NEW SOVIET - YUGOSLAV COOPERATION: BUILDUP FOR TITO'S VISIT

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700030093-5
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 15
• Document Creation Date: December 22, 2016
• Document Release Date: January 18, 2011
• Sequence Number: 93
• Publication Date: June 1, 1972
• Content Type: IM

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`., i I/ (/ :- IV I IVV( /-J / Vf~~V~
Confidential
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
New Soviet - Yugoslav Cooperation: Buildup for
Tito's Visit
CIA
DOCUMENT ~,~' SIR .
w~ e. +d..' ER
IM 72-93
DO NOT DESTROY
tILE ci;v June 1972
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or rcvelatioi; of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP I
[%CLUO6U TNOM AUTOMATIC
11VU NO 1AUIN0 AND
OIt A11YICAT.ON
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
June 1972
INTELLIGENCE MEMORANDUM
NEW SOVIET-YUGOSLAV COOPERATION:
BUILDUP FOR TITO'S VISIT
1. Tito's vis:: to Moscow comes at a time when Soviet-Yugoslav
relations are friendlier than at any time since 1968. Following Brezhnev's
visit to Belgrade last September - a month before Tito came to
Washington - economic activity has been intense. This memorandum
examines the resurgence of Soviet-Yugoslav economic relations and evaluates
its potential impact on the short-term - and longer term - prospects for
the Yugoslav economy.
Summary
2. An upsurge in Soviet-Yugoslav trade and major Soviet credit offers
to Belgrade have created a highly favorable, atmosphere for Tito's visit to
Moscow beginning 5 June. Under recent agreements, th. trade promises
to be more useful to both sides than in the past, and is thus less likely
to be greatly disturbed by inevitable shifts in the political climate.
3. Belgrade's eagerness for trade with the USSR revived in 1970
when balance-of-payments deficits with the West began to get out of hand.
Yugoslav-Soviet trade, after a ragged growth since 1965, shot up during
1970-71 by 46%. This expansion, and also increased trade with other
countries of the Council for Mutual Economic Assistance (CEMA), only
began to have an impact on the balance of payments with the West late
in 1971.
Note: This memorandum was prepared by the Office of Economic Research
and coordinated within the Directorate of Intelligence.
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4. The second stage in the improvement of economic relations was
a round of Soviet offers of assistance following the visit of Party Chief
Brezhnev to Belgrade in September 1971. In rapid succession, the USSR
came up with a $130 million Soviet credit for construction of an alumina
plant in Bosnia-Hercegovina; a $100 million barter arrangement between
the Tol'yatti automobile plant and Yugoslavia's Fiat affiliate in Serbia;
promises of additional credits of $500 million to $800 million for exploiting
mineral and power resources in Yugoslavia's less developed republics; and
a supplementary protocol adding $540 million to planned trade in 1971-75,
including more Soviet deliveries of fuels and cotton.
5. These deals are good business for both sides. They give the USSR
an outlet for machinery, much of which was previously resisted by the
Yugoslavs; help to fill gaps in Yugoslavia's raw materials supplies; and lend
support to Belgrade's efforts to spur growth in the less developed southern
regions. The trade expansion also is in line with Moscow's goal of gaining
a foothold in the weaker republics in preparation for dealing with and
influencing post-Tito Yugoslavia. On the other hand, Belgrade is by no
means increasing its economic dependence on the USSR to the danger
point -- the Soviet share of trade probably will not increase much beyond
its present 11%. In fact, the expansion is likely to give only short-term
relief to the balance of payments; Yugoslav enterprises still have a huge
appetite for Western goods.
6. In the longer run, the Soviet deals may aggravate Yugoslavia's
already difficult task of compromising northern and southern regional
objectives. To the south, trade with the USSR and the rest of CEMA,
together with development credits, dangles the prospect of gro','ing fast
enough to catch up with the north. Southern interests thus may become
even stronger advocates of rapid industrialization and trade with CEMA
in opposition to northern efforts to make the economy more competitive
and more oriented toward trade with the West.
Upsurge in Trade
7. The revival of Yugoslav-Soviet economic relations began in
mid-1970. The disastrous trade results in the first half of 1970 - when
Yugoslavia incurred a hard currency trade deficit of $675 million - provided
the impetus. A decision was made to redirect trade toward the USSR and
other CEMA countries, and to draw down the surplus on clearing account
that Yugoslavia had been accumulating with these countries since 1965.
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During 1971, imports from the USSR increased by 46% while exports to
the USSR rose by 11%. As a result, Yugoslavia ran a deficit in trade with
the USSR for the first time since 1962 (see the chart).
1955
51 Cod 6-1: CIA
YUGOSLAV-SOVIET TRADE
8. In September 1971, Brezhnev visited Belgrade, setting off an
extraordinary flurry of Yugoslav-Soviet economic negotiations, not seen
since the resumption of grade in the mid-1950s. In rapid order, Tarosov,
Soviet Minister of the Automotive Industry; Baybakov, Deputy Chairman
of the Council of Ministers and Chairman of the State Planning Committee;
and Grechko, Minister of Defense, visited Yugoslavia. In contrast to the
past, negotiations were conducted in a businesslike and cordial manner.
There were few of the political conflicts that had delayed agreement on
past protocols.
9. The first plum that the USSR. offered following Brezhnev's visit
was a $130 million credit for construction of an alumina plant at Zvornik
in Bosnia-Hercegovina. The deal was announced in November 1971 and
finally approved in January 1972. Earlier, in the fall of 1971, negotiations
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with Kaiser Aluminum on the construction of a large combine near Mostar
in Bosnia-Hercegovina had fallen through.. The Zvornik plant, with an
alumina capacity of 600,000 metric tons, reportedly will be Europe's largest.
Repayment will be made by shipping to the USSR all alumina produced
at the plant, plus 500,000 tons of bauxite, for a period of ten years. Interest
is pegged at a relatively low 4.5%. Moreover, the USSR reportedly has agreed
to purchase 80% of the alumina at "world prices"; only 20% of the output
will be allocated for repayment of the credit.
10. In December 1971, during Baybakov's trade visit, a supplementary
protocol was signed which adds $540 million to planned trade during
1971-7`. A turnover of $3.6 billion now is scheduled, nearly double actual
deliveries in 1966-70. Furthermore, this new protocol comes on the heels
of the expanded trade of 1971 - the first time in many years that the
Yugoslav-Soviet trade plan was fulfilled.
11. In February 1972, yet another deal was concluded. This one, a
$100 million barter arrangement involving Yugoslavia's Fiat affiliate Zastava,
was originally discussed last September during Tarasov's visit. Zastava will
export automobile parts such as lights, batteries, cables, ignitions, and
steering wheels for use at the Soviet Tol'yatti automobile plant. In return,
the USSR will ship the Yugoslavs about 5,000 Zhiguli cars, industrial
equipment, and unspecified commodities. Zastava already has been
supplying spare parts to Tol'yatti for the past few years, and the new
contract substantially increases the firm's dependence on the USSR.
12. The most recent economic negotiations - in Moscow in early
April - gave rise to a protocol calling for Soviet credits of $500 million
to $800 million for development of mineral and power resources in
Yugoslavia's less developed regions and for a larger exchange of raw
materials. The agreement goes a long way toward meeting earlier Yugoslav
demands for increased Soviet deliveries of coke, crude oil, natural gas, and
raw cottett. Details are to be worked out following Tito's visit. The protocol
also envisions, for the first time, Yugoslav participation in construction
projects in the Soviet Union. Pilot projects will include building two
2,500-bed hotel complexes - a field in which the Yugoslavs have
considerable international experience - and construction of a furniture
factory and two leather-processing factories. Moreover, the USSR has agreed
to renegotiate outstanding contracts on ships ordered from Yugoslav firms.
Previous! the USSR had refused to consider the demands of Yugoslav
shipbuilders for new contracts to protect them against rising costs.
13. Trade with the other CEMA countries is also looking up. But
although this trade is larger than that with the USSR, its expansion will
not provide anything like the same level of investment credits or a
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comparable inflow of industrial raw materials. Total trade with Eastern
Europe rose in 1970-71 by more than one-fourth, from just under $700
million to nearly $900 million, and it is slated to ris? by over 50% in
1971-75. In 1971 the East Germans extended a $66 million credit to the
Loris Kidric Aluminum Combine for building a new alumina and electrolysis
plant at Sibenik in Croatia. East Germany also is participating in the
construction of a $23 million zinc smelter in Slovenia and is a partner
in one of Yugoslavia's first joint investment deals - the Celje Zinc Plant,
also in Slovenia. In May 1972, Hungary reportedly agreed to provide $45
million in equipment and a $5 million credit for construction of an alumina
plant in Obrovac, near the Adriatic. This deal is a significant addition to
the 1971-75 trade protocol.( 1
14. In addition, the Yugoslavs plan an increase in industry-to-industry
cooperation with East European countries, especially Czechoslovakia. Two
large ventures were concluded with the Strojsmalt firm of Czechoslovakia
in December 1971. The deals, each for a five-year period, are worth a total
of $70 million in commodities exchanged and involve t:vo of Yugoslavia's
largest electrical firms, Electronic Industry and Rade Koncar. In another
large cooperative effort, automobile parts are being exchanged between the
Crvena Zastava enterprise and the Polmot automobile firm of Poland. To
a lesser degree, some Hungarian firms also are engaged in supplying parts
to Zastava. To facilitate these ventures and otherwise to expand trade, joint
banks have been set up between Yugoslavia and all CEMA countries except
East Germany and the USSR.
The Stormy Past
15. The renaissance in Yugoslav-Soviet economic relations stands in
sharp contrast to the slowdown in trade since the spurt in 1963-65.
However, Yugoslavia's relations with the USSR and the other countries o;:
CEMA have blown hot and cold before. Trade with CEMA countries was
severed in 1949, after Yugoslavia was ousted from the Comixiform, and
was resumed only in the mid-1950s. The Khrushchev visit of 1955 sparked
greater economic exchanges and led to the extension of some $464 million
in credits, but only $109 million had been drawn when differences over
the Hungarian uprising again chilled relations.
16, A second Khrushchev visit to Belgrade, this time in 1962, ushered
in a new era of economic and political rapprochement. Even though the
growth of trade with the USER began to level off after the economic reform
of 1955, political relations continued to thaw; so much so that by the
1. Other East European credits, granted in the early 1960s, were $110 million from
Czechoslovakia and 9'30 million apiece from Romania and Poland.
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fall of 1967 Soviet-Yugoslav relations were the best they had been since
the 1948 break. The invasion of Czechoslovakia in 1968 shattered the
serenity again and adversely affected trade - in 1969 Yugoslav exports
declined slightly, while Soviet exports to Yugoslavia registered a drop of
10%.
Roots of Revival
17. The renewed interest of Yugoslavia in Soviet trade and aid reflects
the two overriding problems in the Yugoslav economy: periodic crises in
the balance of payments and financing the development of backward
regions. Although massive Western assistance temporarily bailed Yugoslavia
out of its most recent balance-of-payments crises,(2) the economy will be
severely strained to meet heavy debt repayments in the mid-1970s.
Moreover, the regime's preoccupation with raising per capita income in the
less developed regions (Kosovo, Montenegro, Macedonia, and
Bosnia-Hercegovina) has compounded balance-of-payments difficulties. Not
only has the income gap between the more and less developed regions
widened,(3) but the federal government's policy also has encouraged the
poorer areas to import Western machinery and equipment to support
industries that depend on CEMA countries for export markets.
18. The most recent bout in Yugoslavia's perennial battle with the
balance of payments began to mi.terialize in 1969. Import controls had
been liberalized in 1967 and credit controls were relaxed in 1968 to help
speed the economy's recovery from the 1967 recession. After a slow start,
industrial production rose strongly during 1969-71 - and so did prices and
imports (see Table 1). The cost of living went up by nearly 40% during
1969-71, while imports soared upward by more than 80%. Exports, whic:.
had stagnated in 1968, grew by 44% during 1969-71 - ordinarily a good
gain but no match for the leap in imports in this period.
19. Domestic inflation left its mark on the balance of payments,
increasing the cost of export goods and leading to a slowdown in sales
abroad. The physical volume of exports grew by only 19% during 1969-71,
while export prices also increased 19% during the same period. Moreover,
the buoyant Yugoslav market, as well as driving up imports, provided easy
sales for domestic products, leaving little inducement for many producers
to scramble for foreign markets, particularly in the West. Thus the trade
imbalance - virtually all of it in hard currency - climbed to a record $1.2
billion in 1970 and continued to widen, reaching $1.4 billion in 1971. Even
with impressive gains in earnings from tourism and workers' remittances,
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Yugoslavia: Economic Indicators
1968 1969
1970
1971
Annual Percentage Increase
Cost of living
5
8
11
16
Industrial production
6
12
8
11
Imports
5
19
35
13
Exports
1
17
14
8
Trade balance
-533
-659
-1,195
-1,437
the deficit on current account hit record levels in both years. These deficits,
coupled with increasing resistance of the Common Market toward Yugoslav
exports, especially agricultural products, forced the Yugoslavs to seek an
increased volume of trade with their CEMA partners, particularly the USSR.
20. Another compelling reason for the Yugoslav interest in Soviet
assistance was the lagging development of the south. From the beginning,
Tito's postwar government gave top priority to narrowing the income gap
between the poorer re ions and the more industrialized north - Slovenia,
Croatia, and Vojvodina. Actively pursuing a policy of forced growth during
the 1950s, the regime pushed heavy capital investment in the backward
areas. Not only did forced growth fail to lessen the income disparity, but
also the investments undertaken bred inefficient enterprises and contributed
to balance-of-payments difficulties.
21. In the mid-1960s the government tried to abandon the forced
growth policy, instituting a series of reforms designed to promote economic
efficiency. By stressing monetary restraint, better allocation of investment
funds and foreign exchange, and more decentralization of decisionmaking,
the reforms favored the more developed regions and led to a further
widening of income levels. Moreover, as the movement toward efficiency
gained momentum, the northern regions became increasingly reluctant to
divert their resources to support what they saw as wasteful investments
in the south. In particular, the trade-minded Croats became highly touchy
about the National Bank's practice of reallocating hard currency to the
poorer regions to feed their import requirements. Bickering over the
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financial role of the north in the south's development contributed to the
wholesale expulsions of Croat political leaders in 1971.
22. To the beleaguered federal government, Soviet aid - in the form
of credits and purchasing deals - was welcome. On the one hand, Soviet
development credits were in line with the demands of the underdeveloped
regions for construction of factories and mining facilities. On the other
hand, the Soviet credits might make it unnecessary in the next five or ten
years to increase the burden on the Croats and Slovenes to finance southern
development. Furthermore, increasing the south's intake of CEMA exports
would help to balance regional trade flows as well as to reduce
balance-of-payments pressures.
Costs and Benefits
23. In deciding to push for increased trade with the USSR, the
Yugoslavs ha-va had to weigh the obvious economic benefits of the clearing
trade against substantial political risks. On the plus side, the USSR has
provided crude oil, coking coal, and other key raw materials which otherwise
would have to be purchased for hard currency. To pay for these, Yugoslavia
has been able to ship machinery and manufactures for which there is little
demand on Western markets. On the debit side, becoming more dependent
on the USSR for strategic imports could complicate Yugoslavia's position
as a maverick political state that prides itself on nonalignment.
24. Moreover, for several years the Yugoslavs have attempted
unsuccessfully to move away from the rigid barter trade that has forced
them to accept some unwanted goods and has conflicted with their
decentralized economic system. The Zvornik deal provides a classic example
of the disadvantages of barter trade. Since all alumina from the project
will be exported to the USSR for ten years, Yugosavia will have less chance
and incentive to develop an aluminum industry that is competitive in
Western markets. The irony of the situation is that nonferrous metals, and
especially aluminum, are sectors in which Yugoslavia's medium-term
development and hard currency export prospects are brightest. To the
Yugoslavs, however, this is no longer a painful price to pay to obtain at
a fairly low cost a factory in a priority industry and in a backward region.
25. In spite of the drawbacks, the Soviet Union has long been one
of Yugoslavia's key trading partners - 1971 trade turnover with the USSR
ran almost $550 million, 11% of total trade. This was 80% above
US-Yugoslav trade, and was exceeded only by West Germany and Italy.
The USSR is Yugoslavia's best single market for manufactures, especially
those produced by its less efficient industries. As Table 2 indicates, the
Soviet Union concentrates its imports of Yugoslav manufactures in three
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Yugoslav Exports to the USSR
1970
Exports Total Exports to
to the USSR Exports the USSR as
a Percent of
Million US $ Total Exports
Total
Of which:
Food, beverages, and tobacco
26
314
Raw materials
9
158
Fuels and power
Negl.
20
Chemicals
30
97
Semimanufactures
32
492
Of which:
Ferrous metals
8
73
Nonferrous metals
16
'82
Ma pinery and transport equipment
94
381
Of which:
Electrical machinery and appliances
32
119
Trznsport equipment
54
189
Consumer goods and light manufactures
Of which:
Clothing
24
85
Footwear
24
55
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8
6
Negl.
31
7
11.
9
25
27
29
22
44
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main categories: chemicals, machinery and transport equipment, and
consumer goods. Many of these products are not competitive on Western
markets. In 1970, the most recent year for which data are available, the
USSR accounted for almost one-third of Yugoslav chemical exports and
one-fourth of both machinery and transport equipment and consumer
exports.
26. Imports from the Soviet Union fill important gaps in Yugoslav
supplies of raw materials (see Table 3). Raw materials and fuels accounted
for 45% of Yugoslavia's total imports from the USSR. The USSR provides
over two-fifths of Yugoslavia's coking coal imports, nearly one-fourth of
imported crude petroleum, and smaller percentages, but important
quantities, of ferrous and nonferrous metals.
27. The strategy of increasing imports from and exports to the USSR
and other CEMA countries appears tc be paying off. In the first half of
1971, Yugoslavia incurred a horrendous deficit of $854 million in total
commodity trade. However, in the second half of the year, when trade
with CEMA really started rolling, the semiannual deficit was trimmed to
$583 million. Exports to CEMA countries in the second half of 1971 were
39% of total exports, compared with 34% in the first half; imports rose
from 21% to 23% of total imports in the respective periods. Meanwhile,
the hard currency deficit declined from $694 million in the first half of
1971 to $536 million in the second half. The favorable trends were
continuing in the first quarter of 1972 - total e::ports were up 23%, imports
down 11%, compared with the same period last year. Exports, which had
covered only 50% of imports in the first quarter of 1971 were now offsetting
70% of the import bill.
Prospects
28. Yugoslav-Soviet trade should develop in the 1970s on a more
stable basis than in the past, quite apart from ups and downs in political
relations. 11y agreeing to finance big new projects needed by Yugoslavia,
the USSR has guaranteed itself a large secure market for plant and
equipment. Thus the USSR has become less reluctant to absorb increased
sales from firms in Yugoslavia's less developed republics. At the same time,
the large deliveries of Yugoslav alumina and bauxite agreed upon have
opened up the possibility of Soviet shipments of additional fuels and metals
to Yugoslavia. In short, an expansion of the trade is in the economic interest
of both parties, and that is likely to stabilize trade even in times of renewed
politic?! tension.
29. The revival in Yugoslav-Soviet trade will not basically alter the
structure of Yugoslav trade, nor will it necessarily help to ease future
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Yugoslav Imports from the USSR
1970
Imports Total Imports from
from the USSR Imports the USSR as
a Percent of
Million US $ Total Imports
Food, beverages, and tobacco
3
207
Raw materials
Of which:
36
314 II
Raw cott_ a
Fuels and power
Of which:
Hard and coking coal
36
42
Crude petroleum
99
23
Chemicals
267
5
Scmlma nu factures
,
827
6
Ferrous metals
21
237
9
Nonferrous metals
23
190
12
Machinery and transport equipment
33
955
3
Consumer goods and light manufactures
7
146
5
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balance-of-payments pressures. The preponderance of Yugoslav trade -- and
foreign debts - still will b; with the West, and rigid controls on imports
may be needed to avoid another crisis by -the mid-1970s, when debt
payments to the West will be extremely large. But expanded trade -- plus
Soviet credits -- could lighten the impact of investment and import controls,
especially on the less developed republics.
30. To the extent that the trade of backward republics becomes even
more entangled with the Soviet and CEMA markets, it may become
increasingly difficult to carry out policies designed to increase industrial
efficiency and competitiveness in these regions. The CEMA trade offers an
easier way out, one which promises a high rate of growth and significant
progress in catching up with the northern level of development. At the
same time, however, the gap between the northern and southern views on
economic policy is likely to widen - the south pushing harder for rapid
growth and closer ties with CEMA, in conflict with northern demands for
structural improvements in output, more efficient resource allocation, and
more economic incentives to expand trade with the West. The Yugoslav
balancing act between the desires and needs of north and south thus is
likely to become even more precarious.
31. The Soviet economic offensive also has implications for Yugoslav
foreign policy. The indulgent attitude of the USSR in recent negotiations
may have been partly aimed at smoothing over Tito's reservations about
his upcoming trip to Moscow. Tito has much to be pleased about - the
Yugoslavs will be getting some needed assistance from the USSR at a time
when Yugoslavia's ties with the West re main strong. And the USSR too
should be pleased - over the longer run its assistance could give it some
of the increased political leverage in the south that it has long been seeking
and a larger potential stake in the politics of a post-Tito Yugoslavia.
Although Moscow certainly will portray Tito's visit as a movement toward
greater unity in Eastern Europe - symbolized by the Order of Lenin
recently awarded Tito -- the USSR is likely to take a soft political line
with him, not pressing for any of the political concessions that would in
fact narrow policy differences.
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