LETTER TO WILLIAM J. CASEY (SANITIZED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88G01116R000600680001-1
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 54
• Document Creation Date: December 22, 2016
• Document Release Date: May 31, 2011
• Sequence Number: 1
• Publication Date: December 11, 1986
• Content Type: LETTER

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Proof of article for the National Security Record of The Heritage Foundation, 12/86
Western Security and East-West Finance
Declining hard currency earnings threaten the success of
Mikhail Gorbachev's economic modernization program and
are hobbling the USSR's ability to compete in the high tech-
nology race with the West. The Soviet leadership has re-
sponded to its foreign exchange shortfall by cutting imports,
stepping up borrowing in international financial markets, and
by launching a broad economic offensive toward the West. At
the same time, the ability of the Reagan Administration's
national security agencies to help manage East-West eco-
nomic and financial issues has been seriously weakened by the
establishment of an economic policy council that periodically
excludes them.
Last May, our West European allies administered a major
setback to Moscow's long-term strategy of dominating West-
ern Europe's gas markets and increasing its hard currency
earnings. The allies decided not to participate in another ma-
jor gas-for-pipe compensation deal involving the proposed sec-
ond strand of the huge Soviet gas pipeline that runs from the
Siberian fields to Western Europe. The West Europeans in-
stead concluded a S64 billion agreement to develop the Nor-
wegian Troll gas field, as a way of strengthening Western
Europe's energy security. That decision alone will eliminate
billions of dollars in annual hard currency earnings that Mos-
cow has been counting on for the mid- I990's and beyond. This
important development, catalyzed by the so-called "pipeline
dispute," is a major policy achievement for the Reagan Ad-
ministration and the Atlantic Alliance.
Total Soviet hard currency income will fall from about S32
billion in 1985 to an estimated S26 billion this year, further
reducing the cash available to Gorbachev to bolster his eco-
nomic modernization program, to support Moscow's client
states, to promote international terrorism, and to run a world-
wide intelligence network. The hard currency shortfall also
compels Moscow to squeeze the economies of its East Euro-
pean satellites even more than usual.
Unfortunately, the reaction of several Western banks and
governments to Moscow's economic and financial overtures
has been to offer the Soviets subsidized grain and other prod-
ucts, and large untied loans (not tied to a specific purpose) at
extremely favorable rates.
Concerning East-West trade, the ability of the USSR to
expand non-strategic trade with the West will be seriously
constrained if world energy prices and demand remain de-
pressed. Last year exports of oil and gas represented over half
of the USSR's total hard currency earnings. When one adds
estimated earnings from arms sales of about $6 billion, these
combined earnings jump to between two-thirds and three-
quarters of Moscow's total annual hard currency income.
The remainder of Soviet hard currency earnings are com-
prised of gold sales, interest on assets and miscellaneous ex-
ports. With a drop of roughly $6 billion in oil and gas income
this year, the USSR's projected hard currency earnings of
$26 billion hardly represent an impressive annual income for a
superpower. By comparison, General Motors' 1986 revenues
should be about three times higher, even in a troubled year for
the automaker.
Western Banks to the Rescue
The Soviet Union has three major ways of responding to
this sharp decline in hard currency earnings. It can:
Any sustained cut-back in imports, however, could severely
impede Gorbachev's economic modernization program, with
potentially serious political ramifications for the Soviet leader.
The Soviets likewise will be reluctant either to dip into their
gold reserves or to unload so much gold on the world market
that it might depress the price. Finally, the low price of oil is
creating liquidity problems for Iraq, Syria and other countries
that buy Soviet arms, reducing their purchases. Although a
domestic ruble cost (not hard currency), the estimated price
tag of about $900'million for the Chernobyl clean-up also
came at a bad time for the Soviet economy.
As a consequence, the Soviets have embarked on a binge of
new borrowing on Western financial markets. Soviet borrow-
ing resulted in an increase of roughly S5 billion in the Soviet
net foreign debt last year and probably will add another S5
billion by the end of this year. This high level of Soviet foreign
borrowing may well persist for the next several years, depend-
ing on world energy prices. For example, Plan Econ, Inc.,
estimates that the gross foreign debt of the USSR will in-
crease from about S29 billion in 1985 to S53 billion by 1990.
Untied Lending to Soviets
An area of East-West finance that requires close scrutiny is
that of untied, no-purpose lending by Western banks. This
kind of lending permits the Soviets and other potential adver-
saries to easily divert borrowed funds for any purpose they
choose, including activities inimical to Western security inter-
ests. Given the Soviets' hard currency shortfall, a cash flow
analysis indicates they are using borrowed funds to support a
substantial share of their global commitments and activities
that require hard currency.
The strategic problems associated with untied lending
could be remedied by Western commercial banks, particu-
larly those in Europe and Japan, voluntarily adopting lending
guidelines to discipline and monitor the use of borrowed
funds. The adoption of such voluntary lending principles
would not impede the conduct of legitimate non-strategic
East-West trade. This would only involve internal bank deci-
sions to concentrate on traditional forms of lending, such as
equipment loans, tightly-structured project loans, and short-
term commodity financing with loan maturities matched
against the duration of the underlying transaction.
It would also require the careful monitoring of aggregate
interbank deposits in Soviet-owned banks. Some commercial
banks have always maintained disciplined lending policies
with regard to loans to the Soviet Union and Eastern Europe.
It is appropriate for these commercially prudent procedures
to be adopted by all Western lenders.
The forms of untied lending which comprise the bulk of
unguaranteed commercial bank loans to the East include:
? balance of payment loans for no specific purpose;
? loans with excessive maturity structures, for example,
three year loans for grain transactions which take only
180 days or less to complete;
? "project loans" that actually are used for other purposes;
? interbank deposits in Soviet-owned banks: and
? the expected underwriting of Soviet Euronotes and
bonds, which soon may be an important new instrument
of untied Soviet borrowing from the West.
? sharply curtail Western imports (or defer delivery and It is worth noting that large-scale untied lending was one of
payment for items already contracted); the underlying causes of the current international debt crisis,
? sell more gold and arms; and along with a collapse in commodity prices, disinflation, and
? increase- Wectrrn hn"nwinoc capital flight. As a result, lenders now require maior debtor
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2.
nations to demonstrate productive uses for borrowed funds
and identify specific sources of payback whenever possible.
Certainly the same standards that are applied to loans to our
friends in Latin America should be applied by Western banks
to the Soviet Union and East European borrowers.
Soviet Trade Offensive
In addition to offsetting its hard currency earnings short-
falls with accelerated borrowing in the West, the USSR's
Ministry of Foreign Affairs has launched a global "trade
offensive" to secure as many commercial benefits from West-
ern partners as possible. Components of this offensive are:
? a serious effort to join the General Agreement on Tariffs
and Trade (GATT);
? an exploratory effort to join the International Monetary
Fund (IMF) and World Bank;
? the likely issuance of the first Soviet Euronotes and
bonds since the 1917 revolution;
? an even more aggressive campaign to increase the illegal
acquisition of Western technology;
? the encouragement of joint ventures with Western part-
ners and the decentralization of some economic decision.
making; and
? a decision to permit limited private enterprise in the
service and agricultural sectors.
The political tactics being employed by the Soviets to se-
cure Western economic and financial concessions are as var-
ied as granting grave visitation rights to Japanese whose rela-
tives are buried on the Soviet-held islands off northern Japan;
the release of selected dissidents and members of divided
families, a possible increase in Jewish emigration, and pub-
lic exaggeration of the significance of economic reform mea-
sures.
It would not be surprising if Gorbachev were soon to press
the U.S. to grant a one-year "trial" waiver of the Jackson-
Vanik and Stevenson amendments to the Trade Act of 1974,
which tie U.S.-Soviet trade to freer Soviet emigration. This
request could come at a time when Jewish emigration is at its
lowest level in over a decade. The selective release of a few
prominent, high-visibility dissidents does not appear to indi-
cate a change in the general policy of restrictive controls on
emigration. It remains to be seen whether Moscow's desire to
secure most-favored-nation trading status and renewed access
to official U.S. credits from our Export-Import Bank is strong
enough to lead to a policy shift in this area.
The Soviets probably also will seek U.S. support, if not
financing, for their ambitious offshore oil development
project in the Barents Sea north of the Kola Peninsula, and
possibly for other Soviet energy projects as well.
Future untied Soviet Euronotes and bonds eventually could
be subscribed to by institutions as varied as banks, brokerage
firms and pension funds, as well as individuals. As a result,
millions of Western and Japanese citizens could become un-
witting underwriters of Soviet global adventurism. From Mos-
cow's perspective, the sale of Soviet notes and bonds to the
West may also create influential new groups with vested inter-
ests in promoting Western economic and financial concessions
to the USSR.
The question is: how will the United States and our Western
allies respond to this flurry of Soviet economic initiatives
designed to obtain large-scale financing and increased trade
concessions? In the case of the U.S., the answer will depend in
large part on the dynamics of the government's interagency
process and the kind of analysis, options and recommenda-
tions placed before the President for decision.
A Flawed Policy Process
Between July 1982 and April 1985, Cabinet-level recom-
mendations on international economic matters with signifi-
cant foreign policy implications were generated by the Senior
Interdepartmental Group on International Economic Policy
(SIG-IEP). This Cabinet body, chaired by the Secretary of
Treasury, reported through the National Security Advisor to
the President. The executive secretary function was handled
by the National Security Council staff.
The process worked like this: when a U.S.-Soviet trade
issue, for example, had to be decided, the issue would be
discussed in the SIG-IEP after which the NSC staff would
prepare for the President an analysis of the issue and options
for dealing with it that reflected the SIG-IEP deliberations.
When appropriate, the national security advisor's own sum-
mary recommendation was included. In many cases, a full
NSC meeting would be held after the SIG-IEP had com-
pleted its work so that Cabinet members could present their
views to the President face-to-face.
Once the President had made a decision, a directive was
prepared by the NSC and distributed to the relevant agencies,
often assigning a particular agency responsibility for imple-
menting the decision. It was under the auspices of the SIG-
IEP that the President succeeded in achieving an allied con-
sensus on the key security aspects of East-West economic
relations during his first term.
In April 1985 an important change was made in this policy
process. The SIG-IEP was collapsed into a new Economic
Policy Council (EPC). A major reason for this decision, made
suddenly by the White House with minimal inter-govern-
mental consultation, was to streamline the economic policy-
making apparatus. Another reason was considerably more
subtle and manifested itself in the structure and membership
of the Economic Policy Council. The NSC, CIA and the
Defense Department. all important members of the SIG-1EP,
were excluded as regular members of the new EPC.
The chairman of the EPC is the President when he is in
attendance. When he is not, the Secretary of Treasury is
chairman. The important secretariat function was transferred
from the NSC to the Office of the Chief of Staff of the White
House. Taken together, these steps now place foreign eco-
nomic policy firmly in the hands of officials who often are
more concerned about domestic economic and political con-
siderations than about the crucial security dimensions of in-
ternational economic and financial issues.
Decision papers for the President on foreign economic mat-
ters now are predominantly prepared by the Office of the
Chief of Staff in coordination with the Treasury Department.
The national security agencies (NSC, CIA, and DOD) are
invited to attend EPC meetings when the secretariat considers
it appropriate, but invitations are often communicated at the
last minute, preventing an adequate review of the issues.
Some negative implications of the diminished role of the
national security agencies in international economic decision-
making are apparent. An example is the President's recent
decision to offer subsidized wheat to the Soviet Union. and
then to increase the subsidy when the Soviets refused to buy
The list of Cabinet-level opponents of grain subsidies for the
Soviet Union was impressive: the Secretaries of State and
Defense, the National Security Advisor, and the Director of
Central Intelligence all reportedly were opposed. The out-
come on this issue tells a good deal about the influence and
inclinations of those who now administer the international
economic policy process.
The flawed rationale underlying the subsidized drain deci-
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sion resulted in unnecessarily estranging important allies such
as Australia and Canada, establishing an unfortunate
precedent for U.S. trade policy, and contravening the spirit of
three allied agreements on East-West economic relations. De-
spite this major U.S. policy concession, the Soviets spurned
the U.S. subsidy offer and failed to honor their annual grain
purchase obligations for the second consecutive year. It is
impossible to say whether the President would have made the
same decision if the SIG-IEP still had been in existence, but it
is unlikely.
Conclusion
The reduced participation of the national security agencies
in the process of formulating international economic and fi-
nancial policy holds potentially serious risks for U.S. relations
with our major allies and for the long-term security of the
United States. A new or modified organizational structure
should be established by the Administration to restore the role
of the security agencies and provide the President with more
comprehensive advice from his principal national security
advisers on international trade, economic and financial issues.
In addition, the Administration should publicly encourage
a more disciplined approach by Western commercial banks to
East-West finance and urge our allies to do the same. While
more disciplined Western lending policies will not entirely
eliminate the improper use of loan disbursements and deposits
for purposes potentially harmful to Western security interests,
the general adoption of such guidelines would reduce Soviet
flexibility to divert borrowed money in this way. Sensible
lending policies would also help ensure that every dollar, deut-
sche mark, and yen loaned to the East-bloc is tied to the
creation of Western exports and jobs.
Given present uncertainties in U.S. foreign policy resulting
from the controversy over arms transfers to Iran, the Soviets
may well follow their historical pattern of seeking to exploit
what they may perceive as U.S. disarray with new or bolder
foreign adventures. The Administration could slow signifi-
cantly the Soviet ability to divert borrowings from the West to
p?6,,finance a surge of adventurism by encouraging our allies to
endorse voluntary guidelines by Western banks for more disci-
plined lending to potential adversaries. The Administration's
recent decision to publicly oppose Soviet IMF/World Bank
membership is a step in the right direction.
This article is derived in large part from remarks by Roger
W. Robinson, President of RWR Inc.. and Senior Director for
International Economic Affairs, the National Security Coun-
cil, 1982-85. before the U.S.-Soviet Trade Forum on Septem-
ber 25. 1986.
P t.Jo Ilc~
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12/05/86
Mr. Kaneko's Interview
With Roger W. Robinson, Jr. for
Sekai Nippo to be published in January, 1987
Part I - Soviet Economy
Q. What is your view of the present status and direction of
the Soviet economy ?
A. First, the Soviet leadership recognizes that improved
economic performance can only be achieved by fundamental
economic reform. Reform measures are likely to
concentrate on improving management, offering more
incentives to the work force, and an upgrading of
production capabilities. Recent evidence of the Soviet
effort to reduce the rigid structural problems caused by
a centrally - controlled, command economy is the
decision by the Supreme Soviet to permit at least some
private enterprise to take place in the service sector
(i.e., manufacturing of some consumer goods, repair-work
on cars and apartments etc.). In addition, Moscow is
likely to continue experimenting with what it views as
controllable levels of decentralized economic
decision-making.
Nevertheless, these are, as yet, very limited steps in
the direction of individual entrepeneurship and greater
decentralization. These measures would have to be
substantially expanded if they are to bring genuine
dynamism and innovation to the Soviet economy.
What do you believe are Mr. Gorbachev's principal
objectives in his economic modernization program for the
USSR announced last year?
A. Mr. Gorbachev's first priority probably focuses on
accelerating Soviet economic growth. The revised Soviet
five year plan for 1986 - 1990 calls for average annual
growth in national income (roughly equivalent to gross
national product) of 4.1%. According to Plan Econ Inc.,
the USSR's average increase in national income was about
3.1% during the period 1981 - 1985. Gorbachev hopes to
achieve this ambitious goal through the intensified use
of technology, gains in labor productivity and better
management at all levels of the economy. To offset the
serious problems associated with aging or obsolescent
capital equipment the Kremlin plans to sharply increase
investment in fixed capital over the period 1986 - 1990
and probably beyond.
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As always, the Soviet military will remain the number
one claimant of high quality domestic resources and both
imported and illegally acquired technology. Although
the Soviets will seek some relief in the substantial
pressures on their economy through arms control talks,
and the appearance of greater geopolitical conciliation,
they will continue to vigorously pursue weapons -
related breakthroughs and their own version of
space-based military systems.
In short, the Soviet civilian economy will continue to
be heavily subordinate to the needs of the military.
Q. What about the ability of the Soviet Union to earn hard
currency through exports to the West ? Has this been
damaged by the fall in oil prices ?
A. Yes, it has been significantly damaged. The Soviets had
total hard currency income last year of about $32
billion. As oil and gas exports to the West constitute
about 60% of total Soviet annual hard,cu.rrency income,
that figure will decline to roughly $26 billion this
year. It is useful to note that the USSR's total hard
currency earnings for 1986 will probably represent less
than one-third of the annual revenues of General
Motors. This is hardly an impressive income for the
only other superpower.
Q. Mr. Robinson, what particular problem do you think the
Soviets are most concerned about economically?
A. That's a complicated question. They have a number of
choices: For example, the prospect of future declines
in oil production (after a slight increase this year)
along with a security-minded agreement in the
International Energy Agency which, in effect, limits
future Soviet gas supplies to Western Europe; the lack
of exportable manufactured goods which constrains annual
hard currency earnings; the fact that some client
states, like Mozambique, are having serious misgivings
about the ability of the USSR to meaningfully assist
their civilian economies in the future; or a number of
other major economic bottlenecks caused by a
systemically rigid economy.
But if I were sitting in the Kremlin, I would perhaps be
most concerned about the proven failure of a command
economy to compete head to head with the U.S. or Japan
in technological innovation. I think the implications
of the Reykjavik Summit demonstrated to the world, what
many observers of the USSR have known for some time -
namely that it will be technology breakthroughs that lie
at the heart of a successful Strategic Defence
Initiative-- whether the Soviets' or our own. The U.S.
has a fine historical record in achieving national
priority projects, as does Japan and to a somewhat
different extent Western Europe. The prodigious pace of
technological change in the West must be creating many
sleepless nights for those in the USSR mandated to
match, much less exceed, these developments.
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Part II - Soviet Foreign Economic Relations
Q. How would you characterize Japan's role in the context
of the USSR's foreign economic relationships?
A. I believe Japan has achieved, for better or worse,
substantial priority in the USSR's overall strategy of
expanded trade with the free world. The Soviets are
well aware of Japan's enormous proficiency in high
technology fields and, accordingly, have targeted Japan
for an aggresive program of industrial espionage. In
addition, the Soviets have a pressing need for generous
Japanese capital flows and joint-venture-type assistance
to unlock additional energy resources, as well as, other
of their abundant natural resources.
How has this interest in Japan been expressed by actions
of the Soviet leadership?
A. I believe Mikhail Gorbachev came to office determined to
improve the condesending, rude treatment of Japan by the
Soviet Union over the past decades. He clearly sees
that Moscow can realize more commercial and financial
benefit through the appearance of a more respectful and
reasonable Soviet Union in the eyes of the Japanese
public. Moscow's decision to permit Japanese to again
visit the graves of their relatives on Japan's Soviet -
held northern islands is one aspect of this broader
Soviet public relations effort.
The sincerity of this effort, however, is severely
compromised by the alarming escalation of the Soviet
military threat to the nations of the Pacific Basin and
to Japan in particular. For example, in one year the
Soviets violated Japan's air space with their military
aircraft about 940 times.
Q. What should Japan's response be to the Soviet Union's
increased economic and political overtures?
A. First, I would not presume to understand Japan's needs
better than Prime Minister Nakasone and his very capable
government. Second, I am expressing my personal views
throughout this interview and not necessarily the views
of the Reagan Administration. I would only advise
continued caution and a highly realistic evaluation of
true Soviet intentions. Like President Reagan, I
believe deeds are more important than words.
Accordingly the Japanese government might wish to be
satisfied that Moscow is concretely reducing its
military threat to Japan and improving its' record an
human rights prior to proceeding with major new projects
of priority interest to the USSR including one bilateral
project already underway in the energy field.
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I also see no contradiction between Japan seeking
sensible opportunities to expand non-strategic trade
with the USSR, and continuing to strengthen both
Japanese and multilateral controls on the transfer of
militarily-relevant Western technology. Concerning this
latter point, it seems to me that all Western
governments owe it to their taxpayers to do so.
Afterall, it's only through a reduced Soviet threat that
we can achieve sensible limits on alliance defense
expenditures in the future.
Q. Turning to the broader Soviet interest in expanded
foreign trade, what do you think we can expect in the
monthsahead?
A. I think we are already witnessing the outlines of a
Soviet economic offensive toward the West which consists
of: a serious effort to join the General Agreement on
Tariffs and Trade (GATT); exploratory steps toward
membership in the International Monetary Fund and the
World Bank; the likely issuance of the first Soviet
Euronotes and bonds since 1917; a more agressive
campaign to increase the illegal acquisition of western
technology; and, as I mentioned earlier, some very
limited experimentation with decentralized
decision-making and private enterprise. The Soviets are
generally stepping up their negotiations with
traditional western trading partners, including Japan,
to secure maximum levels of economic and financial
concessions during this difficult period.
Many of your recent published articles and comments have
dealt with East-West financial relations and your view
that Western borrowings are being used to finance a
substantial portion of the Soviet global empire. Could
you summarize your concerns in this area and what role,
if any, Japan plays?
A. Unfortunately that's correct. As I stated earlier,
depressed earnings from Soviet energy exports are
compelling the Soviets to finance all of their imports
from the West and an impressive number of global
commitments from a projected annual income for 1986 of
only about $26 billion. Most, if not all, of this
amount will be absorbed by Western imports alone. This
means that a substantial share of their borrowing from
Western banks are probably being diverted to fund
activities which are often harmful to Western security
interests such as aid to Nicaragua, Cuba and Vietnam and
KGB/GRU intelligence operations. The diversion of
borrowed funds is made easier by Western banks making
loans to the Soviet Union and other potential
adversaries for no specific purpose and with loan
maturities longer than the needs of the underlying trade
transactions. Japan has been an important source of new
loans to the USSR over the past two years,'but I am not
certain of the extent to which these loans were or were
not tied to specific nurnnses_
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Q. What is your proposed solution to this problem?
A. I believe that it merely suggests to Western banks,
including Japanese banks, to voluntarily exercise more
discipline in lending to potential adversaries. For
example, untied, no purpose loans, such as balance of
payments syndications and the future underwriting of
Soviet Eurontes and bonds could be avoided and instead
banks could focus on equipment loans, short-term loans
tied to commodity exports, and tightly-structured
project loans where the use of borrowed funds can be
carefully monitored. Western and Japanese bank deposits
in Soviet-owned banks, particularly those located in the
West, could be more formally recorded as credit exposure
to the USSR and also be better monitored. As this issue
receives increased public attention, it could be
potentially unhelpful for Japan or any other alliance
country to be viewed as providing inordinate levels of
untied cash loans to the USSR which can be used in any
way Moscow chooses. Finally tying East-Bloc loans to
Western exports and jobs makes commercial sense.
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STAT
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T TRANSMITTAL SLIP DATE 17 Nov 86
TO: ExReg.
ROOM NO.
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DC~I_ Sf7x,
MEMORANDUM FOR: Director of Central Intelligence
Deputy Director of Central Intelligence
VIA: Deputy Director for Intelligence'
Associate Deputy Director for Intelligence
Director of Global Issues
STAT
SUBJECT: Economic Financial Issues Conference
1. Action Requested: Attached for your signature are
letters o appreciation (Tab A) to the participants in the
24 October Economic Financial Issues Conference. If you approve,
we will also send the attached unclassified summary of the
conference (Tab C) discussions and a copy of the speech on Third
World economics (Tab D) that you gave to the Center for the Study
of the Presidency.
2. Background: We benefited substantially by assembling a
group of businessmen who must deal daily with the practical side
of the issues OGI deals with analytically. Their interaction
with each other generated ideas and insights that we would not
have been able to obtain from one on one sessions with them.
Frankly, it was obvious from my conversations with them prior to
the conference that it was your participation which enabled us to
get the group together.
3. As a result of the Conference, we have taken several
initiatives:
o Financial Vulnerabilities: Given the high level of
concern expressed at the Conference I believe we have to
do more on this matter. We are accelerating and
intensifying our examination of how the Soviets and
others could undermine, manipulate, or exploit
financial network.
-- We have initiated a series of short reports on the
ohysical vulnerabilities of the financial network;
STAT
STAT
9-312-Ir
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1 7 NOV 1986
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STAT
STAT
SUBJECT: Economic Financial Issues Conference
-- We are examining the feasibility of developing a
computer model of the international financial network--
similar to the Persian Gulf pipeline model OGI
developed. The financial network model would simulate
the fallout from a shock to the international
financial structure.
o Technology Vulnerabilities: The conferees expressed
substantial concern over large scale technology loss that
could accompany massive foreign,
investment in the United States and
specific technologies.
r position in
this in mind we are commissioning the ollowing:
4. On Third World Issues, the Conference resurfaced the
need to identify practical ways of injecting Western know-how and
private funds into Third World countries. We have subsequently
uncovered some valuable databases that can help on this score.
We are drawing on that information and other material to prepare
project.
We still believe the
STAT
25X1
25X1
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SUBJECT: Economic Financial Issues Conference
entire package can be completed for your review by early January
and a conference convened sometime in February. The attached
thank you letters (Tab B) invites Messrs.
to the planned Third World Conference.
Attachments:
A. Thank you letters
B. Thank you/invitation letters
C. Conference summary
D. Third World speech
D/OGI
Distribution:
Orig - DCI (w/atts)
1 - DDCI (w/atts A,B,C)
1 - ExReg. (w/atts A,B,C)
1 - DDI (w/atts A,B,C)
1 - ADDI (w/atts A,B,C)
1 - DI Reg. (w/atts A,B,C)
1 - D/OGI (w/atts)
1 - D/ALA (w/atts)
9 X1
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Central Intelligence Agency
80.51~f y 3
I want to personally thank you for your participation in the
24 October Economic Financial Issues Conference. The broad
ranging discussions touched on most of the issues that were on my
mind when I fir t Wed to hold the Conference. I know
have been in touch with you regarding
followup work we will be doing on many of the points of concern
raised and I welcome any help you can provide. I remain
especially troubled about the financial vulnerability issues
addressed at the Conference, as well as the question of
technology loss and the opportunities both provide the Soviets
and their allies.
As I mentioned in my opening remarks at the Conference, I am
also quite concerned about how we can bring Western technology,
managerial skills, and entrepreneurial capital to bear more
effectively on Third World economic development. I view this as
-an essential element in countering Soviet influence in the Third
World, a point I stressed in a recent speech to the Center for
the Study of the Presidency. I am enclosing a copy of that
speech along with the summary of the 24 October Conference. I
would only note that in preparing the summary we avoided the more
sensitive areas we will be working on in order to keep the report
unclassified.
Again, I want to thank you for your time and help on all of
these important matters.
William J. Casey
Director of Central Intelligence
Enclosures:
1. Speech
2. Conference Summary
STAT
STAT
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Economic - Financial Issues Conference
On 24 October 1986 the Economic - Financial Issues conference of
business and economic leaders was held to discuss the rapid changes in
the international financial arena and the possible implications of
these changes for the United States. The conference addressed the
rapid and unprecedented changes in the international financial arena,
the factors responsible for this changing financial environment, and
the consequences for international trade and technology flows. This
report, organized by topic, summarizes the discussion.
The Nature of the Change of the International Financial Situation
Throughout the conference, participants speculated about the
nature of the changes they see in the world of international finance.
It was agreed that any study of the issue must be careful to
distinguish between those changes that are cyclical and those that
are structural. The cyclical trends were identified as the capital
and trade imbalances, the strength of the dollar, and the level of
world interest rates. These variables are subject to the ebb-and-flow
of the world economy and are not direct manifestations of the
fundamental restructuring of the underlying economy; it was
acknowledged throughout the discussions, however, that the direction,
magnitude, and longevity of these cyclical trends are strongly
influenced by structural changes.
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The structural changes, by contrast, are irreversible. The
expanding technologies on which the emerging global financial
marketplace are based will continue to affect the world economy in
ways that are unpredictable. One participant characterized the basic
change as "intellectual" resources overtaking "physical" resources as
the driving force behind the economy. In this new environment,
intangibles --such as ideas and services--will be the goods that
determine national success, while more traditional resource
bases--mineral deposits, productive cropland, and manufacturing
capacity--will become less crucial. The rising role of "abstract"
financial markets in the world economy is one element of this and a
prime example of how economic productivity is being uncoupled from
employment.
In discussing the nature of these changes, the question was
asked, "do exchange rates still determine broader resource flows, such
as those of goods and capital?" The answer from the group was yes,
but the time required for international market imbalances to respond
to exchange rate shifts is being blunted by, among other things,
government intervention in the markets. Related to this, several
participants noted the increased volatility of the equity and
commercial markets and speculated as to whether this was the result of
the structural changes that are occurring or is merely characteristic
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of recent economic events. It was noted that studies show sharply
increased volatility on a minute-to-minute basis in most markets, and
the participants ventured that this was probably the result of the
vastly enhanced capabilities of the system to facilitate and
incorporate rapid changes in the perceptions of market players.
Finally, one participant observed that the increasing unpre-
dictability of the changes in the world economy are reducing the
utility of such qualities as knowledge and experience, while raising
the premium on flexibility and creativity. Although one result of
this is accelerated productivity gains, several participants noted
that this also led to important positions in government and business
being given to individuals without a broad historical perspective or
even a well-developed stake in the health of the existing system.
As a corollary, the changes in the international financial
environment are outpacing governments' ability to understand where the
changes are taking us and are undercutting any efforts to formulate an
effective set of policies to cope with the emerging global market. To
help the United States operate in this era of rapid structural
changes, one participant suggested creating an academic center to
formally study the issue, and perhaps use the center to evaluate
existing and proposed government policies against the backdrop of the
emerging environment.
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Stability of the International Financial System
There was a consensus at the conference that the financial
system is dangerously unstable. One participant presented his
argument that there were "two long-term forces for a breakdown."
First, there is the increasing inflexibility of the operating market.
The higher speed and volatility of the system, coupled with the
"liberating" trends of deregulation, new instruments, and
inexperienced players--both individuals and institutions--has resulted
in a medium in which the transmission of shocks has become immediate,
creating what was called "a potentially dangerous situation." Even
false rumors can jar the markets worldwide, and several discussants
referred to a possible "domino effect."
The second force was said to be the deteriorating global
debt-equity structure, both among firms and among countries. It was
noted that 30 percent of US private debt is held by entities that are
not showing a profit, and that even controlling for questionable
agricultural, Third World, and energy-sector loans, the quality of
debt is deteriorating. Moreover, contingent liabilities--which are
now off the balance sheet-- are at record levels and growing rapidly.
The argument was put forward that the synergy between these two
forces implied that a "crack" in the system could appear quickly
because of the nature of the markets, and then spread uncontrollably
as highly leveraged loans fail and contingent liabilities are
triggered. The November 1985 Bank of New York incident, in which the
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Fed extended a $22.6 billion emergency loan to prevent a default as a
result of a computer failure, was mentioned as a small-scale event
that could lead to a potentially disasterous collapse of the system.
In another scenario, an earthquake in Japan--the world's third largest
money center--could drag down much of the international financial
system. The implications grow, it was noted, as Tokyo's financial
importance rises. One participant observed that most of the financial
structure we see today--as measured by volume, speed, new debt, types
of instruments, new players, and so on--has been "developed, tested,
and implemented" during the economic recovery of the last four years
and that no one knows how the system will react to--or even
withstand--an economic downturn.
Intentional efforts to disrupt the financial system were also
discussed. Three possible motives were identified: a terrorist attack
for publicity, a covert act by the Soviets during a separate
crisis--such as the Cuban missile crisis--to preoccupy Western
governments, or simply to make a profit. On a related issue, one
participant explained that the combination of growing capital
transactions and thin minerals markets made these latter markets
vulnerable to manipulation. Less likely, however, is an outright
cornering of any mineral, or any significant tampering with the
glutted, broader-based oil and agricultural markets. In a dissenting
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opinion, one participant argued that increased information flows, a
broader investor base, and other developments in the international
financial system are actually creating a more stable environment. He
believed that in the event of a crisis, the Western central banks
would act quickly and in concert to limit the damage of an isolated
shock.
The effects of a possible collapse of the system was briefly
discussed. It was said that much would depend on the reaction of both
the Western governments and the private players but that there would
likely be an inflationary bias to the recovery as a result of the
monetary infusions necessary to restart the system. Moreover, the
reactions of the private institutions could very well be
counterproductive if the credibility of the Western capital and trade
system is seriously damaged as the overall economy contracts from the
financial paralysis, even if short-lived. On several occasions,
discussants noted the need to better understand the potential for a
system collapse and the possible fallout.
Technology Loss: The Competition Issue
When the competitive status of the United States was discussed,
one theme dominated: technology loss to Japan. Although the
participants acknowledged the importance of the US trade imbalance,
the consensus seemed to be that more fundamental issues were at stake.
Indeed, one speaker believed that US policy was "overfocused" on
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trade, while other countries--particularly Japan--were concentrating
on the longer-term strategy of securing investment opportunities.
One participant argued that the US Government should be more
concerned with what he characterized as perhaps the most crucial
technology loss: that of biotechnology. This techology, which
includes genetic engineering and pharmaceutical research, has two
unique attributes. First, unlike the maturing computer industry,
biotechnology is still in its infancy, but like the computer industry,
its potential for commercial applications is only beginning to be
understood. Second, it is the last technology in which the United
States has an undisputed lead in research. Although this is the
current situation, the Japanese have targeted biotechnology for future
development.
Three suggestions were given for the US Government to maintain
the US lead. First, introduce a reciprocal set of domestic sales
policies with the Japanese. Under the current trade regimes, Japan
has the advantage in gaining understanding of US pharmaceutical
research. Second, sharply boost US Government funding of
biotechnological research and development. Third, accelerate the
current process of approval and funding for government-sponsored
projects. Another participant endorsed these suggestions, mentioning
that these prescriptions could be adopted for the whole range of high
technology research.
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Although several economic factors were cited as driving the
technology loss--primarily the strong dollar fueled by fiscal
deficits--the participants also identified other problems. One
speaker referred to US Government efforts to discourage
private-sector, joint-venture projects with other countries for
national security reasons. One result of this, it was said, is that
US industry loses the benefit of foreign skills in applying
technologies to commercial uses. Another factor behind technology
loss is the opposite phenomenon: the rise of joint ventures in.the
production of big-ticket items. Technology can be transferred out of
the United States through deals, such as the Boeing-Japanese 7J7
aircraft project, or several foreign countries can band together to
develop and manufacture a product and then restrict their markets from
outside competition in that product--as in the case of Airbus
Industries.
Third World Debt: Where Does It Stand?
One speaker observed that it is becoming more difficult to
characterize whether the Third World debt situation is improving or
deteriorating. On the one hand, participants raised the problem of
Mexico, whose recent debt agreement was seen as a move to delay,
rather than solve, the potential Mexican debt crisis. On the other
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hand, it was said that Brazil was approaching the point where it could
reenter the Eurobond market. If this happens, and a similar status
could be achieved by Argentina, the threat to the overall financial
system could be reduced considerably--and we might be close to being
"out of the woods."
Regardless of deliberate efforts to manage the crisis--such as
the Mexico package and the Baker Plan--certain de facto trends are
appearing. One participant focused on the rise of secondary-market
sales of existing LDC debt. He noted that such developments are
outdistancing regulatory moves to defuse the debt situation by, for
example, allowing controlled write-downs of liabilities from banks'
books. Depending on one's perspective, it was later noted, this can
be seen as either good (the market solving the problem) or bad
(regulators and policymakers losing control of the situation).
Despite these developments, several participants raised concerns
over what was happening in the Third World--and what could be done
about it. One speaker thought there was the danger of more
"conciliatory nonpayment" of debts, as in the case of Peru. Another
feared that we are now witnessing LDCs' foreign debt problems
affecting their domestic economies to such an extent that we will see
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growing political problems there--which, in turn, could undercut US
influence and give rise to fertile ground for Soviet meddling.
Two areas were identified where the US Government could help
"manage" the debt crisis and its effects. First, the regulatory
authorities could encourage--beyond what they are currently
doing--creditor banks to build their real (as opposed to book) asset
base. This would make the system more stable in the event of a series
of defaults. Second, it was said that a way must be found to increase
private investment in the Third World. This would make the LDC
domestic situation more stable and also enhance LDC ability to repay
foreign loans. When asked what a recession would do to the debt
situation, one participant responded, "if we have a worldwide
recession we will have bigger problems than the [Third World] debt
crisis."
Soviet Participation in the International Financial System
One speaker presented his case that the Soviet Union is financing
its global activities--many of which threaten Western
interests--through its participation in the Western financial system.
It was argued that after funding from exports, the Soviets need to
borrow from the West to maintain their overseas commitments, and
therefore the West could enhance its own security by denying Moscow
untied financing; i.e., loans that the Soviets would not need to
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account for in specific development projects. Moreover, he argued
that the Soviets may be poised for a significant increase in their
participation in the Western system, as evidenced by several recent
deals and their overtures to the General Agreement on Tariffs and
Trade.
Other participants raised questions concerning the thesis.
Several noted that the fungibility of money implied difficulty in
keeping track of even tied financing, and that although a curtailment
of Western cooperation would reduce the resources available to the
Soviets, it is less than certain that Moscow would reduce its
expenditures in those areas the West deems threatening. Others
wondered if there was enough solidarity among Western financial
institutions to effectively boycott Soviet untied borrowing, and
observed that Third World money centers are emerging that could
service Soviet transactions. The ineffectiveness of the grain and gas
pipeline boycotts were mentioned in this context. Conversely, one
participant was skeptical on the idea that the Soviets could raise
their borrowing levels much beyond the current--relatively
minimal--amounts.
On a more fundamental level, two participants argued that it is
not clear that it is in the West's interest to interfere with or
constrain Soviet access for international financial system. By
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increasing the Soviet Union's stake in the Western system, it was
noted, Moscow may develop a stake in the well-being of the system.
This would reduce its incentive to disrupt financial markets during an
East-West confrontation or to encourage instability in the Third World
in cases where shock waves would be sent through the markets. The
Soviets could gain influence by joining international economic
organizations, but they also would be subject to more
responsibility--although they could shirk.
Recurring Themes During the Discussions
Although not explicitly on the conference agenda, several issues
resurfaced throughout the discussions:
o Japan. The conference participants repeatedly expressed
concern over the growing power of Japan in such areas as
technological prowess, trade competitiveness, and sheer
financial power. Many thought that these advantages could
easily be translated into political power domestically in
the United States, in negotiations with the US Government,
and throughout the Western and Third World. In considering
where Japan is heading, one participant noted that Japan
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may soon be feeling pressures itself from the emerging
economic powerhouses of South Korea, Taiwan, Singapore, et
al.
o Political Backlashes. During discussions on largely
economic phenomena, it was often noted that such changes
created pressures at the street level. On the uncoupling
of production from employment, one participant said it may
lead to a form of "class warfare" in the industrial
countries. In another example, one speaker noted that no
one 20 years ago would have predicted that the IMF would
have as much political influence worldwide as it has now as
a result of the Third World debt crisis. Is there another
such example waiting to emerge in the coming years as
finance plays a growing international role?
o Third World Stability. Although it was observed that the
austerity measures put into place as a result of the LDC
debt crisis are creating political stability problems, many
participants voiced their belief that new economic
realities have forced many LDC governments to become more
pragmatic in their economic policies--which is likely to
boost stability. One speaker argued that many of the
changes we see are cosmetic and superficial, but several
others argued that in their daily businesses they could see
13
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real, significant improvements on such issues as foreign
direct private investment. One speaker noted that the US
could take advantage of this to compensate for the
resources lost to LDCs as a result of the debt crisis by
boosting investments there.
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F M4 n? USE PREVIOUS
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CONTROL NO._._
CROSS REF:
PRIOR PAPERS ON THIS SUBJECT: N6 YES
PRIOR CORRES SENT TO:
EXECUTIVE REGISTRY FILE NO:
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STAT
Director,
STAT
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Memorandum for:
The attached letters to participants
in the Economic Financial Issues Conference
scheduled for 24 October need your signature.
and I have been in touch with
all the invited guests and at this juncture
we have full participation. If you need
anythin more for the Conference, please
let or me know. I might add that you
are the big drawing card.
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FEB 56 FORM D 36-8 (47)
241 WHICH MAY BE USED.
TRANSMITTAL SUP
TO:
ER
ROOM NO.
BUILDING
REMARKS:
FROM:
ROOM NO.
BUILDING
EXTENSION
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nn T - v_q'"wl "l 1sc
Central Intelligence Agency
8 OCT 1986
STAT-
I was delighted to hear that you will be participating in
the Economic Financial Issues Conference I am sponsoring on
24 October in New York City. As you know, I have been greatly
concerned about how the financial, trade, and technology
imbalances that have emerged in the global economy in recent
years are affecting the United States. It is my hope that this
Conference will shed light on the forces that are propelling .
these imbalances, how they interrelate, and, finally, what risks
and opportunities they raise for the United States, our allies,
and our adversaries.
The Conference brings together a small group of individuals
with extensive knowledge and insight about international economic
and financial matters. I am asking each individual to speak
briefly on a-particular aspect of the issues at hand. I would
especially like you to speak on the changing global financial
structure, the pressure points this is creating, and the
.financial market reaction. I would also appreciate your views on
the key threats posed by the continuing dramatic changes in the
financial structure and system. Naturally, I would also want you
to identify any specific areas of concern that you believe
deserve our attention.
The Conference will begin at 3:00 p.m. at The Helmsley
Palace. I have enclosed the Conference agenda and a list of
invited guests. Director, Office of Global Issues
or Director, office of African and Latin
Amer can Analysis, will be in touch with you regarding the
Conference. If you need to GnPak with them they are available on
respectively.
Yours,
qs,~r~`:3'3J.t: -:
William J. Casey
Director of Central Intelligence
Enclosures
Distribution:
Orig. - Addressees w/atts
1/- ER Watts
1 - D/ALA w/atts
1 - D/OGI Watts
D/OGI I(3 October 1986)
STAT
STAT
STAT
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Economic Financial Issues Conference
The Helmsley Palace
Tower Room
455 a ison Avenue
New To-rk Cit
y
24 October 1986
Session I 3:00 - 4:30
Global Financial Structure, Issues and Trends
-- Factors Forcing Change
-- International Pressure Points
-- Financial Market Reactions
Session II
International Trading System and Pressures
Internationalization of Production
West-West Technology Transfer
The Issue of Competitiveness
Dinner
The Soviet Union and the Financial System
-- Moscow's International Financial Breakout
-- Hidden use of the System
Session III
Third World Debt, Progress, and Risks
-- The Need for Innovation
-- Country Vulnerabilities
Session IV 8:30 - 9:00
Wrap-up and Review of Issues
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STAT
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Central Intelligence Agency
8 OCT 1986
I was delighted to hear that you will be participating in
the Economic Financial Issues Conference I am sponsoring on
24 October in New York City. As you know, I have been greatly
concerned about how the financial, trade, and technology
imbalances that have emerged in the global economy in recent
years are affecting the United States. It is my hope that this
Conference will shed light on the forces that are propelling
these imbalances, how they interrelate, and, finally, what risks
and opportunities they raise for the United States, our allies,
and our adversaries.
The Conference brings together a small group of individuals
with extensive knowledge and insight about international economic
and financial matters. I am asking each individual to speak
briefly on a particular aspect of the issues at hand. I would
like you to be the speaker focusing on the internationalization
of production, the factors causing it, and the problems and
opportunities it poses for the United States. I would especially
appreciate your comments on how recent and continuing financial
imbalances are contributing to this internationalization
process. Naturally, I would also want you to identify any
specific areas of concern that you believe deserve our attention.
The Conference will begin at 3:00 p.m. at The Helmsley
Palace. I have enclosed the Conference agenda and a list of
invited guests- Director, Office of Global Issues
or Director, Office of African and Latin
American Analysis, will be in touch with you regarding the
Conference. If you need to speak with them they are available on
respectively.
p Y3 our s ,
f!s/ 0111'am J. Cri.-
William J. Casey
Director of Central Intelligence
STAT
STAT
STAT
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Central Intelligence Agency
8OCTIJ86
I was delighted to hear that you will be participating in
the Economic Financial Issues Conference I am sponsoring on
24 October in New York City. As you know, I have been greatly
concerned about how the financial, trade, and technology
imbalances that have emerged in the global economy in recent
years are affecting the United States. It is my hope that this
Conference will shed light on the forces that are propelling -
these imbalances, how they interrelate, and, finally, what risks
and-opportunities they raise for the United States, our allies,
and our adversaries.
The Conference brings together a small group of individuals
with extensive knowledge and insight about international economic
and financial matters. I am asking each individual to speak
briefly on a particular aspect of the issues at hand. I would
like you to be the speaker focusing on the Third World debt
problem, the prospects for dealing with it, and the problems and
opportunities it poses for the United States. I would appreciate
your comments on how US financial imbalances are affecting the
debt problem and what innovative approaches would be most
effective in dealing with it. Naturally, I would also want you
to identify any specific areas of concern that you believe
deserve our attention.
The Conference will begin at 3:00 p.m. at The Helmsley
Palace. I have enclosed the Conference agenda and a list of
invited guests. Director, Office of Global Issues
or Director, Office of African and Latin
American Analysis, will be in touch with you regarding the
Conference. If you need to speak with them they are available on
respectively.
William J. Casey
Director of Central Intelligence
STAT
STAT
STAT
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Central Intelligence Agency
$ U C 11986
I was delighted to hear that you will be participating in
the Economic Financial Issues Conference I am sponsoring on
24 October in New York City. As you know, I have been greatly
concerned about how the financial, trade, and technology
imbalances that have emerged in the global economy in recent
years are affecting the United States. It is my hope that this
Conference will shed light on the forces that are propelling
these imbalances, how they interrelate, and, finally, what risks
and opportunities they raise for the United States, our allies,
and our adversaries.
The Conference brings together a small group of individuals
with extensive knowledge and insight about international economic
and financial matters. I am asking each individual to speak
briefly on a particular aspect of the issues at hand. I would
especially like you to speak on the changing global financial
structure, the pressure points this is creating, and the
financial market reaction. I would also appreciate your views on
the key threats posed by the continuing dramatic changes in the
financial structure and system. Naturally, I would also want you
to identify any specific areas of concern that you believe
deserve our attention.
The Conference will begin at 3:00 p.m. at The Helmsley
Palace. I have enclosed the Conference agenda and a list of
invited guests. Director, Office of Global Issues
or Director, Office of African and Latin
American Analysis, will be in touch with you regarding the
Conference. If you need to speak with them they are available on
respectively.
rjq ilf J. C2~'1
William J. Casey
Director of Central Intelligence
STAT
STAT
STAT
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Central Intelligence Agency
8 i CT ,,o1'
I was delighted to hear that you will be participating in
the Economic Financial Issues Conference I am sponsoring on
24 October in New York City. As you know, I have been greatly
concerned about how the financial, trade, and technology
imbalances that have emerged in the global economy in recent
years are affecting the United States. It is my hope that this
Conference will shed light on the forces that are propelling -
these imbalances, how they interrelate, and, finally, what risks
and'opportunities they raise for the United States, our allies,
and our adversaries.
The Conference brings together a small group of individuals
with extensive knowledge and insight about international economic
and financial matters. I am asking each individual to speak
briefly on a particular aspect of the issues at hand. I would
like you to be the lead-off speaker at the Conference. I would
especially welcome comments on what you see as the key elements
in the changing global financial picture, the actions driving
them, and what problems and opportunities they pose for the
United States. Naturally, I would also want you to identify any
specific areas of concern that you believe deserve our attention.
The Conference will begin at 3:00 p.m. at The Helmsley
Palace. I have enclosed the Conference agenda and a list of
invited guests. Director, Office of Global Issues
or Director, Office of African and Latin
American Analysis, will be in touch with you regarding the
Conference. If you need to speak with them they are available on
respectively.
Yours,
7s/ Viiliian J. Ca 'j
William J. Casey
Director of Central Intelligence
STAT
STAT
STAT
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Central Intelligence Agency
8 OCT 1936
I was delighted to hear that you will be participating in
the Economic Financial Issues Conference I am sponsoring on
24 October in New York City. As you know, I have been greatly
concerned about how the financial, trade, and technology
imbalances that have emerged in the global economy in recent
years are affecting the United States. It is my hope that this
Conference will shed light on the forces that are propelling
these imbalances, how they interrelate, and, finally, what risks
and' opportunities they raise for the United States, our allies,
and our adversaries.
The Conference brings together a small group of individuals
with extensive knowledge and insight about international economic
and financial matters. I am asking each individual to speak
briefly on a particular aspect of the issues at hand. I would
especially like you to speak on West-West technology transfer,
the factors causing it, and the problems and opportunities it
creates for the United States. I would also appreciate your
thoughts on how recent and continuing financial imbalances are
contributing to the process. Naturally, I would also want you to
identify any specific areas of concern that you believe deserve
our attention.
The Conference will begin at 3:00 p.m. at The Helmsley
Palace. I have enclosed the Conference agenda and a list of
invited guests. Director, Office of Global Issues
or Director, office of African and Latin
American Analysis, will be in touch with you regarding the
Conference. If you need to sneak with them they are available on
respectively.
Yours,
Cal
William J. Casey
Director of Central Intelligence
STAT
STAT
STAT.
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Central Intelligence Agency
8 O C T 1986 STAT
I was delighted to hear that you will be participating in
the Economic Financial Issues Conference I am sponsoring on
24 October in New York City. As you know, I have been greatly
concerned about how the financial, trade, and technology
imbalances that have emerged in the global economy in recent
years are affecting the United States. It is my hope that this
Conference will shed light on the forces that are propelling
these imbalances, how they interrelate, and, finally, what risks
and opportunities they raise for the United States, our allies,
and our adversaries.
The Conference brings together a small group of individuals
with extensive knowledge and insight about international economic
and financial matters. I am asking each individual to speak
briefly on a particular aspect of the issues at hand. I would
especially like you to speak during the dinner on your views
regarding Soviet use of the international financial system. I
know the participants would welcome the opportunity to hear your
views firsthand on how the Soviets make subterranean use of the
Western banking system. I would also appreciate your thoughts on
how far the Soviet international financial breakout will go.
Naturally, I would also want you to identify any specific areas
of concern that you believe deserve our attention.
The Conference will begin at 3:00 p.m. at The Helmsley
Palace. I have enclosed the Conference agenda and a list of
invited uests. Director, Office of Global Issues
or Director, office of African and Latin
American Analysis, will be in touch with you regarding the
Conference. If you need to sneak with them they are available on
respectively.
Yours,
vi iam J. Case!
William J. Casey
Director of Central Intelligence
STAT
STAT
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Central Intelligence Agency
8 OCT 1986
I was delighted to hear that you will be participating in
the Economic Financial Issues Conference I am sponsoring on
24 October in New York City. As you know, I have been greatly
concerned about how the financial, trade, and technology
imbalances that have emerged in the global economy in recent
years are affecting the United States. It is my hope that this
Conference will shed light on the forces that are propelling
these imbalances, how they interrelate, and, finally, what risks
and opportunities they raise for the United States, our allies,
and our adversaries.
The Conference brings together a small group of individuals
with extensive knowledge and insight about international economic
and financial matters. I am asking each individual to speak
briefly on a particular aspect of the issues at hand. I would
especially like you to speak on how the international investment
community views the pressures stemming from the economic forces
now at play. Your thoughts on the problems and opportunities
they create for the United States, particularly in Third World
countries, would be especially valuable. Naturally, I would also
want you to identify any specific areas of concern that you
believe deserve our attention.
The Conference will begin at 3:00 p.m. at The Helmsley
Palace. I have enclosed the Conference agenda and a list of
invited guests. Director, Office of Global Issues
or Director, Office of African and Latin
American Analysis, will be in touch with you regarding the
Conference. If you need to speak with them they are available on
respectively.
Yours,
ff J William J. Casey
William J. Casey
Director of Central Intelligence
STAT
STAT
STAT
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EXECUTIVE SECRETARIAT
ROUTING SLIP '.~
ACTION
INFO
DATE
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EXDIR
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DDA
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DDO
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DDS&T
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Chm/NIC
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GC
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IG
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Compt
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D/OLL
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D/PAO
15
D/PERS
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VC/NIC
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D A I
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D/06T;CDI
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Executive Secretary
1 6 NOV 86
STAT
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Iq
Next 6 Page(s) In Document Denied
STAT
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October 27, 1986
Mr. William J. Casey
Director
Central Intelligence Agency
Washington, D.C., 20505
Dear Bill:
STAT
Thanks for allowing me to participate in the discussions
Friday afternoon and evening. I'm not certain I added very much,
largely, I think, because nearly every thought I had was expressed
in one form or another by the other participants. Which only
proves just how brilliant I really am.
I was struck, however, by the continuing emphasis given to
the "volatility" and/or "fragility" of the world's financial
markets. Most everyone, when they weren't worried about Japanese
competition, etc., came back to that theme. It's certainly one
that I agree with but I don't think enough was said about the
potential domino effect on the current system due to the enormous
interdependence of international financial institutions which has
built up rapidly during the past decade.
In my view, this is what makes the system vulnerable to
manipulation. There are very few safeguards in the international
financial markets today except, of course, human intelligence which
often breaks down under the pressures of self-interest.
Also, I think, no one seemed to have any real ideas as to
where the system might be most vulnerable, how it would break
down, specifically how it could be manipulated or the degree and
nature of the global consequences. You can bet the Soviets are
trying to figure it out and what we need in the U.S. is a financial
"S. D. I."
Again, thanks for including me. It was a stimulating eve
i
even
f many of the participants used it primarily as a means
getting their international irritations off their chests.
STAT
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