INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88-00798R000400110005-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 46
• Document Creation Date: December 22, 2016
• Document Release Date: June 20, 2011
• Sequence Number: 5
• Publication Date: August 8, 1986
• Content Type: REPORT

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Directorate of - Seer--et
Intelligence
Weekly
International
Economic & Energy
8 August 1986
--Secret--
DI IEEW 86-032
8 August 1986
Copy 8 2 9
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Secret
International
Economic & Energy Weekly
8 August 1986
1
Perspective-OPEC: Implications of the Production Agreement
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Australia: Politics of Wheat Exports Roils Relations With the United States
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Colombia: Economic Challenges for the New Administration
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17 Key LDC Debtors: Grappling With Capital Flight
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23 Syria: Limited Help From Domestic Oil Gains
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Comments and queries regarding this publication are welcome. They may be
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directed to Directorate of Intelligence
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Secret
DI IEEW 86-032
8 August 1986
Energy
International Finance
International Trade
Global and Regional Developments
National Developments
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Secret
International
Economic & Energy Weekly
Synopsis
1 Perspective-OPEC: Implications of the Production Agreement
OPEC's decision to return to adherence to a quota system is in line with Saudi ara-
bia's objective of garnering producer cooperation and fulfills Iran's goal of
increasing prices. Strict compliance could push the average world oil price to about
$15 per barrel in the near term.
3 Australia: Politics of Wheat Exports Roils Relations With the United States
With national elections less than 18 months away, Prime Minister Hawke is
concerned about the effects of the US Export Enhancement Program (EEP) on
Australia's wheat sales next year. Some members of Hawke's government are
urging him to use the US-Australian joint defense facilities as a bargaining chip,
but we doubt this linkage will be made in the bilateral ministerial beginning 10
August in San Francisco.
9 Colombia: Economic Challenges for the New Administration
President Barco takes office this week with the benefit of an improving economy.
The new president, nonetheless, needs to tackle high unemployment, control
inflationary pressures, and prevent mismanagement of the coffee bonanza.
Tunisia's worsening economic situation is severely depressing the country's living
standards and is adding to an already high level of political tension. While the gov-
ernment is finally beginning to confront the country's economic difficulties,
memories of the bloody January 1984 food riots will probably hamper implementa-
tion of the government's structural adjustment program.
17 Key LDC Debtors: Grappling With Capital Flight
Capital flight, which we estimate has bled over $180 billion from the key LDC
debtors over the past decade, remains an obstacle to the solution of their
international financial problems. Unless the debtors implement structural reform,
which would remove the powerful incentives for capital outflows, we believe their
financial straits will persist, multiplying economic problems and undermining
political stability
Secret
DI IEEW 86-032
8 August 1986
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Secret
23 Syria: Limited Help From Domestic Oil Gain
Oil from Syria's new Thayyem field will only marginally strengthen Syria's
economy, but will make Damascus less dependent on Iran for concessional oil
shipments. Syria will continue to run a large current account deficit and suffer
chronic foreign exchange shortages, which will add to President Assad's political
problems.
Secret iv
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International
Economic & Energy Weekly
Perspective OPEC: Implications of the Production Agreement
OPEC's decision to return to adherence to a quota system is in line with Saudi
Arabia's objective of garnering producer cooperation and fulfills Iran's goal of
increasing prices. Strict compliance could push prices substantially above current
levels in the near term. If the agreement collapses, however, and the Saudis renew
the price war, oil prices could fall below current levels for an extended period.
The agreement calls for OPEC production of about 16.6 million b/d during
September and October, some 3.6 million b/d below current levels. The burden of
the cuts will fall on Saudi Arabia, Kuwait, and the UAE-Iraq is not bound to a
production quota. Prices are expected to remain volatile over the near term.
Market psychology and a sharp cut in OPEC output could push the average world
oil price to about $15 per barrel in the near term from its current $11 per barrel
range. Spot prices for some crudes have increased by $5 since Monday.
Considerable uncertainty remains over OPEC's ability to reduce its output to the
target level. Past trends suggest that the membership will not abide by the quotas.
The UAE reportedly was particularly reluctant to agree to the proposal and
probably will be slow to comply. Substantial distrust exists among members, and
they have warned that violations-even if marginal-would lead to a rapid
collapse of the agreement. OPEC plans to monitor member compliance but has no
enforcement mechanism. Most OPEC producers realize the consequences of
indiscipline, however, and might be cautious about attempting to recoup this year's
losses by exceeding their quotas. Indeed, the financial pain producers have
experienced in recent months and the prospect of still greater losses in a continued
price war may well encourage greater adherence to the scheme. Promises of
support from some non-OPEC producers-including Mexico and Malaysia-may
also encourage OPEC discipline.
The Saudi strategy to increase its market share enacted last September was
designed to raise near-term revenues, to force other producers to reduce output,
and to ensure a long-term market for their oil. Although the Saudis probably
hoped that oil prices would stabilize at about $15 per barrel-an amount that
would generate the minimum required revenues at their quota level-excess
production by other OPEC members forced prices to fall further. The Saudi policy
also succeeded in cutting Iran's oil revenues, an incidental but desirable result in
Riyadh's view. The new agreement is in line with Saudi Arabia's basic objectives.
Despite absorbing the largest production cut, Riyadh has succeeded in getting
other members to share in the reductions and would remain the world's largest oil
exporter, an important Saudi objective.
1 Secret
DI IEEW 86-032
8 August 1986
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Secret
OPEC Oil Production, 1986 Million b/d
Old Quota
July
New Quota
16.00
20.2
16.65
0.66
0.7
0.66
Iran
1.20
1.8
1.80 a
0.90
1.6
(1.5)
0.90
Libya
0.99
1.1
0.99
Nigeria
1.30
1.5
1.30
Qatar
0.28
0.3
0.28
4.35
6.0 (5.8)
4.35
UAE
0.95
1.5
0.95
Venezuela
1.56
1.6
1.56
a Current Iraqi export capacity; Iraq was not assigned a formal quota.
b Amount in parentheses excludes Neutral Zone production, which is
divided between Saudi Arabia and Kuwait and included in their
quotas; the Neutral Zone has no quota of its own.
other OPEC members to unite in pressing Riyadh to reach an agreement.
Tehran considers the agreement a success because it will boost prices without Iran
having to cut output. Iran also will view the agreement as a victory for its
campaign of intimidation against Saudi Arabia and the Gulf states, highlighted by
its attacks earlier this year on Saudi ships and by the probable Iranian-sponsored
sabotage of Kuwaiti oil facilities. Tehran will claim that its lobbying convinced the
remain below $10 for two years before market forces led to a rebound.
The Saudis still hold the trump cards, and if other OPEC members fail to adhere
to the agreement Riyadh will have little incentive to restrain output. Faced with
quota violations by other members, the Saudis probably would renew the market
share fight and force prices down again. If OPEC members were to join the fight
and attempt to force their remaining excess capacity-currently about 4 million
b/d-onto the market, oil prices could fall to about $5 per barrel, their lowest level
in real terms since before the Arab oil embargo in 1973. In the absence of
producer cooperation, some industry analysts believe that oil prices would then
force a reevaluation of oil and economic policies.
Although not specifically an anti-US policy, an attempt by Riyadh to keep prices
low would hurt oil exploration and development activity in high-cost areas such as
the United States, Canada, and the North Sea. If prices held at around $5 per bar-
rel for an extended period, domestic political pressures in many countries would
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Australia: Politics of
Wheat Exports Roils Relations
With the United States
With national elections less than 18 months away,
Prime Minister Hawke is concerned about the effects
of the US Export Enhancement Program (EEP) on
Australia's wheat sales next year. Wheat farmers
have been hardest hit by declining commodity prices,
and Hawke undoubtedly believes he cannot afford to
ignore their pleas to use his claimed "special relation-
ship" with the US administration to win them relief.
Moreover, wheat farmers are traditionally the most
vocal of Australia's relatively militant farmers and
exert more political pressure than their numbers
would indicate. Some members of Hawke's govern-
ment are urging him to use the US-Australian joint
defense facilities as a bargaining chip, but we doubt
this linkage will be made in the bilateral ministerial
beginning 10 August in San Francisco.
Farmers-who provide more than one-third of Aus-
tralia's export income-have been hurting the past
years.' The value of agricultural production fell 21
percent in 1985, largely because of low commodity
prices, and probably will fall another 21 percent in
1986, according to the Australian Bureau of Agricul-
tural Economics. Despite high yields, more than one-
half of the country's grain farms suffered net losses
this year. According to our estimates, average farm
income on family farms for the year ending 30 June
1986 fell below $5,000, less than an Australian family
can collect from welfare programs.
Under these conditions, farmers have combined their
economic leverage with militant tactics to gain politi-
cal concessions from Canberra. In July 1985, 40,000
farmers marched on the capital, and five months later
a group from New South Wales dumped 30 tons of
wheat on the Parliament steps to protest low prices-
$135 a ton in December 1985 versus $90 now-and
high domestic interest rates. These tactics
' Wheat is the most important crop, involving 45,000 farms and
about 25 percent of the country's farmers. This year 98 percent of
apparently brought results. During the first quarter of
this year, Hawke granted special tariff rebates on
fertilizer imports and tax rebates on farm fuel, pri-
marily to prevent the Labor Party from losing its
control of several states in elections early this year.
The Prime Minister remains vulnerable to farmer
dissatisfaction because the loss of nine of the Labor
Party's 12 rural seats in the House of Representatives
in the next national election-which must be held by
January 1988-would topple the Hawke government.
To complicate Hawke's political future, growth in the
nonfarm sectors has slackened as a result of the
weakness in world commodity prices. Real economic
growth is likely to be less than 2 percent this year-
compared with 4.5 percent last year-and unemploy-
ment has risen slightly to about 8 percent. The
current account deficit continues to widen, despite the
27-percent depreciation of the Australian dollar in the
last 18 months, which in itself has contributed to an
inflation rate of over 9 percent annually. In addition,
after a three-year lull in industrial turmoil-primarily
due to the government taking an active part in wage
negotiations-Australia's trade unions last month be-
gan a series of strikes that we believe is likely to
continue until at least September, when preparations
for new wage negotiations will begin.
From Hawke's perspective, the EEP darkens an al-
ready grim export outlook. International wheat prices
are plunging because of high world wheat stocks,
stagnant demand, and rapidly increasing production
both in traditional wheat exporting countries and in
former major wheat importers-such as Brazil, Chi-
na, and the EC. World stocks now total over a full
year's trade. Major grain producers are adopting
aggressive export tactics to compete in this environ-
ment including low-interest credit terms, attractive
freight rates, and direct export subsidies to boost sales
to the major cash buyers-the USSR, China, and
Japan.
Secret
DI IEEW 86-032
8 August 1986
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Secret
US Farm Policy and the World Wheat Picture
The 1985 US Farm Bill-in effect for the next five
years-was designed to make US grain exports more
competitive. It mandated a $1 billion, three-year
Export Enhancement Program (EEP) to promote US
sales and reduced rates on loans to US farmers. The
EEP offers payment-in-kind crop bonuses from gov-
ernment stocks to promote exports to targeted mar-
kets where the United States faces competition from
heavy subsidizers such as the EC. The United States
has provided assurances that subsidies would be
targeted to these markets and would not harm other
US allies or nonsubsidizers. Last month proposals
were made to broaden the EEP to include all tradi-
tional US grain customers-including the USSR and
In addition to Australia, the expanded EEP will
sharply depress the export earnings and trade out-
look for other major wheat exporters-including
Canada, the European Community, and Argentina.
Any US action that displaced sales to the USSR,
Canada's most important market-a new Canada-
USSR long-term grain agreement is scheduled to be
signed this fall-would politically damage Prime
Minister Mulroney. He feels the plan would force
Ottawa to match US subsidies in order to maintain
the Canadian market share, thereby undermining his
efforts to control Canada's budget deficit.[
China.
The US wheat price sets a floor price for other wheat
exporters. Under US farm legislation, wheat farmers
take out loans to finance production using their
potential wheat crop as collateral. The wheat price
set by the government and used to calculate a
farmer's loan amount, called the loan rate, acts as a
guaranteed minimum price because the farmer can
forfeit his crop to the US Government if the world
price falls below the loan rate. In recent years, high
US loan rates have propped up global wheat prices
and, in combination with required sizable US acreage
reductions, provided a powerful incentive to other
nations to boost grain production.
The new US farm policy is likely to raise US farm
export volume but sharply depress world grain prices
over the next few years. According to some econo-
mists, world farm commodity prices could drop 50
percent below last year's levels and stay low for the
next five years
The EC also considers the USSR an especially
important market because of its size and closeness,
and US subsidies would fuel EC suspicions that the
United States is directly attacking its Common Agri-
cultural Policy. Even without US subsidies, lower
world grain prices expected this marketing year as a
result of the new US Farm Bill could add $1 billion
to the cost of EC export subsidies. As a result, the
EC would react strongly to subsidized sales to the
USSR and would almost certainly match them in the
short term.
Argentina will also be severely affected. The USSR is
Argentina's largest trading partner and purchased a
near-record 4 million tons of wheat in 1985/86. Under
pressure to boost exports to maintain debt service
payments, Buenos Aires would decry US subsidies as
hypocritical, and the position of political groups
favoring a debt moratorium could be strengthened.
The US subsidy would probably discourage
Argentina's increasing willingness to support inclu-
Since the US Farm Bill was passed in December
1985, Australian farmers have appealed to Hawke to
use the US-Australian alliance as leverage to protect
their markets against subsidized US exports. In April
1986, after the United States offered wheat under the
EEP to North Yemen-traditionally an almost exclu-
sively Australian market-Hawke traveled to Wash-
ington specifically to appeal for a halt to such sales.
sion of services in the new GATT round.
Hawke's visit disappointed many farmers, according
to domestic press reports, because they concluded he
achieved no concrete results.
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Secret
World Wheat Export Market Share in 1985-86k
85.9 million
metric tons
16.8 million
metric tons
China
6.2 million
metric tons
9 Marketing year I July - 30 June.
bUS wheat sales to the USSR this year total only 153,000
tons-far below historical levels of 4 to 6 million tons.
EC Other
US 4.8 1.6
Argentina
8.1
Australia
35.5
The US decision last week to include 4 million tons of
wheat for the USSR in the EEP is of special concern
to Canberra. Farmers have reacted vehemently be-
cause the USSR, China, and Egypt are Australia's
largest wheat customers. Farmers' complaints have
prompted Hawke to call Washington directly and
send a parliamentary delegation to lobby against
pending legislation to permanently include the USSR
and China in the EEP. For their part, the Soviets are
already looking to take advantage of the situation.
Soviet trade representatives in Canberra suggested
during a press conference last week that despite the
US subsidized prices Australian wheat might be
attractive next year if the quality and terms of sale
are favorable.
Canada
41.9
We believe Hawke has reason to be concerned about
the effects of the EEP on the election. In the short
term, Australia could lose as much as $20 million in
export revenue this year if the proposed expansion of
the EEP enabled the United States to win likely
Chinese wheat purchases over the next two months
that we estimate could total 200,000 tons.
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Secret
Australian Wheat Revenues:
Impact of the EEP, 1986/87 a
Without EEP
(US $90 per metric ton) b
With EEP
(US $75 per metric ton) b
Revenue Loss
(million US $)
Volume Value
(million metric tons) (million US $)
Volume Value
(million metric tons) (million US $)
World
16.5 1,485
16.5 1,240
245
USSR c
3.2 290
3.2 240
50
China c
2.3 210
2.3 175
35
L Volume is based on the 1985/86 levels.
b The $90 price for next year is the Chase Econometrics' estimate of
the US wheat export price next year, taking into account the effects
of the US Farm Bill but not an extension of the EEP. The $75 price
is the world price we estimate would prevail with an EEP extension.
The table above does not show the effects of the EEP on the
quantity of wheat Australia might sell. According to our estimates,
if the EEP is extended to the USSR and the Soviets next year buy
the full amount of wheat specified in their current US long-term
agreement (4 million tons), Australia's sales to the Soviets in
1986/87 could fall from an estimated 3 million tons to 1.5 million
tons, cutting revenues by $155 million. China has not entered long-
term agreements for wheat purchases since 1983. Thus we are less
able to predict how much wheat China would import from Austra-
lia or the United States in 1986/87, although industry and USDA
analysts estimate China's wheat imports are likely to be the same as
or slightly less than this year, barring major crop disasters.
Hawke, however, is probably worried more about the
overall effects of the EEP on wheat prices. We
estimate next year's price will fall to $75 per ton if the
EEP expansion becomes effective. In this case, Aus-
tralia stands to lose as much as $245 million on its
wheat exports in 1986/87. It is conceivable that
Australia could lose even more revenue-if the quan-
tity sold also falls-but Australia so far has competed
aggressively with EEP sales-by offering, for exam-
ple, liberal credit programs or discounts for cash
purchases. For this reason we expect Australia to
maintain its current volume share)
just below the surface.
Although Foreign Minister Hayden stresses that secu-
rity issues and trade issues will not be linked in the
San Francisco talks, some members of Hawke's gov-
ernment-echoing popular sentiments-say that Aus-
tralia should use the US-Australian joint facilities as
a bargaining chip in attempts to thwart further
expansion of the EEP. We do not believe the Austra-
lian participants will directly threaten to close the
facilities, but, if the proposed expansion becomes law,
tensions will be high and such a threat will remain
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Secret
Representative Export Sales Prices for
Wheat, 1985-86
US $ per metric ton, f.o.b.
USa
Australiab
Canada'
ECd
Argentina'
90
I I I I I 1
80 1 II III IV I II
1985 1986
-Gulf no.2 hard red wheat
hStandard white
,Vancouver no.l western red spring
,lFrench soft
'Buenos Aires
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Secret
Colombia: Economic Challenges
for the New Administration
President Barco takes office this week with the benefit
of an improving economy. The recent coffee price
windfall and government stabilization measures have
slowed inflation, strengthened the external accounts,
and boosted economic growth. The new president,
nonetheless, needs to tackle high unemployment, con-
trol inflationary pressures, and prevent mismanage-
ment of the coffee bonanza.
Colombia is experiencing a healthy recovery from the
economic stagnation that greeted President Betancur
four years ago. Lower government spending and new
taxes cut the public deficit in half in 1985. Leading
Colombian firms refinanced their foreign debts, halt-
ing the erosion of foreign exchange reserves, accord-
ing to local banking sources. The ailing financial
system-which has suffered from a lack of liquidity,
widespread domestic corruption, and insider loans
made by the banks-is in better shape than a year
ago, and domestic interest rates are set by market
forces. Relaxed import controls have reduced short-
ages of manufacturing and agricultural inputs. The
subsequent impact on prices has helped keep inflation
at 10 percent for the first six months of 1986-the
government goal is 22 percent for the year.
This year's rebound in world coffee prices and lower
world interest rates have improved Colombian exter-
nal accounts. New oil production has made the nation
self-sufficient, eliminating $300 million in yearly oil
import bills. Moreover, oil and coal exports will be
roughly double last year's level. During the 12-month
period ending in May, coffee earnings and capital
repatriation-in response to more attractive domestic
interest rates-pushed the foreign exchange reserves
up 43 percent to about $2 billion.
Nonetheless, Colombia's two-year stabilization pro-
gram has slowed the domestic economy. Official
statistics indicate that real GDP grew only 2.5 percent
Virgilio Barco Vargas
Age 64 ... experienced politician and diplomat ...
attended MIT and Boston University ... studied
engineering, economics, social sciences ... as mayor
of Bogota (1966-69), transformed city into modern
urban center ... Agriculture Minister, 1963-64 ... as
World Bank executive director (1969-74), spoke for
five Latin American nations ... strong supporter of
extradition treaty, which he signed as ambassador to
the United States (1977-81).
in 1985, down from 3.2 percent in 1984, as a result of
austerity policies that reduced consumer demand.
Mining and construction revived this spring, but
agriculture and commerce remain depressed. More-
over, unemployment is at a record 15 percent. Bogota
has issued bonds and accelerated payments for im-
ports and debt service to dampen the growth in the
money supply, generated by the coffee windfall. Al-
though monetary stabilization measures have taken
out of circulation about 50 billion pesos since January,
the money supply is growing at an average annual
rate of 38 percent-the highest rate since 1978.
Secret
DI IEEW 86-032
8 August 1986
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Secret
Colombia: Foreign Financing Gap
Million US $
(except where noted)
-2,885
-2,826
-1,994
-1,305
-320
-2,076
-1,317
-312
9
1,365
Exports, (f.o.b.)
3,282
3,147
3,668
4,036
5,630
Coffee
1,577
1,536
1,799
1,575
2,735
Oil
279
378
445
300
600
Imports, (f.o.b.)
5,358
4,464
3,980
4,027
4,265
Net services and transfers
-809
-1,509
-1,682
-1,314
-1,685
Interest on debt
649
739
1,086
1,112
1,120
Debt amortization
429
636
700
767
950
New medium- and long-term capital inflows (net)
1,322
983
1,278
1,173
1,870
Short-term capital and errors and omissions (net)
314
-449
-848
73
1,105
Other financial items
External debt (end of year)
10,287
11,035
11,035
11,966
13,000
Short-term debt
3,109
2,872
2,230
1,966
2,000
Debt service ratio (percent) C
32
29
33
34
43
Foreign exchange reserves (end of year) d
3,861
1,901
1,364
1,595
2,500
Estimated.
b Projected-assumes Bogota maintains its stabilization program.
As a share of exports of goods and services.
d Excludes gold.
Barco's Strategy
Barco will court foreign investors to accelerate eco-
nomic growth and facilitate the transfer of technologi-
In his campaign, Barco emphasized the need for cal know-how. At a recent meeting with foreign oil
agricultural and industrial development, economic company officials, for example, the President report-
diversification, and increased foreign investment. He edly was receptive to new investment offers.
promised to create jobs, accelerate agrarian reforms,
and improve provision of basic services. He believes
the expansion of agricultural production could help Prospects
counter the rural insurgency by offering employment
opportunities for landless peasants who have been Strong external accounts should facilitate Colombia's
natural recruits for the guerrilla groups that have economic growth through 1987. Most econometric
plagued the country for nearly 40 years. Barco is also services forecast GDP growth at 4 percent for 1986, a
likely to increase government spending in health, $1 billion loan is on tap from international bankers,
education, and communications, and at least continue
construction of low-cost housing projects. We believe
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? Estimated.
nProjected_assumes Bogota maintains its stabilization program.
Unemployment rate at end of year.
dAs a share of GDP.
Money Supply Growth Government Deficit as a
Share of GDP
Gross National Savings and
Gross Capital Formationd
= GNS
0 GCF
and a voluntary-and successful-stabilization pro-
gram monitored by the IMF is in place. The new
president's greatest fiscal challenge will probably be
to limit inflation and prevent mismanagement of the
current coffee bonanza, which may produce nearly
$3 billion in foreign exchange earnings this year.
Despite the government's success in keeping inflation
down during the first half of this year, gains in wages
and a flexible devaluation policy may result in an
annual rate of about 25 percent. The chief danger is a
pattern of short-term planning that has characterized
previous Colombian policymaking in similar situa-
tions and contributed to the serious weakening of the
economy during the last coffee boom (1976-78).
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The Role of Narcotics and Other Contraband
in the Colombian Economy
The US Embassy reports that, as a share of GDP,
illegal earnings from cocaine and marijuana smug-
gling have increased since mid-1985. The estimated
annual value of illegal drugs produced or processed
in Colombia has fluctuated from $400 million to at
least $1.6 billion over the past five years
Drug earnings are Colom-
bia's second most important source offoreign ex-
change after coffee. Illegal earnings from the drug
trade were equivalent to about 20 percent of total
legal exports in 1985, up from 12 percent in 1983, but
not all these revenues returned to Colombia. In
addition, the US Embassy reports that illicit im-
ports-mainly smuggled consumer goods-financed
by drug money probably amount to $400-500 million
a year.
Colombian agriculture has significant potential for
expansion and diversification. The World Bank re-
cently granted $425 million in loans to strengthen the
agricultural sector. Barco's integrated rural develop-
ment program is aimed at increasing food production
and alleviating rural unemployment. Insurgent activi-
ty, however, has hampered the past efforts to imple-
ment rural development projects and will pose obsta-
cles to Barco's program.
US commercial interests would benefit from a sus-
tained economic recovery in Colombia-the third-
largest US export market in Latin America. We
foresee increased opportunities for US sales as a result
of Bogota's import liberalization and improved for-
eign exchange situation, continuing the late 1985
upturn. Because of the need to diversify exports, the
Barco government probably will criticize US counter-
vailing duty actions on Colombian goods, including
textiles and cut flowers. On the regional debt front,
Bogota's willingness to adopt IMF-monitored policies
and good macroeconomic management record could
serve as a role model for other Latin American
debtors. Nevertheless, guerrilla attacks on oil facili-
ties and other economic targets will continue to
discourage foreign investment, despite Barco's plans
to attract new capital.
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The Tunisian Economy:
At an Impasse
Tunisia's worsening economic situation is severely
depressing the country's living standards and is add-
ing to an already high level of political tension. The
appointment of Rachid Sfar, former Minister of
Economy and Finance, as Prime Minister, last month,
along with other cabinet changes, indicates growing
government awareness of the urgency of the problem.
At the same time, however, fears that new austerity
measures will prompt a repeat of the bloody January
1984 food riots have so far held President Bourguiba's
government back from effectively addressing
Tunisia's economic woes. These same fears will also
probably hamper implementation of the government's
structural adjustment program recently proposed to
facilitate desperately needed foreign aid. Reduced
consumer subsidies, minimal wage increases, and a
hefty currency devaluation-all long-standing issues
with Western donors-are almost certain to generate
popular unrest. Nevertheless, Tunis is looking at a
current account deficit that could exceed $1 billion
this year, and, without some financial relief, will
encounter severe problems in meeting even essential
needs.
? Unemployment has hit the young hardest-70 per-
cent of the populace is under the age of 26, and the
population is growing at a rate of nearly 4 percent
annually.
Nevertheless, fears of popular backlash to the new
austerity measures have held the Bourguiba govern-
ment back from effectively addressing Tunisia's eco-
nomic woes. Tunis had attempted in 1983 to begin to
realign the economy and ease the country's financial
bind by slashing consumer subsidies and imports,
restricting development expenditures, and freezing
wages. Local reaction to these measures was largely
muted. In January 1984, however, the government
misjudged public patience. Tunis removed subsidies
on wheat-a staple of the Tunisian diet-causing
bread prices to double and triggering nationwide riots.
The disturbances were quieted only after the military
was called in and Bourguiba reinstituted the subsi-
dies. Wary of further backlash, the government has
instituted few new reforms since. It has carefully
avoided any politically sensitive reforms-such as
devaluation-necessary to bring spending more in line
with revenues and to broaden the economic base.
Tunisia, like its North African neighbors, depends on
oil for its economic well-being. The petroleum sector
accounts for 40 percent of export receipts, 20 percent
of government revenues, and 10 percent of GDP. As
with other oil producers, the prolonged oil market
slump has had a decidedly negative impact on Tuni-
sia's domestic economy:
? Real GDP per capita-at $1,100, still among the
highest in Africa-has sunk far below the oil-boom
levels of the late 1970s.
? Inflation is running on an annual basis at almost 14
percent, while wages remain frozen at 1983 levels.
? The economic slowdown has pushed unemployment
over 30 percent, and unemployment and underem-
ployment together are as high as 50 to 60 percent in
urban areas.
Last year, the poor performance in the petroleum
sector was at least partially offset by surprisingly
strong performances in both agriculture and tourism.
This year, however, these sectors are in trouble.
Inadequate rain is curtailing cereals production-
producing sporadic shortages-and threatening herds.
In addition, Tunisia's tourism industry is still feeling
the effects of the Israeli raid on Tunis in October and
continued Libyan terrorist threats.
Other sources of revenue also are sluggish. World
demand for raw phosphate remains depressed, be-
cause of oversupply and an industry shift toward using
phosphoric acid and other processed derivatives. The
Secret
DI /EEW 86-032
8 August 1986
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Trade balance
-1,324
-1,409
-1,257
-1,389
-1,195
Exports (f.o.b.)
2,454
1,979
1,860
1,793
1,665
Hydrocarbons
1,308
910
832
798
655
Other (including
errors and omissions)
market for Tunisian phosphate rock is particularly
grim, according to industry experts, because of its
poorer quality. Worker remittances also are down, the
result of a declining European market for foreign
workers and Libya's August 1985 expulsion of 32,000
Tunisian workers.
Revenue shortfalls have forced Tunisia to nearly
exhaust its foreign reserves. As a result, Tunis is
looking for an immediate $150-200 million bilateral
428
356
434
427
335
583
573
608
561
510
476
471
446
345
370
aid injection until it can secure funds from multilater-
al or commercial sources this fall. Along with requests
to Washington for additional aid and debt relief,
Tunis has approached other donors as well. Paris has
been asked to provide an immediate 50,000 metric
tons of grain, a $50 million loan to finance additional
grain imports, and another $50 million long-term
trade credit. Tunisia is also looking to Italy, Kuwait,
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Secret
Tunisia: Balance-of-Payments Million US $ Tunisia: Economic Indicators, 1981-85
Scenarios, 1985-86
$15 per
barrel of oil
$10 per
barrel of oil
-825
-1,032
-1,060
-1,195
-1,332
-1,360
1,665
1,168
1,078
Hydrocarbons
655
288
198
Agricultural
products
200
100
100
Phosphates and
chemicals
300
270
270
Other
510
510
510
Imports (c.i.f.)
2,860
2,500
2,438
Hydrocarbons
380
185 c
123 c
Industrial goods
1,635
1,575
1,575
Food
335
255
255
Consumer goods
510
485
485
Net services and transfers
370
300
300
Of which:
Tourist receipts
490
280
280
Worker remittances
290
200
200
Capital account balance
525
390
390
Medium- and long-
term loans
310
200
200
Official grants
25
50
50
Basic balance
-300
-642
-670
Short-term capital
425
425
Euroloan
175
175
Multilateral
200
200
Bilateral
50
50
Reserve position
203
-14
-42
Assumes crude oil production of 100,000 b/d and consumption of
51,000 b/d.
b Assumes $20 million in refined product exports.
Assumes refined product imports of 11.9 million barrels at a cost
of $15.60 per barrel and $10.40 per barrel, respectively.
and Saudi Arabia for help. Paris, and possibly Italy
and Saudi Arabia, are likely to support US efforts to
tie any major increase in aid commitments to an IMF
agreement.
Real GDP Growth
Percent
Inflation
Percent
1/\
4 10
2 5
6 800
6 00
4
I I I 1 I 1 I 1 I I
0 81 82 83 84 85 0 81 82 83 84 85
the effect of
the deteriorating economy and growing joblessness is
currently being felt most acutely in the south where
antigovernment sentiment has traditionally been
strong. Government officials there cite widespread
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malnutrition and unprecedented crime levels. Dis-
gruntlement with economic conditions, in general, has
already led to several localized demonstrations
against the government. Many of the towns are the
same ones involved in the January 1984 disturbances,
which quickly spread north to impoverished urban
areas.
Looking Ahead
The continuing slump in world oil prices, along with
poor performances in nearly every other sector of the
economy, presages a very difficult year. Economic
growth could well be negative-as much as 3 per-
cent-for the first time in over two decades. Tunis
also faces a sixth straight year of current account
deficits; this year's shortfall could surpass the 1984
record of slightly more than $1 billion.
After months of ignoring mounting pressure from aid
donors for action, the Bourguiba government is finally
beginning to confront the country's accelerating eco-
nomic difficulties. According to Embassy reporting,
Tunisia decided in June to implement a six-year
structural adjustment program in conformity with
reforms long advocated by the World Bank and other
Western donors. The program will reportedly empha-
size demand restraint and export promotion. Adjust-
ments slated for this year include price increases in
basic commodities such as milk, sugar, corn, soybean
meal, bread, pasta, and cooking oil, no wage increases
except the minimum wage, about $250 million in
budget and development spending cuts, modifications
of price and import controls, and a free float of the
Tunisian dinar, which is expected to result in an
effective devaluation of 11 to 14 percent. Government
changes announced in July, which elevated the former
Minister of Economy and Finance, Sfar, to Prime
Minister and promoted the architect of Tunisia's
adjustment plan, former Minister of Planning Khelil,
to Minister of Economy, Finance, and Planning un-
derscore the government's new resolve.
The structural adjustment program as presently writ-
ten would significantly ease Tunisia's economic diffi-
culties over the long run. Reduced government subsi-
dies on food, development spending cuts, and
continued wage restraints, for example, hit three
major sources of budgetary deficits. Altering the
country's exchange rate should also make Tunisian
nonoil exports more competitive and help keep a lid on
import demand. Moreover, an adjusted dinar along
with reduced import controls and revised tariff and
customs duties will eventually help promote new
exports, broadening Tunisia's economic base and
making the economy less susceptible to the vagaries of
the world oil market.
We also believe, however, that many of the proposed
reforms could easily spawn domestic unrest long
before the program churns out any benefits. A partic-
ularly explosive element in the government plan is the
hard line on wages combined with gradual cuts in
most food subsidies. The decline in purchasing power
would be even more sizable if accompanied by the
proposed devaluation. Reduced development expendi-
tures could also touch off unrest as project cancella-
tions cause layoffs or firings at a time when unem-
ployment is already at record levels.
As a result, we believe that backstepping from this
year's goals or, at the very least, a stretching-out of
the reform timetable is likely. In our opinion, the 1984
riots are seared into the collective memory of the
Bourguiba government, and those memories will tem-
per any zeal for reform. At the same time, Tunis
cannot abandon the adjustment package entirely for
fear of losing promised international aid. For exam-
ple, Tunis's proposed program probably was behind
the World Bank's recent decision to provide some
$180 million in agricultural and industrial develop-
ment loans. The Bank is also considering loans in the
public enterprise and housing sectors. Embassy
sources claim that Tunis may use its structural adjust-
ment program as collateral to draw on automatically
available IMF funds and other multilateral aid
sources for another $160 million. These amounts are
in addition to a $175 million Euroloan secured earlier
this year.
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Key LDC Debtors: Grappling
With Capital Flight'
Capital flight, which we estimate has bled nearly
$180 billion from the key LDC debtors over the past
decade, remains an obstacle to the solution of their
international financial problems. The debtors are
having a harder time balancing their international
accounts because high borrowing requirements-due
in part to continuing capital flight-are running up
against creditors' resistance to new lending. In addi-
tion, lenders are using the capital flight issue to justify
further lending cutbacks. Unless the debtors imple-
ment structural reform, which would remove the
powerful incentives for capital outflows, we believe
their financial straits will persist, multiplying econom-
ic problems and undermining political stability.
We define capital flight as the net accumulation of
foreign assets by private citizens. This accumulation
is the natural reaction of residents, who are trying to
preserve or increase their wealth, to prevailing eco-
nomic and political conditions. Capital flight cannot
be measured directly or accurately because of its
often surreptitious nature. However, crude estimates
can be made using balance-of-payments and debt
data. We use the "implicit capital outflow" method,
which estimates capital flight as a residual. Our
estimate equals net foreign direct investment plus net
foreign borrowing minus the change in nongold re-
serves plus the current account balance. Because of
the many shortcomings of this method, our estimates
should not be viewed as point estimates, but rather as
benchmarks representing the minimum level of capi-
According to our estimates, the flight of capital from
the key LDC debtors had accelerated dramatically
before the international financial crisis began in 1982.
Capital flight reached a peak of $31 billion in 1981-
up from $9 billion in 1976. The $86 billion that left
these countries during 1980-82 is equivalent to 52
percent of their net foreign borrowing, 12 percent of
their gross fixed investment, and nearly 3 percent of
aggregate GDP. Mexico, Argentina, and Venezuela
were the hardest hit during this period, while Brazil
was virtually untouched by capital flight.
The unprecedented flight of capital from the key
LDC debtors during 1980-82 can be traced primarily
to economic mismanagement:
? We believe overvalued exchange rates were the key
cause of this capital exodus. When currency devalu-
ations failed to keep pace with inflation, the debtors'
real exchange rates appreciated by over 30 percent
LDC debtors include Argentina, Brazil, Chile, Mexico, Nigeria,
Peru, the Philippines, and Venezuela. Dollar values are measured in
1985 US dollars, and growth rates were calculated from constant-
tal flight.
during 1978-81. Overvalued exchange rates made
foreign assets cheaper and raised the specter of
large devaluations.
? Negative returns on domestic assets were also an
important cause of capital flight. Real interest rates
grew increasingly negative as governments fixed
nominal interest rates below the rising rate of
inflation.
? Heightened uncertainty over imminent economic
adjustment made assessing the returns and risks of
domestic assets difficult. There also was increased
political uncertainty arising from martial law, mili-
tary coups, rising political opposition, and transi-
tions to civilian rule.
Secret
DI IEEW 86-032
8 August 1986
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Key LDC Debtors: Capital Flight,
1976-85
Key LDC Debtors: Capital Flight by
Country, 1976-85
Mexico
Venezuela
Argentina
Brazil
Nigeria
Philippines
Peru
Chile
Although our estimates indicate that outflows have
tapered off since the international financial crisis
began, capital flight continued to plague the key LDC
debtors. As massive capital outflows from Mexico and
Argentina were partially staunched, capital flight fell
from $31 billion in 1981 to less than $8 billion in
1985. We believe, however, this capital loss inflicted
more damage than past episodes of capital flight
because of the severe foreign exchange shortage dur-
ing the period. The $37 billion that left during 1983-
85 was equivalent to nearly 75 percent of net foreign
borrowing. We also believe capital flight may have
been even higher because, with tighter capital con-
trols, outflows that once were easily measured were
pushed underground and became impossible to detect.
? The most important step taken to limit capital flight
was the move to more realistic exchange rates.
Faced with financial crisis, these countries devalued
their currencies by 40 percent in real terms during
1982-85, pushing up the domestic currency cost of
foreign assets.
? A drop in savings-the funds available to finance
foreign asset purchases-also stifled capital flight.
Forced economic austerity in the key LDC debtors
led to a 13-percent contraction in the pool of savings
during 1983-85. Resident saving was stagnant, and
savings from foreign sources plummeted when for-
eign borrowing was curtailed.
We believe a combination of new foreign exchange
policies and economic austerity reduced capital out-
flows from the key LDC debtors:
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Key LDC Debtors: Annual Average
Capital Flight, 1976-85
Billion 1985 US $
Total
13.8
28.7
12.2
17.8
Argentina
3.1
8.7
0.1
3.8
Brazil
2.3
0.1
1.1
1.3
Chile
-0.3
0.2
-0.1
-0.1
Mexico
3.6
10.6
5.7
6.3
Nigeria
0
2.2
2.0
1.3
Peru
0.3
-0.4
0.4
0.1
Key LDC Debtors: Capital Flight as a
Share of Net Foreign Borrowing
35
? Most debtors also implemented stringent capital
controls in hopes of buying time so the lingering
problems of negative real interest rates and height-
ened uncertainty could be addressed.
The mechanics of capital flight illustrate why the key
LDC debtors have had difficulty halting capital out-
flows. Our analysis indicates that nearly all segments
of society acquired foreign assets:
? Government officials were implicated in the most
flagrant cases of capital flight. Per capita, they
probably acquired more foreign assets than any
other group. Corrupt chief executives were the
premier capital flight artists, but cabinet ministers
and bureaucrats also funneled illegal payments
overseas.
? In fact, the business community, including promi-
nent businessmen, small businessmen, and multina-
tional corporations, probably moved the most capi-
tal abroad. Their decisions to convert domestic
profits to foreign assets were based almost exclu-
sively on economic fundamentals.
? The general public also participated in a small way
in the foreign asset rush. Even the unsophisticated
learned the benefits of holding foreign assets. Resi-
dents often held US dollars "in the mattress." The
general populace also acquired assets overseas
through banking channels or by carrying small
amounts of capital abroad.
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We believe most of the capital that left key LDC
debtors before the financial crisis moved overtly
through legitimate channels. Unless the funds were
tainted, there was no need to develop complicated
schemes when capital controls were weak. In most
cases, residents made deposits in local banks, and the
funds were transferred by wire to accounts overseas.
Capital was also physically carried out of the country.
Residents mailed bank drafts overseas for deposit in
foreign accounts or brought bundles of cash with
largest recipient, with Switzerland a distant second,
Funds were also moved
offshore to Panama, Hong Kong, and smaller havens
such as the Cayman Islands and the Bahamas. A
small amount flowed to nearby LDCs. Once capital
was shifted abroad, we estimate that residents invest-
ed about two-thirds of it in financial assets and the
rest in personal and business property.
Fallout From Capital Flight
them on foreign trips.
As capital controls tightened, residents developed
increasingly elaborate schemes to transfer funds
abroad:
? The least elaborate ploys involve smuggling.=
everything from
cattle to Krugerrands is smuggled, but financial
assets-cash, bonds, bank drafts, and traveler's
checks-are the preferred cargo. Contraband is
then converted to hard currency and the proceeds
invested.
? More elaborate schemes to move funds abroad
involve misreporting. Exporters underinvoice ship-
ments and remit to the central bank only a portion
of foreign exchange earnings. Importers overinvoice
purchases and draw extra foreign exchange from
the central bank.
? Clever residents also concocted more exotic ploys.
They developed schemes to acquire readily convert-
ible assets, such as gold, foreign exchange, or even
airline tickets, for shipment overseas. Citizens also
devised ways to hide their capital transfers through
legitimate banking and commercial channels. Resi-
dents engage in parallel transactions such as curren-
cy swaps that enable them to acquire foreign assets
without actually transferring funds across the bor-
der.
Analysis of press and diplomatic reporting indicates
that residents of the key LDC debtors invested their
flight capital in an array of assets around the world.
We believe about three-fourths of this capital ended
up in developed countries. The United States was the
Although individuals benefited, we believe capital
flight has had serious economic effects on the debtor
countries:
? Higher foreign debt is the principal legacy. As
capital streamed out of these countries, governments
borrowed abroad to replace it. This policy set off a
capital-flight foreign-borrowing spiral that was
probably responsible for about one-half the buildup
in their foreign debt during the past decade.
? Capital flight also reduced real income, leading to a
lower standard of living for most citizens. As capital
left the country, the pool of funds available for
investment contracted, and domestic capital forma-
tion dropped off. This investment slump in turn
reduced the countries' potential to produce goods
and services.
? Capital flight also increased income inequality.
Those who acquired foreign assets, mostly the
wealthy, received special benefits. Their foreign
asset purchases were subsidized through overvalued
exchange rates. Moreover, they purchased foreign
assets paying high returns while others had to settle
for at best the low returns available domestically.
Assessing the political fallout from capital flight is
difficult, but logic and anecdotal information suggest
that capital flight has affected the political environ-
ment in these countries. As residents moved their
capital abroad, their national allegiance was eroded
because they had less personal stake in their coun-
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Secret
tries' future. Capital flight also provided ammunition
for the opposition, who used the issue to embarrass
political leaders and undermine government support.
Moreover, when capital flight made economic inequi-
ties more pronounced, some residents may have been
attracted to leftist ideologies promising income equali-
ty.
While the exodus of capital from the key LDC
debtors has slowed, we believe capital flight remains a
major obstacle to the solution of their international
financial problems. Capital outflows are keeping for-
eign borrowing requirements high at a time when
access to foreign credit is severely limited. With
foreign exchange scarce, capital flight is inflicting
more damage on their balance of payments than ever
before. Lenders are also seizing on capital flight to
justify further lending cuts. They point to the fact
that over 70 percent of the funds borrowed abroad
since 1982 were used to acquire foreign assets-up
from about 50 percent during 1980-82.
Our analysis indicates that structural reform, rather
than tighter capital controls, would slow the exodus of
funds by removing the incentive for capital flight.
Historically, these countries have relied on capital
controls to limit capital flight, but controls have been
only partially effective. Well-connected elites operate
above the law, and even the less powerful employ
numerous methods to acquire foreign assets illegally.
In contrast, more realistic exchange rates raise the
cost of foreign assets. Financial market deregulation
makes domestic assets more attractive by raising real
returns. Consistent economic policies and strong dem-
ocratic institutions reduce the risk of holding domestic
assets.
If the key LDC debtors can overcome the obstacles to
structural reform, repatriation of foreign assets accu-
mulated by their residents may hold a key to the
solution of their international financial problems. We
believe residents own a stock of foreign assets equal to
at least one-half the foreign debt of these countries.
The debtors might entice some of this capital back if
they adopted structural reform. Repatriated capital
would help relieve balance-of-payments pressures and
cut foreign borrowing requirements. Even if residents
kept their foreign assets but repatriated earnings, the
impact on international accounts would be significant.
If the obstacles prove insurmountable and the key
LDC debtors fail to adopt structural reform, we
believe capital outflows will remain stubbornly high
and international financial problems will continue to
dog these countries. They will have a harder time
balancing their international accounts when inflated
foreign borrowing requirements bump up against cre-
ditors' increased resistance to new lending. Forced to
trim their international outlays, they probably would
lobby even harder for debt service relief rather than
institute greater import cuts. If concessions are not
granted by creditors, more debtors might suspend
principal repayments and limit interest payments.
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Syria: Limited Help From
Domestic Oil Gains
Oil from Syria's new Thayyem field will only margin-
ally strengthen Syria's economy but will make Da-
mascus less dependent on Iran for concessional oil
shipments. The new field will begin producing 50,000
to 60,000 b/d in September when a new pipeline is
completed and is expected to produce 100,000 b/d by
1988. Initially, this will reduce Syria's dependence on
imported oil by about 40 percent. A stronger domestic
oil industry will barely put a dent in Syria's profound
economic problems, which result from years of misdi-
rected Ba'thist policies and burdensome military
spending. Syria will continue to run a large current
account deficit and suffer chronic foreign exchange
shortages, which will add to President Assad's politi-
Syria: Crude Oil Industry, Thousand b/d
1985
cal problems.
Although crude oil and products account for over 60
percent of exports, Syria is a net importer of oil.
Syrian refineries are designed to operate on a blend of
domestic heavy crude and imported light crude but
operate more efficiently on straight light crude. Ac-
cording to the US Embassy, the Syrian oil trade
deficit was about $200 million in 1984 and probably
larger in 1985, mainly as a result of the declining
volume of crude exports.
Exports are depressed because of lower prices and
stagnant production. Revenues from oil exports fell
from over $1.3 billion in 1980 to less than $900
million in 1985. The official price for Syrian crude
was steady through 1985 but fell dramatically in
February after Damascus reluctantly introduced
"netback" pricing, which ties the crude sales price to
the value of refined product. The fall in exports has
been aggravated by erratic Iranian deliveries. Exports
fell in 1985 by at least 20,000 b/d as the Syrians were
forced to divert export oil for domestic use. If the
increase in Thayyem production is unexpectedly de-
layed until 1987, we estimate this year's exports of
crude could provide less than $400 million.
100
20
Imports of crude oil and products represent a growing
share of Damascus' hard currency imports. Syria's
primary supplier, Iran, has pressed Damascus for
prompt payment and often suspended deliveries. Ac-
cording to press reports, periodic cutoffs this year
have forced purchases of 50,000 b/d of light crude on
the Mediterranean spot market. These purchases have
almost exhausted Syrian foreign exchange reserves
and probably underscored for Assad his growing
economic isolation.
Although Damascus has granted several exploration
and drilling concessions to foreign firms since 1974,
these firms failed to find any major new fields until
the recent Thayyem discovery. After peaking in 1976
at 200,000 b/d, current Syrian oil production has
slipped to 185,000 b/d,
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Secret
Iran: Syria's Import Lifeline
Syria's oil import requirement, combined with its
chronic low foreign exchange reserves-estimated at
less than $100 million in May-makes it dependent
on concessional oil shipments. Since Damascus broke
relations with Iraq in 1982 and closed the
1.2-million-b/d Kirkuk-Hims pipeline, Syria has re-
lied primarily on Iran for crude oil deliveries to meet
its growing demand.
will increase to 50,000 to 60,000 b/d by September,
and Pecten officials have promised Assad 100,000 b/d
by 1988. we expect
production goals will be met on schedule. We estimate
the low-gravity, low-sulfur Thayyem crude will re-
duce imports by about 40 percent over the next year.
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2oA I
Syrian nonpayment of its debt and Iranian intransi-
gence on additional price concessions have strained
relations and resulted in periodic cutoffs of Iranian
deliveries. Last year's oil imports from Iran totaled
less than 75 percent of the contract amount
Moreover, Syrian
tankers loaded with Iranian oil have been targets of
Iraqi attacks twice in 1986, further disrupting crucial
imports. We estimate 1986 deliveries of Iranian oil at
approximately 6.5 million barrels. The oil link to
Iran has been weak since the outset of the relation-
ship in 1982. Deliveries have continued, albeit at
progressively lower levels, despite Syria's consistently
poor payment record.
Domestic consumption of petroleum products has
doubled since 1975. We estimate current demand for
petroleum products is 150,000 to 190,000 b/d and
growing more than 10 percent annually. Military and
industrial demand as well as price subsidies have
fostered high consumption of several products. Syria
is only partly meeting current domestic demand for oil
products. The government in late 1985 announced
much-needed price increases for most petroleum prod-
ucts to curb demand and reflect actual costs. Accord-
ing to Embassy reporting, rationing of some oil prod-
ucts began in February, and electricity is shut off in
Because Damascus has exercised its option to use the
lighter Thayyem crude domestically, total oil exports
may actually fall as Syria compensates Pecten with
heavier Suwaydiyah crude on a value equivalent basis.
While the current market prices for the two grades of
crude are very close, light grades generally are higher
priced. Pecten's share could increase by up to 20
percent when prices rebound, cutting further into
Syria's return.
Damascus for three or more hours per day.
The Pecten Syria Corporation-a consortium of Shell
USA, Royal Dutch Shell, and Deminex of West
Germany-is developing Thayyem and other finds
and will divide the marketed production with the
Syrian Government. According to Embassy reporting,
production from the Thayyem field in eastern Syria
Syria will probably remain a net importer at least
until 1988. We estimate Pecten output will have to
increase to over 75,000 b/d-including Syria's for-
eign partners' share-before Syrian oil trade comes
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Syria: The Oil Industry
Crude Oil Exports Crude Oil Sales Price
Million US $ US $ per barrel
100
Netback
pricing
introduced
80
60
40
20
0 J A J 0 J A
1985 1986
30
Netback
pricing
introduced
25
20
15
10
5
J A J 0 J A
1985 1986
into balance. After production exceeds 75,000 b/d,
Syria and its partners will export part of the Thayyem
crude After
the cost recovery period of at least two years, Syrian
export earnings on 75,000 b/d (at $15 per barrel)
would increase by about $100 million but still leave
Syria with an estimated $2 billion current account
deficit.
Embassy reports on estimated reserves suggest Syria
may become self-sufficient in crude oil and perhaps a
net crude oil exporter in the next decade. Pecten has
found oil in a third concession east of Thayyem that
may allow substantially higher production by the
early 1990s.
Pecten's exten-
sive investment and planned excess capacity suggest
higher long-term production is a realistic possibility.
Crude Oil Production
Thousand b/d
Syria still has high reserves in its northeastern fields,
and production could be maintained and even in-
creased if Syria invested more in advanced Western
equipment and seismic studies. The Syrian Petroleum
Company, however, has relied on outmoded equip-
ment and technical support, mostly Soviet, to operate
its principal fields at Suwaydiyah and Qaratshuk, and
it is unlikely Damascus would allow greater Western
involvement in its oil industry at this time.
For the next year or two, Damascus will remain
dependent on its present suppliers, especially Iran, for
concessional oil shipments. Syrian import needs over
the near term are confirmed by the oil supply contract
recently negotiated with Tehran for 100,000 b/d
through March 1987. As Thayyem production is
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stepped up during 1987 and other finds are developed,
Damascus will gradually grow less dependent on
foreign suppliers and Assad will have more room to
maneuver.
Syria's foreign payments position will probably re-
main troubled, even as oil trade moves into surplus.
Nonoil exports are weak and declining, and foreign
aid will probably continue to contract as the economic
slowdown in the region continues. Assad may be
inclined to take measures to increase Syria's share of
eign assets.
the increased output from the new oilfields. If rela-
tions with Pecten in particular, or the United States in
general, turn sour, Syria may well increase taxation
on its foreign partners, demand renegotiation of the
production-sharing contract, or even expropriate for-
fields.
The prospects for increased US leverage over Damas-
cus through greater involvement in the oil industry
are poor. Although Pecten has a high stake in Syria,
threats of sanctions and disinvestment are not likely to
induce Assad to alter his policies. If Pecten withdrew
operations in Syria, the impact on Damascus would be
minimal. The Syrian Petroleum Company-possibly
with Soviet, East European, or Arab assistance-
could easily take over Pecten's operations with little
disruption. In addition, West European oil firms,
including Pecten's part owners Royal Dutch Shell or
Deminex, could offer Western expertise to keep pro-
duction on schedule and continue exploration on new
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Secret
OPEC Production OPEC crude oil production averaged 20.2 million b/d in July, an increase of 1.2
Update million b/d from June levels. This increase came primarily from Saudi Arabia,
which extended its netback discounts through September and aggressively market-
ed its oil to boost output by 600,000 b/d. Kuwait's output rebounded by 400,000
b/d as it was able to resume normal operations after the sabotage of its oil
facilities in mid-June. Similarly, Iran increased output to 2.2 million b/d after
June's supply disruption. Only Libya saw its production fall slightly-by
100,000 b/d. US oil companies stopped liftings on 30 June-withdrawing 250,000
b/d from the market-but Libya was able to find new customers to offset part of
this loss.
OPEC Oil Production, 1986
First Second June July
Quarter Quarter
a Amount in parentheses excludes production from the Neutral
Zone, whose output is divided between Saudi Arabia and Kuwait
and included in their country quotas; the Neutral Zone has no
production quota of its own.
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Secret
Spot Oil Spot oil prices have risen as much as $5 per barrel this week in response to the
Price Developments OPEC decision to cut current production by 3.5 million b/d in September and Oc-
tober. Key North Sea and US crudes are selling for $14.30 and $15.00 per barrel,
respectively, compared to $9.30 and $11.05 last week. Prices remained low during
the OPEC meeting, reflecting traders' skepticism that OPEC oil ministers would
be able to reach a formal agreement to reduce supply. There is still considerable
doubt that OPEC discipline has been restored, and prices will quickly fall if the
market perceives that OPEC members are cheating on their new quotas.
Japan and Indonesia Tokyo has agreed to pay above-market prices on a month-to-month basis for
Reach LNG Indonesian liquefied natural gas (LNG) in exchange for future compensation.
Price Agreement Jakarta has offered LNG for export to Japan in August for about $2.59 per
million Btu (MMBtu)-equivalent to a crude oil price of $16.50 per barrel. Under
a 1981 contract linking LNG prices to the official selling price of a basket of Indo-
nesian crudes, LNG revenues have plummeted.
Japan is looking to Indonesia as a long-term supplier and is thus more willing to
accept these higher prices for the immediate future.
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Secret
Ecuador's
IMF Agreement
in Jeopardy
setbacks.
The US Embassy reports the IMF has delayed action on Ecuador's request for
$138 million in loans because of Quito's failure to implement economic reform
measures, particularly a devaluation. Ecuador needs the loans to meet a projected
foreign payments deficit of $750 million this year caused by declining oil revenues.
Moreover, IMF approval of the loans is required both to trigger the second
disbursement of a US bridge loan needed to sustain foreign exchange reserves and
to lead to a rescheduling of Ecuador's official debt by the Paris Club. Although
some accommodation with the Fund will probably be reached before the IMF
Board meets again at the end of this month, the delay will cause political problems
for President Febres-Cordero. He cannot appear to give in to IMF pressure, yet he
must take action on the faltering economy. The new leftist-controlled Congress
opens on Sunday, and it will be ready to exploit the President's recent economic
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Secret
Sudanese Legal Sudanese officials appear intent on prosecuting foreign and Islamic bank manag-
Actions Against ers for alleged illegal credit and foreign exchange operations. To date, one
Banking Community manager has been arrested, another has fled the country, and fines of $24 million
have been levied. The banks whose "gray" foreign exchange transactions were
until now widespread and tolerated reportedly have been targeted by leftist
elements within the government intent on discrediting the banking sector. More
prosecutions and fines may cause several foreign branch banks to close operations
in Khartoum, disrupting already strained credit and trade lines and further
damaging Sudan's reputation within the international financial community.
Agreement The GATT Textile Committee on 1 August reached a tentative agreement
Reached on MFA renewing the Multifiber Arrangement (MFA) after 48 hours of intense negotia-
tions. The agreement must still be ratified by the GATT member governments.
Significant changes from the previous MFA include coverage for linen, ramie, silk,
and several other fibers, and the authorization to continue unilateral measures to
halt import surges for an additional year if the respective trading partner is
unwilling to negotiate. The accord is more restrictive than the LDCs wanted.
Throughout the negotiations, LDCs sought better terms for cotton and wool
suppliers, tighter market disruption criteria, and speedier dispute handling. LDC
efforts to obtain commitments to liberalize textile trade or phase out the MFA
were also unsuccessful. LDC discontent with the MFA could make talks for the
new trade round more difficult and give hardline LDCs, such as Brazil, greater
support.
Global and Regional Developments
Japan Preparing The Japanese Foreign Ministry told US Embassy officials last week that Tokyo is
South African willing to impose harsh economic sanctions against South Africa if the United
Economic Sanctions States and the United Kingdom take similar action. Tokyo has already drafted a
set of measures, including a ban on imports of coal, iron ore, and agricultural prod-
ucts. Other moves under consideration include banning flights to and from South
Africa, barring South African tourists from visiting Japan, and discouraging
Japanese citizens from vacationing in South Africa. Japan, which has been
criticized for not being more active in the international arena, probably believes
that the United States and the United Kingdom will soon take strong measures. It
does not want to appear reluctant to participate. The proposed sanctions would cut
Japan's purchases from South Africa in half. Past sanctions, which included a
longstanding ban on direct investment in South Africa and limits on computer
exports, have not significantly affected the volume of trade.
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Secret
Foreign Aerospace Plane Western Europe and Japan are debating development of completely reusable space
Development Programs launch systems. The United Kingdom is proposing HOTOL, a horizontal-take-off-
and-landing launcher, which would use a combination of air-breathing and rocket
propulsion. The British contend that HOTOL would lower launch costs by 50
percent for geostationary orbit and 80 percent for low-Earth orbit. Recognizing
they could never fund the projected $6 billion development alone, Britain is
attempting to compete with Hermes-the French-proposed, rocket-launched,
spaceplane-for European Space Agency support. The West German Research
Ministry is also considering HOTOL participation. In addition, the West Germans
are developing the Saenger, a two-stage spaceplane with a recoverable air-
breathing booster. For their part, the Japanese are exploring technologies for an
advanced air-breathing hypersonic engine, but have not committed to a develop-
ment program. Although none of the foreign efforts are as far advanced as those of
the United States, there may be an opportunity for cooperation to speed the
technology development and lower US development costs.
Brazil-Iraq Brazil has suspended its $630 million countertrade deal with Iraq-signed in
Countertrade December 1984-under which 100,000 Brazilian Volkswagens were to be bartered
Deal Stalls over 25 months for Iraqi oil. Rio de Janeiro blames domestic labor problems for
the action, but it is almost certain that falling oil prices were responsible. Brazil
agreed to accept a quantity of oil determined by the spot market price of $27 per
barrel at the time the contract was signed-and to absorb all transport and storage
costs. With oil prices declining to about $8 per barrel, Brazil faced substantial
losses on the deal even though Iraq raised the monthly amount of oil shipped.
Latin American
The recent Argentine-Brazilian bilateral economic cooperation agreement will
Regional Integration
further stimulate efforts toward Latin American economic integration, 25X1
F4forts Accelerate
Uruguay has already been invited to join the agreement
25X1
I Also, Buenos Aires
and Brasilia want Mexico and Venezuela included. We believe that Montevideo
might announce its formal participation in the Argentine-Brazilian system as early
as next week, during President Sanguinetti's visit to Brazil. Other countries, such
as Mexico and Venezuela, are likely to be more cautious. Despite these positive
steps, economic integration almost certainly will be a slow process, given the
historical suspicions among Latin American countries and the inherent difficulties
in implementing economic cooperation schemes.
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Secret
Weak Canadian Dollar Ministry of Finance officials are worried that any attempt to boost the slowing Ca-
Worries Ottawa nadian economy could cause another currency crisis. With recent forecasts
showing the economy growing only 2.5 to 3 percent in 1986-almost a full point
below Ottawa's February estimate-the government would like to lower interest
rates. Recent efforts to reduce the gap between the US and Canadian discount
rates, however, have caused sharp drops in the Canadian dollar, forcing the.
monetary authorities to quickly widen the differential. Ironically, part of the
currency's weakness probably stems from Ottawa's budget reduction measures:
the recent boost in sales taxes helped keep inflation close to 4 percent while rates in
the rest of the major industrial countries have declined. Canadian officials also
fear that the initial impact of a pickup in US economic growth would be higher in-
terest rates, which would force them to either match the rate increases-slowing
the economy further-or accept a weaker currency.
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Secret
Canadian Auto Ottawa has decided not to press South Korea for "voluntary" auto export
Import Policy restraints-while attempting to retain such limits on Japan.
Creating Problems
The
decision is sure to anger Tokyo, because Ottawa is demanding that Japan allow
only a slight increase in auto exports despite substantial investments in Canada
made by Japanese carmakers in the past year. Moreover, Ottawa is likely to
further aggravate the situation by supporting Suzuki's request that Tokyo grant it
the majority of the eventual increase in the Japanese quota. Suzuki claims that it
must increase its visibility in Canada in order to ensure the success of its proposed
joint venture with GM to build a plant in Ontario.
Spanish Industrial Poor market prospects for traditional industries, increased competition from other
Restructuring EC steel producers, and promises to the EC to cut back steel capacity probably are
Extended the major factors that have prompted Madrid to extend an industrial restructuring
program. The program-originally expected to cost $6.7 billion during 1984-86-
aimed at enhancing export competitiveness and bolstering the finances of sunset
industries by trimming surplus labor, closing inefficient plants, and modernizing
production. According to press reports, Madrid believes that further gains are
necessary, and it intends to spend an additional $1 billion during 1987-88 to
support investments in equipment, restructure debts, and lay off additional
workers. We expect most of this effort will be directed at the steel and shipbuilding
sectors. Madrid must reduce crude steel capacity by 3 million tons under the terms
of its EC accession agreement, and Spanish steel firms are demanding that the
government finance layoffs of another 10,000 to 20,000 workers. Worldwide
surplus capacity and slack demand will probably lead to sharp cuts in shipyard ca-
pacity and employment.
Greek Parliament The Greek Parliament last month fulfilled a longstanding commitment to the EC
Passes VAT Legislation by imposing a value-added tax (VAT) effective 1 January 1987. Athens previously
had requested three delays, but finally committed itself to implementing the tax as
part of a deal to receive a $1.5 billion balance-of-payments loan from the EC last
November. The VAT will replace 10 of 24 existing indirect taxes. It will have
three rates-averaging about 10 percent-and will cover all goods and services
except banking and insurance; banking services will become taxable in 1989.
Athens probably hopes that the VAT, coupled with the tougher enforcement
measures adopted earlier this year, will reduce widespread tax evasion and help de-
crease the budget deficit, which hit a record last year. Government estimates
indicate, however, that the tax will raise only about $3 billion-or approximately
the same amount that would have been raised by the indirect taxes that are being
abolished.
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Secret
Turkish The main result of Prime Minister Ozal's recent trip to Moscow was the signing of
Prime Minister agreements on tourism and economic planning. Ozal did not meet with General
Visits the USSR Secretary Gorbachev, however, and the two sides failed to resolve their disagree-
ments over the Soviet ban on turbot fishing in its economic zone in the Black Sea
and the Soviet FIR line, which the Soviets claim extends to Turkey's shores. The
only surprise was an agreement on the repair of Soviet commercial ships in
Turkish ports. The two sides also discussed Turkey's purchase of Soviet natural
gas, 70 percent of which will be paid for by Turkish exports. If the Turks are un-
able to sell this amount, then Turkish contractors will be offered opportunities to
build hotels in the Black Sea region in the Soviet Union as payment.
Israeli Shekel The shekel is now pegged to a five-nation foreign currency basket, according to an
Linked to New announcement by the Bank of Israel last week. This ends the informal policy that
Foreign Currency had pegged the shekel to the dollar since the start of the economic stabilization
Basket program in July 1985. The new basket is composed of a weighted average of the
currencies of Israel's principal trading partners: the US dollar will make up 60 per-
cent; the West German mark, 20 percent; the pound, 10 percent; and the French
franc and yen, 5 percent each. The Bank of Israel stressed that this is a technical
measure and that there was no intention of effectively devaluing the shekel. Bank
officials hope the move will help bring inflation in Israel down to European levels
while minimizing the shekel's fluctuations against the newly incorporated curren-
Less Developed Countries
Mexican Mexico's new IMF program will provide $1.5 billion over 18 months and contains
IMF Agreement unprecendented contingency measures to increase financing if oil prices fall or the
Brings Respite economy does not rebound sufficiently. The agreement also features relatively
lenient economic targets consistent with Mexico's planned growth of 3 to 4 percent
next year. For example, the IMF negotiators backed off their original demand that
Mexico's deficit as a share of GDP be held at about 6 percent this year, and agreed
to a target of 16.9 percent. We believe that most Mexican policymakers are
convinced that they received a good deal and will make a stronger effort than in
the past to adhere to the agreement.
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Secret
Reactions to Brazilian President Sarney retains basic support for his Cruzado Plan, but has received
Economic considerable criticism for the adjustments he recently made to the program.
Adjustments fixed reaction to the compulsory saving program-heavy
surcharges on automobiles, fuel, foreign travel, and the purchase of dollars on the
parallel market-announced on 23 July. Leaders of the governing coalition
publicly supported the effort to restrain consumption, but have criticized the lack
of prior consultation. The leftist parties and labor have charged that the new taxes
represent a lifting of the price freeze
Several
prominent business leaders complained that the private sector is bearing the cost of
the battle against inflation-through continuation of the price freeze-while
government fails to contain its own spending. The parallel market dollar exchange
rate-traditionally a barometer of public confidence in the economy-rose sharply
last week to its highest level in three years. If public confidence in the Cruzado
Plan drops sharply, Sarney probably will consider additional measures to prevent
the left from strengthening its prospects in the crucial November elections.
Bolivian Request President Paz Estenssoro is increasing pressure on the United States to reciprocate
for Economic Aid his willingness to cooperate in antinarcotics efforts by agreeing to a long-term aid
package for Bolivia. According to the US Embassy, Paz plans to send a delegation,
including the Ministers of Finance and Planning, to Washington next week to ask
for financial backup in the foreign exchange market, resources to continue the
fight against narcotics over the long term, and mechanisms to accelerate
development assistance. Members of the Bolivian delegation will emphasize the
economic fallout from the anticocaine drive-and the political risks Paz took in
agreeing to a direct US military role. The long-fragile Bolivian economy has been
struggling in the face of the collapse of the tin market and recurrent strikes. The
government crackdown on the illegal cocaine industry in the past month has added
to the economic problems by precipitating a run on the peso, depressing prices for
coca leaves grown by thousands of peasants, and disrupting the vast, drug-related
underground economy.
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Secret
Thailand The Ministry of Commerce announced on 1 August that 1986 rice exports could
Anticipating Record surpass the 1984 record of 4.5 million metric tons, a development that we believe
Rice Exports may mute Bangkok's allegations of a "devastating" impact of the US Farm Act on
Thai rice exports. After Bangkok reduced its rice export target to 4 million tons
this spring, unexpected demand from Brazil, Peru, China, and Vietnam caused a
surge in exports. Total volume of rice exports for the first half of 1986 was up
nearly 13 percent over the same period last year and the record year of 1984. The
value of rice sales was down 14 percent from last year, however, because a larger
share of these exports were cheaper, lower quality grades.
Soviets Criticize A midlevel Soviet foreign trade official has admitted that the USSR is circuin-
Western venting the COCOM embargo. In an interview with a Swedish journalist, he
Technology Controls accused Stockholm of reneging on its neutralist policy and of bowing to US
pressure by implementing new controls on technology exports to the USSR, and he
hinted at a tougher Soviet line toward Sweden. The official asserted that the
embargo will hurt Swedish exports without affecting the USSR because Moscow
can get foreign technology from other neutrals and through secret trade with
Western countries. He acknowledged the embargo causes delays and provides an
incentive to collaborate with other countries to develop technology. The official's
statements are the first such public admissions. The unusual forum, the frankness
of the remarks, and the apparent official sanction of the interview may signal a
more open approach to Western export controls, in line with General Secretary
Gorbachev's domestic policy of more open media discussion of sensitive issues. The
Soviets also may be attempting to warn neutrals who may have a larger stake in
trade with the USSR not to follow Sweden's lead.
Soviet Commission Ithe Commission on Improving Management, Planning
Discusses Supply and and the Economic Mechanism (Talyzin Commission) is discussing allowing
Price Reforms manufacturers of producer goods to directly negotiate contracts for the sale of
above-plan output. Sellers and buyers would negotiate under a price ceiling
established to prevent excessive profits and inflation. The proposal is intended to
give buyers more influence over producers and give producers greater incentive to
promptly deliver more quality output. Despite General Secretary Gorbachev's
backing-he alone among the Politburo members advocated elements of this
proposal at the March Party Congress-such a proposal threatens the power of the
supply and planning organs and economic ministries, and officials of those bodies
are likely to try to block it. Nonetheless, the measure's impact would be negligible
unless planned output targets are lowered and stabilized to encourage enterprises
to produce more than token above-plan output.
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Czechoslovak Economy According to recently released data, Czechoslovak economic performance during
Not Responding to the first six months of the year was in line with the slow growth trend of recent
Structural Changes years although slightly stronger than the first half of 1985. The plan fulfillment re-
port was accompanied by an unusually strong critique of the poorer-than-planned
performance. Prague is attempting to reorient production away from energy- and
raw-material-intensive industries toward higher value-added sectors as part of a
modernization drive. The regime was unable, however, to restrict growth in
energy-intensive mining and metallurgy, boost productivity in manufacturing, or
improve the quality and technical sophistication of manufactures, as it had hoped.
Czechoslovakia's leaders have failed to establish incentives that would move their
desired structural change forward-relying instead on calls for management
discipline. As a result, the country faces continued slow, below-target, growth for
the year.
Yugoslav The government has stepped up its battle against inflation-now running at a
Price Increases near-triple-digit rate-by ordering a rollback in the prices of some 200 products to
Revoked the level of two months ago. Tougher price controls, including a de facto price
freeze for many items, were enacted in June. More recently, the government
announced new sanctions against violators of price controls, including threats of
dismissal and prison sentences for managers. In recent weeks, however, implemen-
tation of its price policy program has been marked by indecisiveness and
disorganization. The willingness and ability of Premier Mikulic's government to
hold the line on price controls could become a test of its ability to implement its
broad economic recovery program. While the government can probably count on
modest support from the Communist Party, it will be forced to balance public
demands for price stability against increasing pressures from industrial organiza-
tions to relax price restrictions and threats from producers to undermine price
policies.
Chinese China appears to be on the verge of implementing a nationwide labor reform
Labor Reforms package aimed at gradually replacing the centralized system of assigned jobs and
lifetime tenure with fixed-term contracts. In late June, the China began a 105-day
suspension of new hiring and transfers in state-owned offices and factories,
according to a credible Hong Kong newspaper account. The report, citing an
internal Chinese Communist Party document, also disclosed that the state will
provide temporary unemployment insurance to contract workers who lose their
jobs under the new system. By making it easier for mangement to release
employees, these reforms are aimed at raising enterprise productivity and market
responsiveness, and cutting back the number of redundant workers. A Hong Kong
press report in May suggested that, during the Seventh Five-Year Plan (1986-90),
Beijing hopes to trim "surplus" employment in state enterprises by 15 million
workers, out of a total of 86 million employees in the sector. The Chinese press has
recently expressed concern about finding new jobs for these workers, many of
whom they hope will be absorbed into collective and private-sector jobs.
37 Secret
8 August 1986
Declassified in Part - Sanitized Copy Approved for Release 2011/12/12 : CIA-RDP88-00798R000400110005-3
 Declassified in Part - Sanitized Copy Approved for Release 2011/12/12 : CIA-RDP88-00798R000400110005-3
Secret
CAAC Faces Down The Director General of the Civil Aviation Administration of China (CAAC), Hu
Kickback Scandal Yizhou, recently told foreign aviation officials in Beijing that they must take
"drastic actions" to help halt recurrent rumors of bribes and kickbacks from
foreign aviation companies. Foreign commercial aviation officials have vehemently
denied stories that Hu's predecessor accepted bribes on foreign aircraft sales to
China, but a CAAC official's evasion of a reporter's question during a May 1986
press conference has fueled the gossip. Despite persistent rumors of his arrest, US
Embassy officials say the former director was conspicuously present during the
May 1986 Aerospace Exhibition in Beijing-a move some CAAC officials
speculated was designed to squelch these reports. In response to Hu's plea, State
Planning Commission Vice Minister Gan Ziyu has agreed to meet with represen-
tatives of foreign firms to offer suggestions on how to convey their concerns to the
State Council. US diplomatic officials note that one US aviation corporate head
has already written to Deng Xiaoping personally, assuring him of his company's
innocence and expressing concern over the possible long-term damage that could
be done to Sino-US commercial aviation relations.
China Stages China is holding a three-week trade exhibition in the Soviet Union-its first since
Trade Fair 1953-featuring more than 4,000 industrial, consumer, and military items,
in Moscow including a model of China's Long March-3 rocket, satellites, computers, televi-
sions, textiles, and handicrafts. Although the show has not yet resulted in any
contracts, it has drawn considerable press attention in both countries, and has
attracted more than 20,000 visitors daily. According to US Embassy reporting, the
Soviets have played up the exhibit-highlighting the countries' common interest in
"socialist construction"-as part of Moscow's recent overtures to Beijing: Premier
Ryzhkov paid a visit the day of Gorbachev's Vladivostok speech. The Chinese
exhibit appears designed to publicize China's economic growth, according to the
Embassy; Chinese press accounts have reported the Soviets' interest in "the vitality
of China's economy as reflected in the exhibits." At the opening of the fair, the
two countries signed a protocol on exchanges of trade exhibitions through 1990.
According to Chinese customs statistics, trade between the two countries more
than doubled last year over 1984 levels, to nearly $2 billion.
Secret 38
8 August 1986
Declassified in Part - Sanitized Copy Approved for Release 2011/12/12 : CIA-RDP88-00798R000400110005-3
 Declassified in Part - Sanitized Copy Approved for Release 2011/12/12 : CIA-RDP88-00798R000400110005-3
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