(SANITIZED)RESPONSE TO YOUR 12 NOVEMBER REQUEST

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T01017R000505380001-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 12
• Document Creation Date: December 22, 2016
• Document Release Date: February 4, 2011
• Sequence Number: 1
• Publication Date: November 19, 1986
• Content Type: MEMO

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DOC NOS-6P(1-1Fe' 0?10/0
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MEMORANDUM FOR:
Central intelligence Agency
* ?
%Winona n C20505
19 November 1986
?
.Chief, Intelligence Division
Verfication and Intelligence Bureau
United States Arms Control and Disarmament Agency
SUBJECT: Response to Your 12 November Request
1. Attached is .our response to your 12 November request for an
assessment of Soviet economic problems and their relation to arms
control. (
3. Finally, we would be happy to meet with you to discuss any of
these issues informally, or to present more formal briefings if you would
like. If I can be of any further assistance, please let me know.
Attachment:
as stated
Acting Director
Soviet Analysis
SOVA M 86-20109
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19 November 1986
MEMORANDUM ?
SUBJECT: The Impact of Soviet Ecoriomic Problems
on Soviet Arms Control Positions
Summary
- Soviet economic problems and priorities have created strong
incentives for Gorbachev to reduce the growth of defense spending below
the relatively low levels of recent years, but we are fairly confident
that he does not believe that it is imperative that he do so. This
judgment is based on our assessment of the performance of the Soviet
economy since Gorbachev took over, the nature of the resource allocation
decisions that will have to be made over the next few years, and the
benefits to be gained from an arms control agreement:
Since Gorbachev assumed power, economic performance has picked up.
GNP growth is headed for 3 to 3 1/2 percent in 1986,*substantially better
than in recent years. Gorbachev's human factors campaign has had a
positive impact on productivity, while agricultural output will apparently
match or exceed the previous record achieved in 1983. At the same time,
our estimates show that defense spending. already at a very high level,
continues to grow, albeit slowly.
We also believe that the shifts in machinery demand implied by
Gorbachev's industrial modernization program will not have an immediate
impact on the level of weapons production. Our analysis indicates that
almost all of the weapons we expect to be produced thr9ugh 1990 will be
manufactured in plants already operating. Competition for some basic
materials and intermediate goods used in the production process such as
high quality steel and microprocessors will be intense and could well
cause some delays in the production of certain weapons, but overall these
changes are likely to be marginal.
While we do not believe Gorbachev feels compelled for economic
reasons to sign an arms agreement or cut defense spending sharply in the
immediate future, important decisions involving resource allocation will
have to be made over the next two to three years. In 1988-89, the Soviets
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will have to decide on production rates for major weapons systems in the
1990s, if planning for the 1991-95 Plan is to proceed on schedule. At.
about the same time, Gorbachev will bb in a much better position to assess
00W his modernization program is faring. We believe the planned gains in
productivity and product quality will not be achieved. Gorbachev will .
.then have to deal with military leaders--who now appear to be backing his
modernization program--asking ?r more money, even as pressures for more
civilian investment increase.
We do not know what Gorbachev..will do, but the state of the economy,
Moscow's perceptions of the military threat, and Gorbachev's domestic
political standing would all come into play. Even if the economy is doing
poorly, however, there is no guarantee that Gorbachev will feel compelled
to cut defense spending staroly, although it would certainly make an arms
agreement more attractive.
There is another view of how Soviet economic problems influence
defense policy. A few experts outside of government(
argue that that USSR's economic
stringencies are so severe that Moscow will nave to conclude a strategic
arms-control agreement to lessen the defense burden. We believe, however,
that the near-term economic benefits to be gained from an arms control
agreement are often exaggerated by proponents of this view. Certainly,
there are major economic benefits to be gained from an arms control
agreement, particularly one limiting SDI, but they are mainly in the area
of cost avoidance and would be reaped over the longer term. The immediate
benefit to Gorbachev's modernization program from reducing or even
eliminating particular strategic systems would be small. Production
facilities take time to convert, and spending on stl'ategic offensive
systems represents only about 10 percent of total defense spending.
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?-?
Measuring Soviet Economic Performance
When Gorbachev took over, the econony was mired in a decade long
'slump. Overall GNP growth during the 1981-85 Plan was headed for its , ?
.smallest increase in any Five-Year Plan period. Moreover, GNP had
increased by less than 1.5 percent in 1984, and duriny the first quarter
of 1985, just before Gorbachev took over, production was essentially
flat.
The USSR's economic performance should not be judged primarily in
terms of growth rates, however. Soviet economic growth since 1980 has
been as good or better than that of other major industrial countries
except for the United States and Japan (see table 1). What is more
important in analyzing Moscow's willingness to increase rates of military
spending is the size and the technological level of the Soviet economy.
Soviet GNP in 1960 was roughly half that of US. After closing the gap
during the 1960s and 1970s, Soviet GNP as a percent of US GNP fell from a
high of about 58 percent in 1982 to about 55 percent last year (see figure
1 for a comparison on Soviet GNP with the United States and other
developed countries).
Moreover, although the Soviet economy is the second largest overall,
its relative technological standing is better captured by per-capita GNP
comparisons. According to this indicator, both the USSR and its East
European allies lag far behind the major Western countries (see figure 2).
The USSR's failure to modernize its industrial sector is partly
responsible for the USSR's relatively weak technological base.
equipment in the early 1980 was 20 years
old on average. In contrast to the West where the rapid introduction of
advanced manufacturing technologies has sparked large efficiency gains,
the combined productivity of labor and fixed capital in the USSR has
declined in absolute terms over the past decade.
Soviet leaders have been especially worried about the implications of
these trends for military competition. They recognize that in most
advanced manufacturing technologies--technologies critical to future
weapons development--the USSR remains years behind the United States (see
figure 3). Indeed, even before SDI, Soviet military authorities had
expressed concern about the level of technology embedded in such US
programs as the D-5 SLBM, the Stealth Bomber, "smart" conventional
weapons, and cruise missiles. SDI, by concentrating competition in those
high tech areas where Moscow is weakest, has been viewed as a new and even
greater threat. Although they claim they can counter the US SDI, the
Soviets are clearly worried by the technological challenge posed by SDI
and the possible spin-off of new technologies in other areas.
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Table 1
?
Real Average Annual Growth Rates of GNP
(percent)
1961-65
1966-10
1971-75
1976-80
1981-85
:
USSR
5.0
5.3,
3.4
2.3
1.9
US
4.7 _
3.0
2.5
3.4
2.4
Japan
10.0
11.0
4.3
5.0
3.9
France
5.8
5.4
4.0
3.3
1.21
West Germany
4.8
4.2
2.1
3.3
1.2
Italy
5.2
6.2
2.4
3.8
0.81
UK
3.2
2.5
2.1
1.6
1.71
1Data are for gross domestic product (GDP). The difference between GNP and
GDP, net factor income from abroad, is small.
Note: Growth rates are measured in national currencies'.
?
Sources: 1961-80, OECD, National Accounts
1981-85, IMF, International Financial Statistics
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Billion dollars
3989
4000 ?
3500
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FIGURE 1
Gross National Product, 1985
1584
863
Fa 679 600
S
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241 178 174 136 124 80 58
F-71
csNc"ce,c\c,'
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?*-1?
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1985 Dollars
16.710
16, 000
14, 000
12, 000
10, 000
8000
6000
4000
2000
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14. 090
13. 16813, 126
12. 322
11. 718
FIGURE 2
Per Capita GNP, 1985
9,C1 ,coe
*O's 30\,es0
\N\L
10. 56910. 440
8750
756? 7400
N
6570 6420
5450
11/4
,ss9, vo6
ocp ? ,a? -
V> 9,0w
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Figure 3
Selected Advanced Manufacturing Technologies:
The United States Versus the USSR
Microprocessors
Computer?operated machine tools
Minicomputers
Mainframes
Supercomputers
Software
Flexible manufacturing systems
Approximate length of US lead in years
0 i 2 3 4 5 6 7 8 9 10 11 12
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Gorbachev's Economic.Agenda and the Competition for Resources
Gorbachev's commitment to revitalizing the country's economic base?
and hence future military modernization?has been evident since beforeth6
became General Secretary. Essentially, he has adopted a two-step
approach. Initially, Gorbachev is relying on a combination of measures to
strengthen party discipline, improve worker attitudes and weed out
incompetents--what he refers to as.the "human factor." Over the longer
term, Gorbachev is counting on achieving major productivity gains as a
result of organizational changes, reform initiatives, and, most
importantly, an extremely ambitious campaign to modernize the country's
stock of plant and equipment.
Addressing the Human Factor
Gorbachev's first and most accessible target in his program to boost
productivity has been his campaigns for discipline and against corruption
and alcoholism. These efforts--like those pushed less vigorously by
Andropov before him--have received widespread public support and yielded
positive results. At the same time, Gorbachev has removed an
unprecedented number of senior economic managers, including the Chairman
of the Council of Ministers, the Central Committee Department Chiefs
responsible for the machinebuilding, construction, and trade and services
sectors, and over two dozen of the country's economic ministers and heads
of state committees.
Gorbachev has moved only somewhat more slowly 9n the organizational
front. During the past year, he has established new bureaus to oversee
the machinebuilding and energy industries and embarked upon major
reorganizations of the agro-industrial and trade bureaucracies. Gorbachev
also has overseen the enactment of a series of measures designed to
increase the autonomy of Soviet enterprises and improve workers'
incentives. He has openly complained about the bureaucracy's resistance
to his efforts, however, and the decrees that have emerged thus far appear
to be the products of political compromise and not the "radical" reforms
he has said are needed.
Industrial Modernization
But the heart and soul of Gorbachev's drive to accelerate
productivity is his industrial modernization program or, in his words,
"the structural transformation of the economy." In laying out his
program, Gorbachev has proposed:
-- Doubling retirement rates of capital stock to accelerate
the replacement of obsolete capital by more efficient,
largely state-of-the art machinery.
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Modernizing the nation's capital stock so that by 1990 more.
than a third of the machinery portion will have been
installed within the preceding five years. .
Increasing capital investment in the civilian machine
building sector in 1986-90 by 80 percent compared with
investment in 1981-85.
Achievement of these goals would require extremely rapid growth in
the machinery allocated for Sovidt plant and equipment. Because the
machinery needed for industrial modernization is produced in the machinery
and metalworking sector--which is also the primary source of military
hardware and consumer durables--the competition for resources will, of
necessity, increase.
Leadership Attitudes Towards Defense Spending and Arms Control
The competition for resources for plant modernization certainly
creates incentives for Gorbachev to hold down current military spending
and to reduce the need for future programs through an arms control
agreement, but we do not believe that Gorbachev feels that it is essential
that he do so. Recent improvements in the economy's performance and the
momentum of ongoing military programs weigh heavily in this judgment.
Since Gorbachev assumed power, economic perfotmance has picked up.
GNP growth is likely to be about 3 to 3 1/2 percent in 1986, substantially
better than in recent years. Gorbachev's human factors campaign has had a
positive impact on productivity, and agricultural output this year
apparently will match or exceed the previous record level achieved in
1983.
At the same time, our estimates show that defense spending--already
at a very high level--continues to grow, albeit slowly. In this
connection, we believe the shifts in machinery demand implied by the
industrial modernization program will not have an immediate impact on the
level of weapons production. Our analysis indicates that almost all of
the weapons we expect to be produced through 1990 will be manufactured in
plants already operating. Competition for some basic materials and
intermediate goods used in the production process, such as high quality
steel and microprocessors, will be intense and could well delay production
of certain weapons, but these adjustments are likely to be marginal.
In short, we believe Gorbachev's commitment to industrial
modernization will not significantly impede the major deployments of
strategic weapons that the Soviets have programmed for the next decade.
In the absence of a major arms reduction agreement that limited the
deployment of new systems by the early 1990s, we expect that a
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comprehensive modernization of the USSR's strategic forces will have been
completed with the widespread deployment of new generations of land- and
sea-based ballistic.and cruise missiles. Strategic defensive force
improvements, although less substantial, also will permit sustained
improvements in capabilities with the fielding of the SA-10 and SA-X-12 .
.strategic defense missiles.
Longer Term Pressures
?
While we do not believe Gorbae,hev feels compelled for economic
reasons to sign an arms agreement or cut defense spending sharply in the
immediate future, important decisions involving resource allocation will
have to be made Over the next two to three years. In 1988-89, the Soviets
will have to decide on production rates for major weapons systems in the
1990s, if planning for the 1991-95 Plan is to proceed on schedule. Based
in part on these decisions, the Soviets will also have to accelerate
renovation of their defense industries, as they start preparing to produce
the next generation of weapons.
Meanwhile, Moscow will be trying to gain a better understanding of
the outlook for US military programs and the potential for derailing these
programs politically. It has already launched a massive active measures
campaign against SDI aimed at influencing public opinion in the United
States and Western Europe. Interestingly, Foreign Minister Shevardnadze
commented after the recent US Senate elections that the loss of control by
the Republicans could be viewed as a public referendum on the President's
SDI policy. While his remarks are obviously self-serving, the Soviets
may, in fact, believe--though they cannot be sure--that budgetary
pressures, as well as mounting public opposition, will force the next
President to go more slowly on SDI.
Equally important, in a few years Gorbachev will be in a much better
position to assess how his modernization program is faring. Despite the
economy's better performance this year, in our judgment the improvements
in productivity needed to accelerate growth during the 1990s will not be
forthcoming without some major economic reforms and even greater
investment in technology and civilian industry. If, in fact, the planned
gains in productivity and product quality have not been achieved,
Gorbachev will have to deal with military leaders?who. now appear to be
backing his modernization program--asking for more money, even as
pressures for more civilian investment increase.
We do not know what Gorbachev will do, but the state of the economy,
Moscow's perceptions of the Military threat, and Gorbachev's domestic
political standing would all come into play. Even if the economy is
doing poorly, however, there is no guarantee that Gorbachev will feel
compelled to cut defense spending sharply, although it would certainly
make an arms agreement more attractive.
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SUBJECT: Memo to Raymond B. Fi rehock , US Arms Control
Agency, Responding to ACDA' s 12 November Request
dated 19 Nov 1986, SOV M 86-20109
TDI/SOVA,
(19 Nov 86)
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