4
231
2.2
Natural gas, electricity
7,163
1,514
21.1
16
0.2
0
0
Manufactures
83,281
278
0.3
3,305
4.0
6,938
8.3
Chemicals
12,352
168
1.4
566
4.6
1,191
9.6
Semifinished
21,460
66
0.3
992
4.6
706
3.3
Machinery
19,494
15
0.1
371
1.9
3,863
19.8
Transport equipment
12,132
14
0.1
36
0.3
550
4.5
Consumer goods
17,844
15
0.1
1,340
7.5
628
3.5
5,317
264
5.0
65
1.2
53
1.0
a Trade with East Germany is included in the Eastern Europe and
World totals even though Bonn does not officially treat this as
foreign trade. Because of rounding, components may not add to
totals shown.
Four-fifths of West German imports from the USSR In trade with Eastern Europe (excluding East Germa-
consist of fuels, and these cover approximately ny) manufactures dominate in both the export and
6 percent of the country's primary energy require- import categories. Machinery accounted for more
ment. Last year West Germany obtained one-fifth of than one-third of total sales in 1982, while chemicals
its natural gas imports and 7 percent of its oil imports and semifinished goods (mostly textiles and metals)
(crude plus products) from the Soviets at a total cost
of $3.7 billion. Other significant imports were raw
materials, gold, and chemicals.
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were each over one-fifth. On the import side, food-
stuffs, raw materials, and fuels each constituted 13 to
16 percent of the total versus 56 percent for manufac-
tures. Consumer goods (especially clothing) and semi-
finished goods (especially steel) were the key manufac-
tured items. During this period West Germany was a
net importer of steel from Eastern Europe.
Trade Promotion
The overall framework for West German economic
relations with the Soviet Bloc has been set down in a
succession of broad economic cooperation agreements.
These accords, however, are little more than declara-
tions of intent; actual projects or deals are negotiated
on a case-by-case basis. The first West German-
Soviet trade accord was signed in 1958 and called on
West Germany to sell, among other things, steel
products and various machinery and equipment in
return for raw materials, chemicals, nonferrous met-
als, and oil-the same goods that compose the bulk of
trade today. The accord also extended most-favored-
nation status in mutual trade
The 1972 long-term Agreement on Trade and Eco-
nomic Cooperation was the first West German-Soviet
trade accord to go beyond simple trade relations into
the broader area of economic, industrial, and techni-
cal cooperation. It called for establishment of indus-
trial complexes, modernization of individual industrial
enterprises, and exchange of patents, licenses, and
technical documentation. This agreement also first
formalized the system of mixed commissions to inves-
tigate specific trade deals.
The most recent cooperation accord was signed in
1978 for a 10-year period and may be renewed for
three additional five-year periods. Like previous ar-
rangements, it calls for economic, industrial, and
technical cooperation between the two countries in a
wide range of areas, including raw materials and
energy development, construction of industrial plants,
joint development and production of goods, and coop-
eration with firms in third countries. During Chancel-
lor Schmidt's visit to Moscow in the summer of 1980,
West Germany and the- USSR signed another long--
term cooperation agreement intended to "add sub-
Possibilities for intensifying trade and cooperative
ventures are examined in the mixed commissions,
headed by government officials, and their sector-
oriented working groups, usually headed by industry
representatives. The working groups act as trade
associations and thereby open the door to prospective
buyers and sellers. West German businessmen and
Soviet officials negotiate specific projects and trade
deals; the West German Government does not negoti-
ate for its firms.
Credits for financing West German exports to the
Soviet Bloc generally carry no special provisions or
government subsidies. Financing is arranged through
commercial banks and, in effect, at market rates. .
When the Soviets demand interest rates below market
levels, the exporting firm usually makes up the differ-
ence between the negotiated rate and the market rate
by raising the selling price. The Soviets are well aware
of this practice. The West Germans, of course, benefit
from the fact that their market interest rates usually
are low relative to most other Western countries.
Bonn's principal trade promotion device is export
credit quarantees. The guarantees are provided by the
private Hermes company, operating as Bonn's agent;
the government thus sets policy and bears the ulti-
mate risk. It is up to the individual West German
exporter or bank to request Hermes coverage, depend-
ing on the perception of risk; exports to Western
industrial countries are almost never insured. The fee
structure is based only on the amount of the export
credit, its maturity, and whether the importer is a
public or a private entity-not on the country in-
volved. Taking a five-year credit as an example, the
fee is slightly over 2 percent in the case of a state
purchaser, almost double that for a private entity. The
maximum maturity allowed is ten years for LDCs and
eight and a half years for Communist countries.
Repayments must be made in equal semiannual in-
stallments with no grace period. The system appears
to operate in a nondiscriminatory fashion, although
guarantees for exports to the Soviet Bloc always
benefit from the lower fee because the importer is, by
-definition, a state entity.
---stance'' to-the 1975 accord.-The agreement,-however,- did little more than reaffirm the areas of cooperation
specified in the earlier accord.
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In recent years, 8 to 13 percent of total exports have
been covered by Hermes guarantees, although the
figures are much higher for sales to LDCs and
Communist countries. Outstanding guarantees cur-
rently total about $60 billion. As of early 1982 about
half of the guarantees went to OPEC countries and
one-sixth to the Soviet Bloc. Saudi Arabia was the
largest single recipient, followed by the USSR-with
about 10 percent of the total. Guarantees for the
USSR rose sharply in 1981 and apparently took
another upward jump in early 1982. The increases
most likely were due to the finalizing of previously
negotiated contracts, including some deals related to
the gas pipeline. Some West German firms may have
hastened their applications for credit insurance in the
wake of the Polish crisis fearing that restrictions
might be imposed. Shortly thereafter a Bonn spokes-
man stated that the Soviet share of guarantees would
not increase any further. It is likely, however, that
East Europe's share of Hermes coverage has contin-
ued to rise during the past year due to the increasing
reluctance of West German banks to make unguaran-
year and has a cumulative profit for 1949-82 of about
$500 million. The West Germans also note that
countries such as France and the United Kingdom
provide guarantees-plus direct interest rate subsi-
dies-for a much larger proportion of their exports.
Basic Setting
France's pursuit of a "special relationship" with both
the Soviet Union and Eastern Europe began in the
1960s under Charles de Gaulle. Over time, this policy
became an integral part of the French position in the
world, maintained to serve three underlying purposes:
? To foster commercial advantages for French busi-
ness. Simply put, Soviet and East European buyers
of Western goods and services were expected to
prefer dealing with firms from the Western country
that had the best political relations with Moscow.
teed loans to the area.
For the most part the Hermes system operates accord-
ing to economic criteria. If the risk seems large that a
particular country may not repay the loans, Bonn may
set ceilings for the guarantees, require larger down-
payments, or reduce the percentage of the loan that is
guaranteed. Political considerations can play an im-
portant role, however. The guarantees provided for
Poland in 1981 were based solely on political grounds,
as are the special restrictions which currently apply
for guarantees for South Africa and Chile.
The West Germans are strongly opposed to altering
the Hermes system, believing that it enhances the free
market rather than interferes with it. They argue that
ideally private enterprise should provide such guaran-
tees but cannot because West Germany's foreign
trade is so large relative to the size of its banking
system. (All West German banks have an aggregate
reserve for losses on the order of $9 billion, equal to
about one-sixth of the Hermes guarantees outstand-
ing.) Bonn officials point out that Hermes normally
makes a profit and that self-financing guarantee
systems are not considered export subsidies, according
to GATT definitions. Although Hermes lost about
$300 million in 1981, it edged back into the black last
? To establish France as the conduit for more commu-
nications between West and East. There also was at
least the hope that closer Eastern political and
economic relations with the West would contribute
to internal pressures to liberalize the Communist
systems.
? Finally, to highlight France's position in the geome-
try of.world power. French policymakers saw the
special relationship with the East as a means of
demonstrating France's independence without com-
promising its membership in the Atlantic Alliance.
Before the Soviet invasion of Afghanistan, few if any
French policymakers would have been likely to judge
the Franco-Soviet special relationship a failure. In-
stead, statements of government officials and editori-
alists alike indicated the judgment that the relation-
ship had increased French stature in the world and
even indirectly had stimulated East European reform
pressures. Nevertheless, French expectations and am-
bitions for the relationship have never been achieved
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in practice. This is most obvious in economic terms,
given the stagnant Soviet share of French exports.
French firms have only rarely benefited from any
special preference in dealing with the Soviets, accord-
ing to the French press and the US Embassy, and the
meager follow-on benefits have disillusioned many in
the business community.
Since Afghanistan, Paris has taken a harder line
toward the USSR and references to the special rela-
tionship have all but disappeared. The Soviet military
posture in Europe and the situation in Poland have
increasingly suggested the special relationship's obso-
lescence and forcibly demonstrated that basic French
interests lie with the West. Results from the Giscard-
Brezhnev meeting in Warsaw in May 1980 were
particularly meager. Giscard apparently hoped to
elicit some Soviet movement on Afghanistan, thus
lowering East-West tension and confirming an impor-
tant mediating role for France in salvaging detente.
The special relationship, however, proved unequal to
the task and emerged badly shaken.
The 1981 election of a Socialist government in France
marked the end of French pretensions about the
special relationship, although overall policy toward
the USSR probably has changed little. The French
Communist Party (PCF), of course, has long been one
of Moscow's staunchest supporters in Western Eu-
rope, and it favors much closer economic ties. Presi-
dent Mitterrand, however, is profoundly opposed to
the Soviet system and to Soviet actions in Poland and
Afghanistan, and he has effectively denied the PCF a
significant role in setting foreign policy.
A member of Foreign Minister Cheysson's cabinet
told an Embassy officer last September that the
French and West European view of the USSR is
basically pragmatic, while the US view is ideological.
Pointing out that Western Europe shares a continent
and a long history of relations with the USSR, the
official argued that in the absence of trade the USSR
would see Western Europe exclusively in military
terms. He said that Paris regards the Soviet economy
as basically strong and expressed doubts that US
sanctions would alter Soviet foreign policy. Even
without the revenues from the gas pipeline, he argued,
Soviet military capabilities would not be diminished
because the military always gets all it wants. Proceed-
ing from this assessment of the reality of dealing with
Moscow, the Mitterrand government strongly believes
that the West must achieve military equality with the
Soviets.
This more pragmatic and hard-nosed posture seems to
have shown itself in recent months in the negotiations
for the Astrakhan gas project. This huge gas deposit,
located near the Caspian Sea, has a high sulfur
content and cannot be exploited by the Soviets with-
out corrosion-resistant Western pipe and equipment.
Although anxious for a piece of the business, the
French-in marked contrast with earlier positions-
resisted Soviet demands for low-interest-rate credits.
They insisted that the USSR pay the higher OECD
consensus rate either directly, or indirectly via an
inflated price for the equipment, and they eventually
obtained a substantial contract in spite of their firm
position. The French attributed this success, in part,
to a political decision by Moscow and it is likely that
Paris's hammering away on the widening bilateral
trade deficit did convince Moscow that a concession
was necessary.
Despite his anti-Soviet feelings, Mitterrand is as wary
of perceived US slights to French sovereignty as de
Gaulle ever was. This showed up most clearly in the
pipeline dispute in which France took by far the
strongest stance against the US sanctions. French
officials publicly labeled the sanctions as illegal and
an infringement of European sovereignty and de-
scribed them as an attempt to wage economic war
against the USSR. In the end, when the first post-
sanctions shipping date arrived, Paris took the lead in
ordering one of its companies to violate the sanctions
by shipping the embargoed equipment.
The French participated in the post-La Sapiniere
talks that led to the revocation of the US sanctions,
but they insist that they are under no obligation to
accept any conclusions flowing from the follow-on
studies in the OECD, NATO, and COCOM. This
position is due in part to their lingering unhappiness
over the sanctions controversy itself, but it also stems
from their longstanding insistence on exercising fully
their national sovereignty in policy matters. Paris may
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Table 4
France: Trade With the Soviet Bloc and
the United States, 1982 a
World
(million
USSR
US $)
Million
US $
Percent
Million
us $
Percent
Million
US $
Percent
Exports
92,705
1,558
1.7
1,271
1.4
5,215
5.6
Foodstuffs
15,421
515
3.3
296
1.9
607
3.9
Raw materials
3,858
9
0.2
61
1.6
93
2.4
Fuels
3,712
20
0.5
8
0.2
33
0.9
Manufactures
69,245
1,014
1.5
905
1.3
4,477
6.5
Chemicals
11,880
250
2.1
250
2.1
652
5.5
Semifinished
17,412
299
1.7
270
1.6
1,053
6.0
Steel
5,636
218
3.9
70
1.2
514
9.1
Machinery
17,770
416
2.3
258
1.5
1,137
6.4
Metalworking
369
28
7.6
13
3.5
19
5.1
Transport equipment
14,059
13
0.1
82
0.6
1,196
8.5
Consumer goods
8,124
35
0.4
45
0.6
440
5.4
Other
469
0
0
0
0
6
1.3
Imports
115,702
2,883
2.5
1,446
1.3
9,109
7.9
Foodstuffs
12,330
24
0.2
173
1.4
989
8.0
Raw materials
7,627
317
4.2
151
2.0
467
6.1
Fuels
30,874
2,338
7.6
332
1.1
828
2.7
Coal
1,672
7
0.4
102
6.1
579
34.6
Crude oil
19,893
877
4.4
0
0
0
0
Oil products
5,228
823
15.7
230
4.4
228
4.4
Natural gas, electricity
4,081
632
15.5
0
0
21
0.5
Manufactures
64,347
202
0.3
790
1.2
6,803
10.6
Chemicals
9,849
122
1.2
108
1.1
904
9.2
Semifinished
15,599
17
0.1
226
1.4
525
3.4
Machinery
18,226
11
0.1
121
0.7
4,191
23.0
Transport equipment
8,616
45
0.5
39
0.5
520
6.0
Consumer goods
12,057
6
NEGL
298
2.5
662
5.5
Other
524
2
1
0.2
22
4.2
be willing to accept tighter strategic trade controls,
but only if a convincing case for them can be made.
Agreement is likely to be limited to narrowly defined
items of military significance, and the French will
attempt to rally their West European partners to
resist perceived US efforts to expand controls on
strategic exports into a more broadly discriminatory
system.
Trade Patterns
Over the last two decades the Soviet Bloc generally
has taken about 4 percent of French exports. A surge
in sales in 1975 pushed the figure to its peak of
4.9 percent, but exports have slumped badly during
the last two years reflecting hard currency shortages
in the Bloc. Exports in 1982 totaled $2.8 billion, down
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more than a third from the 1980 high. Their share of
total French exports was only 3.1 percent-the lowest
share since 1965. Exports to the USSR alone have
held up slightly better, accounting for 1.7 percent of
total exports versus a peak of 2.3 percent in 1977.
For the last three years the Bloc has accounted for
about 4 percent of total imports, up from 3 percent
during most of the 1970s. The increase since 1979
mainly reflects larger deliveries of natural gas from
the USSR. France actually had been contracting for
Soviet gas for several years, but there was no pipeline
to deliver it until early 1980. As a result, Paris
arranged a gas swap with Italy, which did have a
pipeline link to the USSR: until 1980 Italy took
France's Soviet gas, and France took deliveries of
Dutch gas contracted by Italy
Exports to the USSR and Eastern Europe are domi-
nated by manufactures-especially semifinished
goods and machinery-but foodstuffs account for
more than one-fourth of the total. Imports from
Eastern Europe are varied, ranging from raw materi-
als to finished consumer goods; more than half are
manufactured products. By contrast, imports from the
USSR during 1982 consisted almost wholly of fuels
(81 percent) and raw materials (11 percent). During
this period the USSR provided almost 7 percent of
French oil imports and one-sixth of gas imports and
accounted for about 6 percent of France's total energy
supplies.
Trade Promotion
Economic relations between France and the Soviet
Bloc are governed by long-term cooperation accords
that set general guidelines for trade patterns from
which specific scientific, technical, and economic
agreements may be worked out. In addition, France
and Bloc nations meet periodically at "Grande" and
"Petite Commissions." The higher level Grande Com-
mission traditionally reviews the broad range of coop-
eration in economic, commercial, technical, and scien-
tific affairs. The Petite Commission handles these
issues at the working level in specialized industrial
groups made up of business and government repre-
sentatives.
April 1979-lays out a program of economic, indus-
trial, and technical exchanges until 1990; it includes
compensation deals, trade in and access to French
technology, and favorable financial terms. A number
of shorter term economic cooperation pacts also were
signed: a proposed tripling of commercial trade be-
tween France and the Soviet Union by 1985 to match
the increase in 1976-80; an improvement in direct
communications between the Kremlin and the Elysee
Palace; and greater cooperation in scientific, techno-
logical, and oceanographic research. Moscow and
Paris also resolved to coordinate bilateral and multi-
lateral efforts in the fields of energy, environment,
and foreign aid.
France traditionally has been a leader in providing
package lending and in extending government-backed
credits and guarantees at below-market rates. Al-
though not alone in occasionally breaking and often
bending the "gentleman's agreement" on export cred-
its, Paris has been one of the most reluctant to tighten
the terms of the agreement. French trade officials
have expressed the fear that in the absence of attrac-
tive financing terms, they would be unable to compete
with what they regard as better organized banks or
trading houses in the United States, West Germany,
or Japan.
The French export credit system, which was estab-
lished in the 1950s, became especially important as a
tool of French trade policy following the 1974-75
balance-of-payments crisis. The substantial use of
official interest rate subsidies helped to boost exports
from a wide range of sectors-especially machine
tools and construction projects-at a time of slowing
world demand. During 1975-80 the share of French
exports financed through the government's export
credit program rose from 7 percent to 10 percent.
About one-third of total credits go to the Soviet Union
and Eastern Europe, covering about the same share of
total French sales to the East. In 1980 the US
Embassy in Paris estimated the direct budgetary cost
of the worldwide export credit program-including
interest rate subsidies, insurance payments, and treas-
ury loans-at nearly $2 billion annually to support
about $10 billion in gross export credit disbursements.
The current 10-year economic accord with the Soviet
Union-signed during Giscard's trip to Moscow in
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France's export credit system offers a comprehensive
range of financing and insurance. The official export
bank, Banque Francaise du Commerce Exterieur
(BFCE), refinances export-related credits extended by
French banks or French branches of foreign banks
and lends official export credits. BFCE obtains funds
by refinancing wiih the Bank of France, borrowing
from the French Treasury and private banks, and
selling its securities on capital markets. Insurance
coverage for export credits is provided by the semioffi-
cial export and credit insurance agency Compagnie
Francaise d'Assurance pour le Commerce Exterieur
(COFACE). French exporters may obtain insurance
against political and commercial losses covering 80 to
90 percent of credits extended; French banks are
guaranteed against losses up to 95 percent of the value
of their direct loans to foreign buyers. In addition, all
export credits of at least 18 months are subsidized by
the French Government for the full term of the loan.
Other important forms of support include protection
against losses due to foreign exchange fluctuations
and inflationary pressures, as well as the blending of
public "concessional" funds with private export
credits.
The most recent Franco-Soviet five-year export credit
agreement was concluded in February 1980. Interest
rates on export credits were fixed through September
1981 at a maximum 7.75 percent for all projects
between five and eight years. Similar terms were
extended to East European countries. The Soviets
pressed hard and succeeded in signing contracts for
equipment for the gas export pipeline before the low
interest rate expired.
French-Soviet trade is also promoted by firms set up
in France with the participation of Soviet foreign
trade organizations. These formal organizations,
which are subordinate to the Soviet Ministry of
Foreign Trade, are responsible for a wide range of
commercial activities including shipping, fishing, in-
surance, banking, manufactured products, and raw
materials. Important French-Soviet joint ventures in
France include the marketing firms GISOFRA
(heavy machinery and technology), ACTIF-AVTO
(tractors and other farm equipment), FRANSOV
(fishing), PROMOLEASE (leasing heavy equipment),
RUSBOIS (timber), and SOGO (chemicals, raw ma-
terials, medicine). French-Soviet joint ventures are
also located in Moscow, representing such sectors as
automobiles, electronics, heavy machinery, medical
products, and metals. In addition, the wholly Soviet
owned Banque Commerciale pour I'Europe du Nord
(BCEN, or Eurobank) located in Paris is active in
organizing and taking part in consortium loans, in
placing bond issues, and in financing East-West trade.
Six French banks, including the three largest, have
offices in Moscow to facilitate trade.
Italy
Basic Setting
Close economic ties between Rome and the Soviet
Bloc predate the heyday of detente in the 1970s. In
fact, at the height of the cold war, large Italian firms
such as Fiat and ENI (the state energy agency) were
in the forefront of expanding East-West trade, partic-
ularly with Eastern Europe. Rome often opposed EC,
NATO, and US attempts to restrict economic rela-
tions. With the advent of detente, Italy hoped to
exploit the relaxation in tensions to broaden its eco-
nomic links with the Bloc, to parlay them into im- 25X1
proved political relations, and to provide a further
underpinning for the international rapprochement al-
ready under way. Rome viewed the economic and
political interdependence between East and West
fostered by detente as an important constraint on
Soviet "adventurism" and a buttress to international
security. The flowering of detente pushed Rome to-
ward even closer relations with Moscow, as did do- 25X1
mestic rapprochment between the governing parties
and the Italian Communists during the 1970s.
The major Italian political parties have rather differ-
ent views on East-West trade. The two largest parties
generally have favored it-the Christian Democrats
to please a large business constituency and the Com-
munists for ideological reasons. The Socialists and
Social Democrats, on the other hand, take a strong
anti-Soviet stand and have been particularly outspo-
ken in their opposition to the Siberian gas pipeline.
The Italian Communist Party (PCI), however, no
longer plays as direct a role in facilitating trade with
the East as it once did. Until 1976, the Soviet Union
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and other Bloc countries gave preferential trade treat-
ment to four PCI-owned East-West trading firms; the
commissions went to PCI coffers. To comply with a
1975 law on political party financing, however, the
PCI sold its trading companies to the National
League of Cooperatives.
Italian-Soviet relations cooled substantially after the
invasion of Afghanistan. Rome immediately post-
poned the January 1980 meeting of the Italo-Soviet
Mixed Economic Commission and decided to limit
Italian participation in the Moscow Olympics. The
government even decided in favor of limited economic
sanctions against the USSR, despite pressure from
Italian business. Although Rome does not consider
such boycotts effective, it apparently was willing to go
along in this instance to impress Washington with its
reliability as an ally
Rome has continued to take an uncharacteristically
forceful stance in later encounters with the Soviets.
During a visit to Moscow in October 1980-ostensibly
to normalize bilateral political and economic rela-
tions-Foreign Minister Colombo declared that the
Soviets were responsible for the major obstacles to a
revival of detente. He called for:
? The withdrawal of Soviet troops from Afghanistan.
? An end to the Soviet threat to Poland.
? The deployment of INF missiles in Western Europe
unless Moscow agrees to a sharp reduction of its
own missiles.
Soviet-Italian relations deteriorated further in early
1981 when Italian President Pertini implied publicly
that Moscow might be behind Italian terrorism. This
statement prompted bitter Soviet press criticism of
Italy's increasing pro-American stance.
Immediately after the declaration of martial law in
Poland, Rome announced a "pause for reflection" on
the purchase of Siberian gas, even though the contract
was just about ready for signing. Italian officials were
also relatively receptive to US overtures concerning
limiting official subsidies and guarantees on export
credits for the USSR. Foreign Minister Colombo,
however, stated in early 1982 that, if the Europeans
were to be prevented from selling pipeline equipment
to the Soviets, then Washington should also embargo
grain sales. The Siberian gas contract remains un-
signed in early 1983, although it is now probably
being held up mainly by squabbling among the politi-
cal parties.
Trade Patterns
Over the last two decades Italy has oriented its trade
somewhat more to the Soviet Bloc than have most
other West European countries. Through the 1960s
the USSR generally took about 2 percent of Italy's
exports and Eastern Europe about 3 percent. The
Bloc's export share peaked in 1975 at 6.2 percent,
including 2.9 percent for the USSR. Since then the
Bloc share has fallen dramatically, averaging only
3.3 percent in 1982. The USSR-down to 2.1 per-
cent-and Poland accounted for most of the drop, but
the export shares of all the East European countries
were below their 1975 levels. The value of exports to
the Bloc was $2.4 billion for the year, only slightly
ahead of the 1975 pace
Although the USSR was only Italy's 12th-largest
export market in 1982, sales to the USSR remain
quite important to some larger, often state-owned,
Italian firms. Among the companies with strong trade
ties to the East are Fiat, Italy's largest private
employer; Montedison, the troubled chemical giant;
Finsider, a state-owned steel producer; and ENI.
Pirelli, the tire manufacturer, and Olivetti, a producer
of office machines, also have fairly extensive dealings
with the East. Energy-related equipment is another
important area for Italian-Soviet trade. Nuovo Pig-
none, an ENI subsidiary, is providing 57 turbines for
the Siberian pipeline-almost half of the total needed.
Over the last 20 years, imports from the Bloc have
usually accounted for 5 to 6 percent of total imports,
with a peak of 7 percent in 1967. Imports picked up
considerably last year, totaling $5.3 billion and push-
ing the Bloc's share to 6.2 percent-the highest level
since 1968. The increase was due largely to higher
energy purchases from the USSR, which attained a
record 4.2-percent share of total Italian imports.
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Table 5
Italy: Trade With the Soviet Bloc and
the United States, 1981 a
World
(million
USSR
Eastern Europe
United States
US $)
Million
US$
Percent
Million
Us$
Percent
Million
US$
Percent
Exports
75,246
1,284
1.7
1,185
1.6
5,109
6.8
Foodstuffs
5,597
111
2.0
99
1.8
371
6.6
Raw Materials
1,664
7
0.4
45
2.7
65
3.9
Fuels
4,725
15
0.3
63
1.3
169
3.6
Manufactures
63,181
1,151
1.8
978
1.5
4,488
7.1
Chemicals
5,338
101
1.9
204
3.8
240
4.5
Semifinished
17,725
625
3.5
332
1.9
1,251
7.1
Steel
4,100
441
10.8
78
1.9
548
13.4
Machinery
16,473
365
2.2
328
2.0
975
5.9
Metalworking
975
49
5.0
58
6.0
53
5.4
Transport equipment
7,030
41
0.6
43
0.6
566
8.1
Consumer goods
16,615
19
0.1
72
0.4
1,455
8.8
Other
80
0
0
NEGL
0.1
17
21.7
Imports
88,996
3,085
3.5
1,612
1.8
6,136
6.9
Foodstuffs
10,952
14
0.1
296
2.7
1,250
11.4
Raw materials
9,394
267
2.8
152
1.6
584
6.2
Fuels
30,741
2,631
8.6
397
1.3
842
2.7
Coal
1,440
17
1.2
74
5.1
651
45.2
Crude oil
22,202
1,283
5.8
0
0
0
0
Oil products
4,525
286
6.3
312
6.9
191
4.2
Natural gas, electricity
2,574
1,044
40.6
11
0.4
0
0
Manufactures
37,708
173
0.5
759?
2.0
3,451
9.2
Chemicals
7,224
105
1.5
176
2.4
574
7.9
Semifinished
8,468
33
0.4
226
2.7
433
5.1
Machinery
10,272
23
0.2
146
1.4
1,613
15.7
Transport equipment
7,392
9
0.1
105
1.4
562
7.6
Consumer goods
4,352
3
0.1
106
2.4
269
6.2
Other
203
NEGL
0.2
8
4.0
10
4.8
Some Italian imports from the East stem from buy- Italian multinationals can usually absorb such prod-
back provisions in past contracts. Montedison pio- ucts with little difficulty, smaller Italian firms often
neered this type of agreement with the Soviets in 1973 find Soviet emphasis on compensation agreements
when it provided them with seven chemical plants and difficult to accommodate
accepted subsequent Soviet shipments of finished
chemical products as payment. The firm signed a
similar accord with the USSR in 1980. Although
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Exports to the Bloc consist overwhelmingly of manu-
factures, particularly semifinished goods and machin-
ery. In 1981 the USSR accounted for about 2 percent
of Italian machinery exports and 11 percent of steel
exports. While Italian imports from Eastern Europe
are widely diversified, fuel accounts for 85 percent of
imports from the USSR. As of 1980 the Soviets
provided for about 8 percent of Italy's oil supplies
(crude plus products) and one-fifth of its natural gas.
All told, about 9 percent of Italy's primary energy
supply came from the USSR, the highest level of
dependence among the major West European coun-
Trade Promotion
Rome's willingness to provide generous state guaran-
tees and subsidized trade credits has been a principal
characteristic of Italian-Soviet trade since the early
1960s. Indeed, Italy was.one of the first Western
countries to offer such credits, and Rome granted
Moscow a total of approximately $3 billion during
1973-79. The Soviets have not been hesitant about
pressing the Italians for loans. Faced with a severe
balance-of-payments crisis in late 1976 and early
1977, Rome was reluctant to grant additional credits.
In response, the Soviet Deputy Minister of Foreign
Trade threatened to renegotiate all past contracts,
and the Italians eventually agreed to a 7.55-percent
interest rate, claiming that the new line of credit was
really an extension of previous agreements and there-
fore permissible under the grandfather clause of the
gentleman's agreement on export credits.F_
To date the changing trade relationship has had only
a marginal impact on export credit policy. Before
1980 Rome periodically extended credit lines for
Soviet purchases of Italian capital goods. Following
the Afghanistan invasion, Rome suspended credit
negotiations for a time, then resumed issuing credits
on a case-by-case basis. In particular, a large credit
was approved to finance Italian exports of equipment
for the Siberian pipeline. Rome continues to subsidize
these credits. Mediocredito Centrale, a public institu-
tion, doles out subsidies equal to the difference be-
tween OECD consensus rates and commercial financ-
ing costs. The 1980 budget, for example, gave.
Mediocredito $425 million to provide credit subsidies
for exports to non-EC countries. Despite Rome's
desire to promote Italian exports, the cost of providing
these subsidies has become a contentious issue as
fiscal problems have mounted.
United Kingdom
Basic Setting
Great Britain's trade and financial links with the
Soviet Bloc remain more limited than those of any
other major West European country. F
British officials emphasize
the importance of continued economic and political
contacts. They have told US representatives that such
contacts help to maintain at least a minimal level of
detente and demonstrate to British voters, to neutral
countries, and to smaller NATO Allies that the West
is not inflexible in dealing with the Soviets. There is
little concern about the potential leverage Soviet
economic and political ties could have because of the
low level of trade. Moreover, Britain is not dependent
on the Soviets for strategic minerals or for energy,
and relatively few British workers depend on Soviet
trade for their jobs.
Given the relative y t m economic re a-
tionship between the two countries, we believe London
is more concerned about the potential for Soviet
influence inherent in the economic relationships other
West European nations, notably West Germany, have
with the Soviet Union. Foreign Office officials have
expressed agreement with the widespread European
perception that commercial ties make the Soviets
more conscious of the risks of certain actions, notably
intervention in Poland, but they doubt that a threat-
ened cut in Western business ties would deter Moscow
from action it believed essential to protect its vital
interests.
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Despite misgivings about the possible implications of
growing West European-Soviet trade, both British
politicians and government officials essentially see
sanctions as an ineffective weapon. In the Foreign
Office view, sanctions work better as a threat than
they do when put into practice. There is both a
philosophical and practical dimension to the British
view:
? The British have traditionally argued that the politi-
cal nature of a regime should not affect trade
relations; the sanctions imposed on Argentina and
Rhodesia are regarded as "special cases." During
the Iranian hostage crisis London backed off from
sanctions under Conservative pressure.
Representatives of all major parties have expressed
the view that it is almost impossible to monitor
enforcement of sanctions, a skepticism acquired
through experience with various forms of sanctions
in Rhodesia, South Africa, and Iran.
contract with the USSR to provide 21 gas turbines,
about one-sixth of the total needed for the pipeline.
London's response to the declaration of martial law in
Poland was moderate, restrained perhaps by self-
interest and by a public that reacted to the situation in
Poland more with interest than with indignation. The
Thatcher government agreed with Washington on the
need to send a clear political signal to the Soviets and
thus announced a package of sanctions in February
1982. Most of the measures chosen were symbolic,
however, such as travel restrictions on Soviet diplo-
mats. The most significant step was London's decision
to support the idea of reclassifying the USSR as a rich
country within the OECD consensus. This step,
agreed to in July 1982, means that the Soviets will
face higher interest rates and shorter repayment
periods for export credits in the future.
London's primary concern in the wake of Poland was
the prevention of splits within the Alliance, both to
The British see little hope that other Western maintain a united front against the USSR and to
nations more dependent on trade with the East ' avoid being forced to choose between its Common
would be willing to support sanctions over an ex- Market partners and the United States. Throughout
tended period of time. This feeling was reinforced the sanctions crisis the British tried to play a calming
by the recent Falklands experience, when Britain's and mediating role, pushing for compromise that
EC partners quickly moved to resume trade as soon would be acceptable on both sides of the Atlantic.
as hostilities ended. Nevertheless, Thatcher emphatically stated her un-
Despite these misgivings, the Thatcher government
took a fairly firm stance after the Soviet invasion of
Afghanistan. In the wake of the Soviet move, London
cut off intergovernmental trade talks, participated in
the EC grain export curb, and declined to renew the
$2 billion 1975 Wilson credit agreement. While the
Soviets had not made extensive use of the Wilson
arrangement-they had drawn only.$1.2 billion be-
fore it expired-it nonetheless offered them credit
terms below the OECD consensus because it was
negotiated prior to the 1976 "gentlemen's agreement"
on export credits. London did not, however, impose
any restrictions on pipeline-related negotiations, and,
in September 1981, John Brown Engineering signed a
happiness with the sanctions and on the key issue of
existing contracts sided firmly with Britain's conti-
nental neighbors. Taking the position that signed
contracts must be honored and that US efforts to
block those contracts were an unacceptable infringe-
ment on British sovereignty, Thatcher ordered the
British firms involved to ignore the sanctions.
Trade Patterns
Of the four major West European countries, the
United Kingdom depends least on trade with the
Soviet Bloc. In the 1950s, when Western trade with
the East was recovering rapidly, Britain kept pace
with other West European countries; as late as 1963,
the Soviet Bloc accounted for about 4 percent of UK
imports and 3 percent of exports. In the 1960s,
however, Soviet imports increasingly centered on
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Table 6
United Kingdom: Trade With the Soviet Bloc and
the United States, 1982 a
World
(million
USSR
US $)
Million
US $
Percent
Million
us $
Percent
Million
US $
Percent
0.6
885
0.9
13,054
13.4
0.6
123
1.8
664
9.5
Manufactures
65,322
516
0.8
640
1.0
6,668
10.2
Chemicals
10,712
105
1.0
190
1.8
725
6.8
Semifinished
13,901
122
0.9
121
0.9
1,362
9.8
Steel
2,264
34
1.5
15
0.7
261 .
11.5
Machinery
30,766
232
0.8
240
0.8
3250 .
10.6
914
12
1.3
27
3.0
161
17.6
9,029
45
0.5
63
0.7
1170
13.0
3,047
9
0.3
13
0.4
223
7.3
Imports
99,674
1,129
1.1
843
0.8
11,620
11.7
Foodstuffs
13,248
11
0.1
44
0.3
741
5.6
Raw materials
6,325
218
3.5
144
2.3
835
13.2
12,956
740
5.7
46
0.4
355
2.7
392
2
0.4
23
5.8
135
34.4
Oil, crude and products
10,983
738
6.7
23
0.2
219
2.0
Natural gas, electricity
1,581
0
0
0
0
2
0.1
64,914
142
0.2
607
0.9
8,907
13.7
Chemicals
7,319
32
0.4
67
0.9
753
10.3
Semifinished
17,262
42
0.2
229
1.3
1,075
6.2
Machinery
27,968
51
0.2
122
0.4
5,029
18.0
666
NEGL
0.1
5
0.8
147
22.0
11,699,
17
0.1
184
1.6
1,903
16.3
2,232
18
0.8
.2
0.1
784
35.1
heavy machinery and industrial equipment, mainly
from West Germany and Japan. Moscow's poor grain
harvests and its need for pipe and drilling equipment
to boost energy production also shifted imports from
the United Kingdom to the United States, West
Germany, and Japan. As a result, Britain's share of
Soviet trade has slipped fairly steadily in relation to
most other Western countries.
Trade with the Soviet Bloc remained sluggish during
1982. Exports to the area declined by one-fourth to
$1.5 billion, while imports picked up to almost $2
billion. The Soviet Union accounted for just 0.6
percent of total exports and 1.1 percent of imports,
while Eastern Europe accounted for just under
1 percent of both exports and imports.
Approved For Release 2008/09/19: CIA-RDP84SO0555ROO0200050003-4
 Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4
Secret
British imports of Soviet goods last year consisted
mostly of crude oil and oil products (65 percent) and
raw materials (19 percent); manufactured goods ac-
counted for only 13 percent of the total. Imports of
Soviet oil and products are confined to lower grades
and will decline in importance as energy conservation
measures and increases in North Sea production push
down British demand for foreign energy products.
Soviet attempts to increase sales of manufactures and
finished goods in the United Kingdom have been
largely ineffective. Britain's dependence on the Soviet
Union for strategic minerals is practically nil. 0
British exports to the USSR last year fell mainly in
the categories of machinery (37 percent), chemicals
(17 percent), and metals (11 percent). Machinery
exports are largely industrial and power-generation
equipment. Steel and unprocessed nonferrous metals
make up the largest part of the metals category.
Machinery accounted for roughly one-fourth of ex-
ports to Eastern Europe; other important export cate-
gories were chemicals, foodstuffs, and semifinished
goods. In sharp contrast to trade with the USSR,
almost three-fourths of imports from Eastern Europe
consisted of manufactured items. The main subcate-
gories were semifinished goods, consumer goods, and
machinery.
Trade Promotion
British Government support for export financing is
handled by the Export Credits Guarantee Depart-
ment, which is responsible to the Secretary of State
for Trade. It insures credits. and can also subsidize
them so as to guarantee the lending banks a commer-
cial rate of return. All ECGD operations require the
consent of the Treasury, but in practice only questions
involving new credit policies, large amounts, or espe-
cially long terms are submitted to the Treasury.
ECGD provides credit insurance to exporters and
guarantees of repayment to private banks (either
suppliers or buyers) for export credits. It accepts
90 percent of the risk of the buyer's failure to pay and
90 to 100 percent of the political risk on comprehen-
sive insurance. On bank guarantees, ECGD accepts
100 percent of the risk.
Over the last two years British banks seem to have
adopted a more cautious attitude toward lending to
the Bloc. The switch is based mainly on economic
considerations, with banks typically trying to shorten
maturities and in some cases refusing new short-term
loans and rollovers.
The government, however, appears hesitant to tighten
credit restrictions against the Bloc despite concerns
about the level of Western credit exposure to the
USSR. British officials have expressed their concern
that the US approach would place a disproportionate
share of the burden on the West Europeans and their
skepticism of the impact credit restraints would have
on Soviet military capabilities: The government be-
lieves that reducing the subsidy element of official
guarantees also would give low-interest-rate countries
a large advantage in manufacturing trade. British
firms, hard pressed by a profit squeeze and only
partially regaining the losses in export competitive-
ness suffered over the last several years, will push the
government to continue its current program.
Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4
 Secret
Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4
Secret
Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4