INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84-00898R000100040006-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 32
• Document Creation Date: December 22, 2016
• Document Release Date: April 5, 2011
• Sequence Number: 6
• Publication Date: January 28, 1983
• Content Type: REPORT

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International
Economic & Energy
Weekly
DI IEEW 83-004
28 January 1983
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International
Economic & Energy
Weekly
28 January 1983
iii Synopsis
1 Perspective-OPEC Fails To Bite the Bullet
Energy
International Trade, Technology, and Finance
National Developments
11 Mexico: Fast Start but Long Way To Go
19 Saudi Oil Capacity: Impact of the Weak Market
23 USSR: The Astrakhan' Natural Gas Project
Comments and queries regarding this publication are welcome. They may be
directed to Directorate of Intelligence,
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International
Economic & Energy
Weekly
Synopsis
Perspective-OPEC Fails To Bite the Bullet) 25X1
OPEC's latest failure to agree on oil prices and production quotas will
intensify downward pressure on prices. We would expect some further efforts
to forge an agreement with OPEC before the Saudis cut prices as threatened.
Mexico: Fast Start but Long Way To Go
President Miguel de la Madrid has made a fast start in addressing Mexico's
financial and economic crisis, but we expect increasing pressures on him to
backslide and we see no letup in persisting financial problems. We believe that
concessions to maintain what he views as minimum consumption and to
preserve the ruling party's traditional social and economic programs will cause
Mexico to miss-perhaps by wide margins-some of its quarterly IMF
stabilization targets. Economic recovery and expansion in consumption are
likely to be postponed until 1985 at the earliest.
Saudi Oil Capacity: Impact of the Weak Market
Saudi Arabia has decided to reduce oil production capacity to 8.5 million b/d
over the next several months. Anticipated reductions in Saudi capacity should
not by themselves affect the market.
USSR: The Astrakhan' Natural Gas Project
Having secured Western assistance in developing the Siberia-to-Western
Europe gas pipeline, Moscow is again turning to the West for equipment to
develop its natural gas reserves at Astrakhan'. The Western countries involved
in the bidding are considering ways of accommodating Soviet demands for
highly concessionary interest rates.
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Perspective
Weekly
International
Economic & Energy
28 January 1983
OPEC's latest failure to agree on oil prices and production quotas will
intensify downward pressure on prices. Buyers will further delay purchases
and draw upon inventories in anticipation of lower prices and a seasonal
downturn in consumption this spring. Unless an agreement on production
quotas or price cuts is reached soon, Saudi Arabia and the other Arab
producers in the Persian Gulf could bear the brunt of the 1-million-b/d or
more decline in demand that we project for the second quarter. Rather than
accept this outcome, we believe that Gulf producers will carry out their threat
to cut prices, risking retaliatory cuts by other producers.
OPEC ministers reached tentative agreement on the first day of their Geneva
meeting on an allocation scheme to restrict overall crude output to about 17.5
million b/d. According to the Venezuelan Oil Minister, under this scheme
Saudi Arabia would be limited to production of 4.5 million b/d, Iran would be
allowed 2.5 million b/d, and Libya would produce 1.2 million b/d. These
quotas represent significant concessions from demands that earlier had
obstructed a pact. OPEC production has fallen sharply this month, however,
and it is questionable whether the 17.5-million-b/d ceiling would be sufficient
to absorb the market surplus in the months ahead.
Arab Gulf states foresaw difficulty in marketing their allotted production
without some realignment of prices and made their support for new quotas
conditional on an increase in the prices of Iranian and high-quality African
and Iranian crudes. The agreement broke down when these producers refused
to accede. After the meeting, OPEC President Dikko from Nigeria claimed
that a consensus on the 17.5-million-b/d ceiling still stood, but Saudi Oil
Minister Yamani labeled the session a complete failure.
Saudi Arabia now faces a difficult decision. Early this month its largest
customers told Riyadh that they would reduce purchases drastically unless the
Saudis cut prices. Saudi output already has fallen under 5 million b/d this
month and could drop well below 4 million b/d early this spring. The Saudis
had hoped to improve their situation through the OPEC forum and took the
lead in calling for the special session. Evidence has been mounting that the
Saudis are considering discounts or price cuts to buoy sales in the absence of
an OPEC agreement, but any move along these lines probably would be taken
in concert with other Arab Gulf producers. Kuwait's Oil Minister has been
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among the most vociferous in threatening to cut prices, and the UAE Oil
Minister said after the Geneva meeting that the Emirates will increase their
output by several hundred thousand b/d.
Any Saudi move to cut prices unilaterally would be a major change in policy
by Riyadh. In addition, the risks of a price war may cause the Saudis to delay
any unilateral price moves until further efforts to forge an agreement within
the cartel are attempted. The Saudis did achieve significant progress toward
an acceptable production sharing arrangement at Geneva, and Nigeria's
delegate indicated afterward that the African states would be willing to meet
next month to address the issue of price differentials. The Saudis, moreover,
recognize that further weakening of the market will probably increase the
willingness of other OPEC members to bargain, particularly if North Sea
producers or Mexico yield to buyer pressure to reduce prices. In our judgment,
the Saudis still see substantial benefits in operating within OPEC.
If OPEC cannot reach an agreement on realigning prices, we believe the
likelihood of independent action by the Arab Gulf states will grow. The Saudis
then might attempt a price cut of about $2 per barrel, which they believe
would restore the proper price differential with African crudes. Riyadh could
argue that a cut of this magnitude would not warrant competitive price cuts by
Iran or producers outside the Persian Gulf. If these producers held the line on
prices, a cut of this size probably would lead to a more even sharing within
OPEC of the further decline in oil sales that we expect next quarter.
An unmatched Saudi price cut on the order of $4 per barrel, the maximum the
Saudis reportedly are considering, probably would be required to head off
further erosion in Saudi sales. We would expect other producers-both within
and outside of OPEC-to match a cut of this magnitude. Should the Saudis
adopt this course, we believe that they would try to defend prices at about $30
a barrel to avert a major price collapse.
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Energy
International Trade, Technology, and Finance
A major Japanese steel producer recently said, however, it had lost confidence
in the collaboration between Japan and Western Europe. It complained that
Spot Oil Spot crude oil prices plunged following the OPEC meeting last weekend when
Market Trends members failed to reach agreement on new production quotas. Arab Light fell
by about $2 per barrel to $29.25, the lowest level in over nine months. North
Sea and light North African crudes also declined sharply. North Sea Brent
crude dropped to $29.10 per barrel, more than $4 below its official price.
While underlying demand for both crude and products remains weak, many
analysts attribute most of the recent price decline to speculative trading. We
expect spot prices to weaken further in the coming weeks unless OPEC can
agree on production quotas.
Japanese-European Japanese and EC producers of steel are collaborating to divide markets and set
Community Steel prices in Western European and in the Third World.
Cartel both European and Japanese steel companies were bidding on a
Malaysian contract but that the Japanese consortium would get the sale under
the terms of the marketing arrangement with the EC steel firms. Negotiations
for another deal revealed Pakistan was in the territory assigned to Western
Europe.
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price and marketing agreements were being broken by some European mills. 125X1
evidence concerning this cartel activity refers to non-EC West European or
Third World markets. The arrangement probably does not apply to the US
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market, perhaps because of Japan's sensitivity to US antitrust laws.
New Banking Institute Representatives of 35 international banks from nine countries have founded
the Institute of International Finance, which will have its headquarters in
Washington. The Institute will provide economic information on debtor
countries to member banks, particularly to assist smaller US and foreign banks
in their decisions on the creditworthiness of borrowers. It will review economic
conditions and plans in debtor countries, consult with international agencies
and banks, provide information to its members, and give financial advice to
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borrowers. The directors will meet in March in Zurich to receive working
committee recommendations on senior permanent staff, recruitment of new
member banks, and the details of how the Institute should function.
Major international banks that have lent heavily to developing countries are
concerned that smaller banks are jeopardizing repayment by reducing their
lending to these countries. The Institute is intended to help persuade the
smaller banks to maintain their lending levels by giving them more adequate
financial data. It may have difficulty, however, getting data because banks
may be reluctant to report the amount loaned to individual countries, and the
IMF probably will be reluctant to share confidential informatio
Soviets Ease Terms The USSR has reversed its earlier demand for immediate payment for at least
of Weapons Sales $2 billion worth of weapons it has delivered to S ria since last summer's war in
to Syria Lebanon, Moscow now has agreed to
defer any repayment at least through The USSR also has dropped its
usual requirement that Syria use hard currency to pay salaries of Soviet
advisory personnel. The concessions should help ease Syria's foreign exchange
crunch, lessening the need for President Assad to accede to Gulf state pressure
to reopen the Syria-Iraq oil pipeline in exchange for financial aid.
National Developments
Developed Countries
Portugal's Balance- Portugal's current account deficit widened to $2.6 billion for the first three
of-Payment Deficit quarters of 1982, 30 percent above a year earlier. The US Embassy estimates
Worsens that the deficit for the full year will total $3.2-3.4 billion, equal to 14 percent
of GDP. The deterioration during the first three quarters was attributable
entirely to net tourism receipts and worker remittances, which were both down
significantly, and to sharply higher interest payments. Official reserves of $8
billion-most in the form of gold-are adequate to forestall a near-term crisis.
The problem is severe enough, however, that Lisbon will have little choice but
to implement an austerity program similar to the one proposed in December by
now acting Premier Balsemao. The Portuguese probably will also need
assistance from the IMF, but no progress is likely on that front until the 1983
budget is passed. At this point, it is far from certain that Balsemao's caretaker
government will pass even emergency economic legislation before President
Eanes follows through on his recent pledge to dissolve parliament and schedule
an early election.
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Australia To Allow The Fraser government has approved plans'to allow foreign banks to set up
Entry of business in Australia-thus removing an embargo on foreign banking that has
Foreign Banks been in force since the 1940s. Entry will be limited by several regulations-in-
cluding a domestic equity requirement that will limit foreign participation to
50 percent unless the bank can prove a clear benefit to the Australian
economy. Canberra expects to approve the entry of about 10 banks in 1983;
several banks already have expressed an interest in doing business in Australia.
The opposition Labor and Democratic Parties have made it clear that they
oppose the plan, and Labor Party leaders are suggesting that a Labor victory
in the 1983 elections will result in a review of the terms and conditions of
entry.
Major French The nationalized French aluminum company Pechiney and the government of
Investment in Quebec Quebec last week announced a joint venture in which Pechiney will invest $890
million for the construction of a smelting-manufacturing complex near Trois
Rivieres. The project would be the largest single investment in the province's
industrial sector and Quebec's first major deal with France. Quebec's commit-
ment to invest $81 million in the project and Hydro-Quebec's promise to
provide electrical power at half price for at least the first five years of the facil-
ities' operations apparently persuaded Pechiney to proceed. The project will
boost employment in Quebec by 1,200 jobs during the construction phase, and
800 permanent jobs are expected when production begins; it also will provide
Hydro-Quebec with a market for a portion of its surplus electricity.
Less Developed Countries
Iraq Seeking Deputy Prime Minister Aziz visited Paris this month to request payment
Financial Relief deferments from France for arms purchased earlier, according to the US
Embassy in Paris. Aziz last month also visited Moscow, in part to arrange easi-
er terms on weapons contracts. To minimize reductions of civilian imports,
Iraq has delayed payments on a wide variety of economic projects already
under way. Iraq now requires firms bidding on contracts to offer credit as a
prerequisite for new orders. Most exporters probably will go along with Iraq's
payment deferrals in the hope that Iraq's economic situation eventually will
improve and because there is not much they can do to force payment.
Iraq can do little now to augment its foreign exchange earnings. Because of the
closure of the pipeline through Syria last April, oil revenues will be even lower
this year than last. Iraq's foreign exchange reserves have plummeted from
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$21 billion at the beginning of 1982 to about $5 billion-the equivalent of less
than three months' worth of imports. The Persian Gulf states so far have not
responded to Iraq's pleas for more financial aid. They will find it more difficult
to provide Iraq with the $5.5 billion they gave last year because of their own fi-
nancial situation. A weak world oil market also will prevent them from selling
much oil for Iraq.
Increasing Saudi Although Saudi Arabia hopes to cut spending in the next year or two because
Outlays For of greatly reduced oil revenues, significant cuts in outlays for imports of
Military Imports military equipment, services, and construction will be difficult. Saudi pay-
ments for deliveries are scheduled to increase by more than 40 percent in
FY 1983 and remain high for at least three years. We estimate between
$22-25 billion will be due over the next three years if estimated payments for
non-US deliveries are included. The largest payments will be for construction
of military facilities, an air defense system, combat and transport aircraft, and
for the AWACS program.
These programs are unlikely to be canceled or delayed because of Riyadh's
commitment to the gradual creation of a complete, modern defense establish-
ment by the early 1990s. New contracts to modernize Saudi weapons are
expected over the next three years, and significant future savings could be
effected through selective delays for high cost programs like the M-1 Abrams
tank or a replacement fighter for the F-5E.
.Venezuela's According to US Embassy reports, Venezuela's foreign exchange reserves-
Deteriorating the combined holdings of the Central Bank, the national oil company, and the
Reserve Position Venezuelan Investment Fund, excluding gold-fell to about $8.4 billion by the
end of December, nearly 50 percent below the holdings of $16.1 billion at the
end of May of last year. Caracas has been forced to draw down reserves
because of:
? Difficulty in obtaining longer term loans necessary to cover the current
account deficit.
? Growing demands by bankers since September for repayment of maturing
short-term loans in lieu of rolling over existing obligations.
? A sharp escalation of capital flight in the face of ebbing business confidence
in government economic policies and persistent rumors of a large
devaluation.
Caracas is moving to bolster its external accounts in an effort to stem the re-
serve drawdown. Oil exports have been increased by 50 percent since the
second quarter of last year. Tight import restrictions-licensing requirements,
tariff hikes, outright prohibitions-became effective in late November.
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Despite political costs, Caracas may be forced to impose exchange controls or a
major devaluation to stop capital flight that drained some $5 billion in reserves
last year, according to Central Bank estimates. Growing banker anxiety about
dwindling reserve levels also could increase Venezuela's difficulties in refi-
nancing maturing obli ations, restructuring short-term debt, and raising new
loansJ
Chilean Debt Chilean officials earlier this week met with foreign creditors to discuss
Rescheduling Talks rescheduling on $4.8 billion in medium- and short-term debt due in 1983 and
to secure some $1 billion in new loans. Chile's debt crisis was precipitated by
Santiago's decision to liquidate three financial institutions, intervene in the
operation of five banks, and appoint inspectors for two others, which together
have a combined foreign debt of $3.5 billion. The interventions-aimed at
boosting domestic confidence in the country's weak financial system-upset
foreign bankers and caused them to cut off Chile's access to new credits. In an
effort to restore confidence, the government has assured foreign creditors that
it will guarantee the loans of the 10 banks. Moreover, Chile's excellent past
debt servicing record, its willingness to implement austerity measures, and the
prospect of a rebound in copper exports probably assure a successful outcome
to the rescheduling negotiations.
Soviet-Grenadian
Ties Expanding
Over the last six months, the USSR has expanded political and economic ties
with the Bishop regime. Moscow established a diplomatic mission on the island
last fall, and during Bishop's first visit to Moscow last summer agreed to
provide $10.5 million in credits for a satellite receiving station, a feasibility
survey for a deepwater port, and other aid projects.
Suriname Seeking Surinamese attempts to expand trade relations with the USSR and Cuba have
Economic Ties With become more important in the wake of the execution of regime opponents and
USSR and Cuba subsequent suspension of Dutch and US aid last month. Army Commander
Bouterse is hopin that increased trade with these countries will lead to offers
of economic aid.
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Early last month-on a trip to Havana scheduled prior to the executions-the
Surinamese Minister of Industry, Trade and Transportation discussed poten-
tial trade agreements with Cuban officials. (S NF NC)
Malawi Miffed by Senior Malawian officials are bitter about a recent decision by the Bank of
US Bank Pullout America to withdraw its $12 million equity from Malawi by the end of 1983,
according to the US Embassy in Lilongwe. They blame Washington for failing
to dissuade Bank of America and see the move as another indication that
Malawi ranks low on the list of US priorities in Africa. Despite Lilongwe's un-
happiness about the bank's decision, the economic impact on Malawi is likely
to be slight. We believe that Barclays Bank and Standard Bank, British
institutions that are the principal shareholders of Malawi's only other commer-
cial bank, will be strongly tempted to take over Bank of America's equity.
Barclays and Standard already own and operate the largest commercial banks
in South Africa, Zimbabwe, Zambia, and Kenya.
Yugoslav Hard The Yugoslav press reports that banks in Yugoslavia have lifted the $250 limit
Currency Restriction on withdrawals from hard currency accounts. The restriction had been
Lifted imposed last October in conjunction with other foreign exchange 'controls.
According to the US Embassy, however, only a few banks thus far have
carried out the relaxation.
The federal government probably hopes the removal of the restriction on the
approximately $7 billion worth of deposits will lead to an increase in
remittances from Yugoslav workers living in Western Europe. Remittances,
which are a key source of hard currency, apparently fell off substantially
following the imposition of the restriction. Yugoslav bankers probably believe
depositors will have more confidence, now that a $1.3 billion financial package
with Western governments has been announced.
Soviet Nongrain Crops Agricultural performance figures for 1982 have been released by the Soviet
Below Plan Central Statistical Administration, and for the second consecutive year, data
on grain production were not included. These figures indicate that with the ex-
ception of cotton, the 1982 output of the principal nongrain crops-sugar
beets, potatoes, vegetables, sunflowers-increased over last year. Even so,
production for all of these crops, except for vegetables and cotton, was well be-
low plan, and the production of sugar beets and potatoes was below the 1976-
80 average.
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Weather conditions, poor seed quality, improper handling, and the lack of
transportation equipment all contributed to this year's shortfall in nongrain
crops. Soviet admission of disappointing harvests of sugar beets and potatoes,
which are extensively grown in and on the perimeters of some of the major
grain-producing areas, also lends credence to our previous estimate that the
Soviets suffered another poor grain harvest last year.
Beijing Hikes Prices In a bold move certain to spark consumer protests, the Chinese Government
of Cotton Textiles has ordered a 20-percent increase in retail prices of cotton textiles. The action
comes after increases in prices paid cotton growers and is intended to cut down
on massive subsidies that have contributed to a string of deficits in the state
budget. At the same time, Beijing is cutting by 20 to 30 percent consumer
prices of synthetic fabrics in order to dislodge inventories and help soak up ex-
cess purchasing power. The government is attempting to put the best face on a
politically sensitive issue by arguing that the growth of its synthetic garment
industry has reached the point where the average Chinese should now be able
to dress better. Although the price changes may be less unpopular in the cities,
the rural poor will be hit hard, which the government has acknowledged by au-
thorizing subsidies for certain areas. Chinese media are billing the price
changes-which also involve a number of slow-selling consumer durables-as
a major step in reforming the country's highly irrational price system.
China has cut back sharply on imports of synthetic fibers over the past year
because of increased production and stockpiles of synthetics and because of
record cotton crops. Although Beijing last week restricted future purchases of
US-origin fibers to protest controls on textile trade, China probably will
reenter the market-but buy less than in past years-after the domestic supply
situation stabilizes.
Abolition of Communes China's rural communes-the centerpiece of China's rural development
in China strategy for 25 years-will be abolished and replaced by village cooperatives
and village governments. The change, which is mandated by China's new state
constitution, is now being implemented experimentally in 60 localities. The
new administative system will be similar to that of the 1950s. The communes,
which combined both governmental and economic functions, were viewed as
too large and inefficient to. play a useful role under Beijing's increasingly
market-oriented agrarian policies.
The abolition of communes is important mainly as a political symbol of
Beijing's willingness to reject Maoist institutions. The commune system had
been closely associated with Mao Zedong since its inception in 1958 during the
Great Leap Forward, and its egalitarian ideological basis is at odds with the
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current leadership's emphasis on rewarding individual productivity. The
communes' cadres, most of whom will lose their jobs, have frequently been
accused of blocking reforms and interfering with decisionmaking at lower
levels to protect their own power.
In the short run, the new rural institutions are unlikely to have much effect on
agricultural production. Agricultural responsibility systems-under which
individuals or groups can exercise greater control over production outside state
plans-are already in place in most communes. They are given credit for the
rapid gains in production over the past few years, which have given Beijing
confidence that the communes are no longer needed. Joint economic and
trading companies will take over some of the communes' economic functions,
but individual households and cooperatives will be the basic economic units.
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Mexico: Fast Start but Long Way To Go
President Miguel de la Madrid has made a fast
start in addressing Mexico's financial and econom-
ic crisis, but we expect increasing pressures on him
to backslide and we see no letup in persisting
financial problems. For 1983 we project a steep
drop in economic activity, high inflation, and a
sharp falloff in consumption compared with the
previous year. As a result, keeping the cooperation
of labor and the middle class for austerity will
become progressively harder. We expect to see
increasing consumer demonstrations, growing dis-
sension among factions within the ruling party, and
perhaps violent antigovernment protests.
In these circumstances, we think that de la
Madrid's dedication to economic stabilization will
wane in favor of maintaining domestic stability. He
already has eased projected austerity by reversing
commitments to cut food and public transport
subsidies and by offering a huge new public works
program. We believe that concessions to maintain
what he views as minimum consumption and to
preserve the ruling party's traditional social and
economic programs will cause Mexico to miss-
perhaps by wide margins-some of its quarterly
IMF stabilization targets. This will cause periodic
gaps in foreign financing as Mexico seeks to extract
more lenient conditions from the IMF. These set-
backs will add to problems in restoring public
confidence and reversing capital flight, while un-
dermining business recovery. Economic recovery
and expansion in consumption are likely to be
postponed until 1985 at the earliest
Austerity and a New Beginning
De la Madrid's quick fleshing out of the emergency
economic program announced in his 1 December
inaugural speech and his ending of antibusiness
rhetoric have reassured the international financial
community, gained Mexico access to $9 billion in
new IMF and commercial bank credits, and set the
stage for a $21 billion public-sector debt reschedul-
ing. Meanwhile, his seizure of economic initiative
and establishment of a new "clean" presidential
image have earned him cautious public approval.
His strong support for the IMF program-he pub-
licly stated that the loan was essential to avoid even
worse austerity-helped end the acrimonious de-
bate in the Mexican press over loan conditions that
had persisted since the last months of the Lopez
Portillo administration.
Most Mexicans give de la Madrid high marks for
his vigorous attack on inefficient policies and his
measures to attack official abuses of power. Legis-
lation pushed through Congress in December estab-
lishes a cabinet-level Comptroller General to moni-
tor government spending procedures and strictly
limits outside income for officials. It also better
defines categories of illegal activities-including
influence peddling, unjust use of power, and illegal
enrichment-sets punishments, and closes loop-
holes in existing anticorruption laws. Additionally,
in an unprecedented move, de la Madrid publicized
public salaries-including his own.
To implement the IMF program of tight limits on
public spending, domestic credit expansion, and
foreign borrowing and purchases, Mexico City
slashed the projected 1983 budget. The new budget
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spending and a 30-percent real increase in revenues
in order to reduce the public-sector deficit from 17
percent of GDP in 1982 to 8.5 percent in 1983.
Government ministries are slated to cut expendi-
tures an average of 25 percent. Increased revenues
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are projected largely from a boost in the value-
added tax and gasoline prices while nonfuel subsi-
dies are projected to grow.
In a step to lessen market distortions, Mexico City
removed most price and foreign exchange controls
and sharply raised interest rates. The Commerce
Ministry removed price restrictions on 4,700 of the
5,000 controlled items, leaving controls on basic-
largely public-sector supplied-commodities. In
mid-December Mexico City devalued the peso for
the third time in 1982, boosted the controlled rate
from 70 to 95 pesos to the US dollar, and reestab-
lished a free market rate. The controlled rate is
being adjusted downward 13 centavos a day, with
an eventual goal of unifying it with the free market
rate, presently at 148 pesos to the dollar or 82
percent below the value a year ago. Interest rates-
although they remain negative in real terms-have
been raised substantially to reduce the disincentive
for domestic savings.
Crucial Labor Support
De la Madrid's most successful move thus far-in
our view-has been that of gaining union leaders'
support for only moderate wage hikes. At the end
of 1982, the government announced a labor, gov-
ernment, and management solidarity pact designed
to keep wages in line, maintain subsidies, and
control food prices while assuring supplies. As a
part of this deal, labor accepted an increase in
minimum wages of 25 percent, with an additional
12.5 percent promised this summer. We believe
labor's willingness to accept pay well below project-
ed rates of inflation reflects de la Madrid's success
in convincing Mexicans of the need for belt tighten-
ing. Moreover, we believe the early acceptance of
the modest wage hike will help persuade interna-
tional lenders and business leaders that de la
Madrid is committed to austerity, and that he can
control major domestic interest groups
As an indication of the importance that de la
Madrid attaches to successful worker relations, he
appointed Arsenio Farrell-described by the US
Secret
28 January 1983
Embassy as a decisive leader and totally familiar
with labor issues-as Secretary of Labor. In ex-
change for labor's support of moderate wage hikes,
de la Madrid made important concessions. Taxes
on low-cost housing and medicines were reduced
and plans to raise public transport fares postponed.
The National Minimum Wage Commission-com-
posed of government, private-sector, and labor rep-
resentatives-is now allowed to meet more than
once a year to discuss raising wage rates.
Debt Refinancing Exercises
Against this backdrop, Mexico City is pulling
together a series of huge financial deals totaling
more than $30 billion over the next three years.
These arrangements involve the IMF, more than
1,400 foreign commercial banks, and numerous
foreign governments. Successful completion of
these deals is needed if Mexico is to avoid default
on a portion of its $82.5 billion foreign debt and
maintain essential imports. Although the IMF will
provide only a fraction of the funds, its support is
needed to gain other financing. In early January,
Mexico drew its first quarterly installment of $330
million from the three-year, $4 billion IMF pack-
age.
Quantitatively more important is the $7 billion in
new credits that commercial banks and foreign
governments are reluctantly committing. We be-
lieve most of the requested amount will be forth-
coming by next week. Foreign governments and
international organizations have committed $2 bil-
lion for 1983, a sizable increase from their support
in recent months. Through last week, $4.7 billion of
the $5 billion requested from commercial banks
had been subscribed. To assure participation of
other institutions that had made their subscriptions
contingent on full syndication of the loan, we
expect some large banks to make additional
pledges. Payments from this credit are to be made
in four equal installments, contingent on and imme-
diately following the quarterly IMF tranches.
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Labor leaders-long an integral part of the govern-
ing process-are willing to go along with austerity
measures, mainly because they consider them-
selves equal partners with the government in run-
ning the nation. Labor officials-representing the
ruling party's biggest and best organized sector-
hold the largest share of national, state, and local
government offices. Union members traditionally
have gained numerous benefits from close labor-
government ties and are relatively immune to
opposition party blandishments to alter the rela-
tionship. The major trade union leader, Fidel
Velazquez, recently told US Embassy officials that
he recognizes the gravity of the situation and the
necessity for austerity. He indicated that union
leaders will attempt to educate their members on
the seriousness of Mexico's problems.
In addition to the recent tax and.price concessions,
wage gains late in the Lopez Portillo administra-
tion helped union leaders keep the rank and file in
line. Moreover, the recent emphasis on job preserva-
tion rather than large wage hikes has served the best
interest of skilled workers, the bulk of unionized
labor. Few skilled laborers have lost their jobs,
despite the 1 million added to the unemployment
rolls since August.
Unions not affiliated with the ruling party represent a
small minority of laborers and have yet to display the
strength or inclination to force changes in the govern-
ment's labor policies. High wages, more fringe bene-
fits, and better working conditions make challenges
by affiliates of the Independent Federation of Work-
ers-the nation's largest independent union organiza-
tion-unlikely despite the country's economic prob-
lems. Although leftist-dominated unions and labor
organizations have increased their efforts to expand 25X1
links with labor since economic problems intensified I
last August, their influence is limited to electrical,
telephone, and teachers' unions.
Mexico's bank advisory group would like to turn to
the even more complex debt rescheduling package,
which needs attention before the moratorium on
principal payments expires at the end of March. At
yearend 1982 Mexico's public-sector foreign debt
totaled $68.5 billion. Mexico has proposed resched-
uling $21 billion in arrearages and principal obliga-
tions due on this debt through 1984. We expect
most of Mexico's creditors to accept public-sector
debt rescheduling, although they are likely to press
for higher interest, new collateral, and some longer
term stabilization agreement that would restrict
Mexican economic policy initiatives throughout
most of the seven-year rescheduling period.
Mexico City has proposed a new scheme for pri-
vate-sector debt relief, according to US Embassy
reporting. Since August, private firms have built up
arrears of $2 billion, nearly equally divided be-
tween interest and principal payments on the $14
billion privately held debt. If a foreign creditor is
willing to reschedule principal payments on a firm's
debt, the government has announced that foreign
exchange will be available for purchase by the firm
to pay its debt. Although details of the scheme are
not yet worked out, we believe foreign creditors will
jump at the chance to clear up private-sector
principal arrears.
Miguel Mancera, director of the Bank of Mexico,
stated that this mechanism will not apply to inter-
est payments. To meet interest obligations, the
private sector will have to deposit pesos with the
Bank of Mexico at the controlled exchange rate.
Mancera said Mexico will pay 10 percent of the
outstanding balances of these accounts at the end
of January. Thereafter, the Bank will make month-
ly payments on private-sector interest as foreign
exchange becomes available.
Secret
28 January 1983
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In our assessment, planned financial inflows will
slow, but not reverse, the steep decline in economic
activity that began in late 1982. Economic
performance during early 1983 will be particularly
weak. Imports are running 50 percent below last
year, and businessmen report that capacity utiliza-
tion has dropped to 50 to 70 percent compared with
90 percent between 1980 and mid-1982. Because of
these trends, we largely agree with the forecast of
Data Resources Incorporated (DRI); they project
that economic activity will fall at a 6-percent rate
for first-quarter 1983 and that inflation will rise to
a 100-percent annualized rate during the time
period
Shortages of foreign exchange and domestic credit
will intensify the private-sector slowdown at least
until debt arrears are reduced. Business leaders
claim that few dollars are available outside the free
market because of the critical foreign exchange
needs of the government. They indicate that even
firms earning foreign exchange from exports are
having trouble maintaining production levels.
Moreover, drastically reduced inventories of spare
parts and raw materials are reported by business
leaders. Industrialists interviewed by US officials
in Guadalajara say that productivity is falling and
that they are relying on the free foreign exchange
market for necessary imports despite government
guarantees of subsidized exchange for those pur-
chases. As a result, they are cannibalizing ma-
chines for parts to maintain production
Inflation in January-March 1983 will almost surely
stay at triple digits. Floating the peso and removing
price controls- boosted the cost of living by 10.7
percent in December alone, a 240-percent annua-
lized rate. The soaring peso cost of imports will
continue to be a large component of price increases,
while the boost in the value-added tax will give
another fillip to inflation. Decontrol of prices on
many consumer goods and the government's 15-
percent hike in prices of controlled items in mid-
January will add more fuel to inflationary fires.
Secret
28 January 1983
Austerity Challenged
Accumulating Social Pressures. Continuing eco-
nomic deterioration could generate a prolonged
crisis that would put Mexican institutions under
stress unprecedented in several generations. Pres-
sures on de la Madrid to weaken the program will
mount as the austerity program intensifies econom-
ic problems of important interest groups:
? Further reductions in food and transport subsi-
dies will especially hurt the lower classes.
? Additional devaluations-which policymakers in-
dicate will be an important instrument to force a
more export-oriented economy-will undercut
middle class consumption as imports become even
more expensive.
? Job losses will increase as the government cuts
public spending and falling sales force business to
cut production.
Union leaders may push for new concessions if they
believe government policies or private-sector un-
willingness to limit price increases are putting a
disproportionate share of the burden on labor.
Victories by dissidents in local union elections
would send a clear message to national leaders that
policy changes were in order. Strikes by unions
affiliated with the ruling party would be an indica-
tor that the difficulties plaguing the system were
too complex to handle in traditional, behind-the-
scenes negotiations. Disorganization within labor's
hierarchy would also complicate continued union-
government cooperation. Fidel Velazquez remains
in undisputed control of Mexican labor, but at age
82 his health is uncertain. His death could bring
union disarray because potential successors lack his
influence.
External economic factors could also throw de la
Madrid's efforts off course. Despite the devalua-
tions that have undervalued the peso for trade
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Best
Case a
Deepening
Crisis d
-3,119
-1,647
-3,520
7,000
8,700
12,700
3,461
16,925
20,880
22,000
23,200
22,700
Oil and gas
460
10,306
14,400
15,500
15,700
15,200
Manufactures
1,763
3,725
3,750
4,000
4,600
4,600
Agriculture
815
1,544
1,530
1,500
1,700
1,700
Minerals
423
1,350
1,200
1,000
1,200
1,200
6,580
18,572
24,400
15,000
15,000
10,000
-9,480
-12,500
-12,000
-11,000
-1,437
-5,380
-8,217
-11,900
-12,000
-12,000
Current account balance
-3,693
-6,597
-13,000
-5,500
-3,800
1,700
Debt amortization
1,058
5,984
6,310
7,000
7,500
7,500
Fina
ncial gap
-4,751
.-12,581
-19,810
-12,500
-11,300
-5,800
Medium- and long-term
capital inflows
5,629
12,460
18,514
13,000
11,300 e
7,000 e
Net short-term capital
(terrors and omissons)
-740
1,009
Exte
rnal debt (at yearend)
17,600
48,800
74,900
82,500
85,000
80,000
Short term
5,200
16,900
21,900
24,000
23,000
21,000
Debt
service ratio (percent)
35.0
45.4
47.5
57.7
54.9
56.5
a Estimated.
b Projected
c Assumes'Mexico maintains IMF program.
d Assumes Mexico loses IMF and international banking support.
e Includes 7 billion in debt relief on medium- and long-term debt
principal due.
purposes, we project only a small increase in export
revenues. We expect nonoil sales to improve only
slightly because of weak world commodity demand
and continuing economic policy uncertainties. To
boost nonoil exports more would require major
long-term investment to reorganize Mexican-
indus-try, which for years has concentrated on the local
market because of domestic incentives and an
overvalued peso. On the other hand, tourism and
border trade should be a small plus, adding up to
$1.5 billion to service receipts.
The greatest shortfall from Mexican projections
will reflect lower oil revenues, which represent 70
percent of all merchandise exports. While we assess
that Mexico could boost oil production and export
capacity by 200,000 b/d on average this year as
Pemex had earlier planned, the US Embassy re-
ports that Pemex has scaled back its production
and sales targets because of budget constraints, the
weak world oil market, and concern over alienating
OPEC. Largely for budget reasons, Pemex explo-
ration and development spending was slashed 25X1
Secret
28 January 1983
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December Targets and Limits for 1983
1982
(estimate) January- April- July- October-
March June September December
Net credits to the public-sector
by the Bank of Mexico a
Cumulative overall public-sector deficit b
Cumulative change in net domestic
assets of the Bank of Mexico
Cumulative net foreign borrowing
by the public sector b
Cumulative change in net international reserves
of the Bank of Mexico b
a End of period.
b Limit tested at the end of each period.
c Amount subject to ceiling is defined as the difference between note
issue and net foreign assets.
75 percent in 1982 and is projected to be cut
another 50 percent this year. Current Pemex pro-
jections call for export revenues of $15.8 billion this
year, compared with an estimated $15.5 billion in
1982. This forecast assumes constant nominal oil
prices and a slight increase to 1.5 million b/d in
export sales. For each $1 change in world oil prices,
Pemex receipts change $550 million annually.
Missing IMF Targets
We believe the odds of de la Madrid's further
backsliding on austerity are better than even and
that, as a result, Mexico will fail to meet some IMF
targets this year. The requirement to lower the
public-sector budget deficit from 17 percent to
8.5 percent of GDP is probably the most unlikely
target to be met. Even so, noncompliance with this
Secret
28 January 1983
goal could remain hidden by the slow process of
budget reporting at least until the end of the year.
We think that strong government ministries will
not accept slashed budgets without a fight. Firing
the hundreds of thousands of public employees it
would take to meet the goal is unrealistic both
because of Mexican job security laws and because
we believe key government ministries such as In-
terior (cut 50 percent), Defense (cut 30 percent),
and Health and Education (cut 25 percent) will
resist]
At the same time, we project government income
will fall short of budgeted revenue levels because of
a deteriorating tax base and a weakening of the
receipts of government enterprises. Price controls
on basic goods will keep revenues substantially
below inflation in many government-owned busi-
nesses. Moreover, we expect tax remittances by
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1,763
1,605
360
690
1,005
1,500
635ac
21
44
44
104
Million US $
1,250
2,500
3,750
5,000
734 a
500
1,000
2,000
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Pemex to the central government to be at least
$1 billion below the $11 billion the budget projects.
We calculate that receipts from the higher value-
added tax probably will fall 20 percent below
projected revenues because of a falloff in economic
activity.
Other targets likely to be missed-and much easier
to detect-are net credit to the public sector by the
Bank of Mexico and the change in net domestic
assets of the Bank of Mexico. Recent monetary
policy has been designed to meet the financing
needs of the public sector. Between September and
December, net credit to the public sector increased
by 31 percent and net domestic assets soared by
almost 100 percent. The IMF program, however,
limits the increase in both to just 34 percent for all
1983. A 9-percent increase in net domestic credit to
the public sector in the first quarter seems particu-
larly difficult in light of triple-digit inflation. With
a large part of its new foreign credits already
committed to interest obligations, Mexico City will
have to depend on domestic credit to finance
continuing subsidies and its new public works
program. Moreover, we expect Mexico City to be
faced with unanticipated wage hikes and financing
requirements for business transactions that will
boost public and private domestic credit because its
goal of cutting inflation to 50 percent in 1983 is
unrealistic.
In our assessment, Mexico City could meet the
other three of its six quantitative IMF targets. The
probable successes, in our view, will be the reduc-
tion of foreign borrowing, the $2 billion increase in
net foreign reserves, and the reduction of debt
arrears by $600 million. On the other hand, if
devaluation begins to substantially lag inflation and
other economic shocks drive a skittish public into
another round of capital flight, even these targets
could be missed.
Implications of Backsliding
Even though we foresee economic deterioration and
backsliding, we believe that the international
financial community will allow a fair amount of
flexibility if they perceive the thrust of de la
Madrid's economic policies as positive. Then the
IMF and world bankers will allow Mexico to
readjust austerity criteria based on the administra-
tion's six-year economic plan now scheduled to be
released by de la Madrid in May.
In this case, we see only temporary delays in
financial disbursements, with a gradual increase in
the foreign exchange availability by the end of
1983. Even so, the bulk of the improvement will be
swallowed up by the need to stay current on
government interest obligations, reduce private-
sector debt arrears, and rebuild inventories. Thus
the volume of imports in 1983 will be lower than in
1982
Under these circumstances, we project that 1983
economic performance will be substantially worse
than in 1982. Construction, manufacturing, and
commerce will be the hardest hit by import short-
ages. Domestic budget cuts will, in a similar fash-
ion, slice government and other service activities.
Even the mineral sector-which paced by oil devel-
opment has been the engine of dynamic Mexican
economic growth for the past eight years-will not
avoid the slump. For 1983, at best, we assess that
GDP will fall 3 to 5 percent and that inflation will
run between 70 and 90 percent.
25X1
25X1
If Mexico misses its IMF targets by wide margins
and international bankers perceive that de la Ma-
drid's policies are off base, we believe that the risks
of losing international financing are significant. In
this case, Mexico could lose IMF support and
additional commercial bank credit; imports would
then plummet, private-sector debt arrears would
expand, and many Mexicans, particularly intellec-
tuals and leftwing politicians, would call for an
interest moratorium. To remain current on interest, 25X1
Mexico would be forced to cut imports by as much
as one-third in 1983. In this situation, the economic
activity would fall by 10 percent and inflation
would stay at triple digits. 25X1
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28 January 1983
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Saudi Oil Capacity:
Impact of the Weak Market'
Saudi Arabia has decided to reduce oil production
capacity from 10 million b/d to 8.5 million b/d
over the next several months. They plan to moth-
ball 1.5 million b/d of capacity, which, according
to Saudi directives, should be capable of being
returned to operation within 90 days. Recent bud-
get reductions, however, may adversely affect up-
keep and maintenance of the mothballed equipment
and lead to further postponements of new capacity
development projects.
Anticipated reductions in Saudi capacity should
Saudi output of 8.5 million b/d will not be required
before the end of the decade. The reductions,
however, will substantially reduce the world's cush-
ion of spare productive capacity to offset supply
disruptions in the short term.
Saudi Oil Capacity Policy
With proved and probable reserves estimated by
Aramco at 178 billion barrels, Saudi oil capacity is
dictated by policy considerations rather than re-
source availability. The Saudis maintain some
spare productive capacity to use as leverage in
OPEC pricing decisions and to protect Saudi politi-
cal, economic, and security interests in response to
supply disruptions. In 1976 the Saudis, at US
urging, reluctantly agreed to raise sustainable ca-
pacity to 12 million b/d. For several years Saudi oil
officials cited the 12-million-b/d figure as existing
capacity, although actual sustainable capacity was
only about 10 million b/d. We believe that the
Saudis made this claim to enhance their leverage
over OPEC oil prices during a period of peak
OPEC production and substantial u ward price
pressures.
Now, however, with the current weak oil market,
many Saudis feel that existing underutilized capac-
ity-4.5 million b/d or more in recent months-is
too expensive to maintain merely as an emergency
cushion to protect the industrial nations. Moreover,
the foreign manpower requirements to build and
maintain capacity exceed what many Saudis con-
sider prudent to avoid social and cultural disrup-
tions
In November 1982 the Saudis instructed Aramco
to adopt an 8.5-million-b/d-capacity level as a cost-
saving measure. This 1.5-million reduction in ca-
pacity will be achieved by shutting in several
marginal oilfields and mothballing the associated
processing facilities. In some cases, facilities shut
down are to be available to be returned to service
within 90 days. Regular maintenance and periodic
testing will be required to prevent deterioration of
these facilities. Given likely spending cuts, we
believe that proper maintenance will not be carried
out, leading to a loss of part or all of mothballed
capacity
Evolving Aramco Plans
capacity are likely.
Aramco plans call for the maintenance of
8.5-million-b/d operating capacity during the next
five years. The plan, however, is currently under
revision, and we believe that cuts in productive
Secret
DI IEEW 83-004
28 January 1983
25X1
25X1'
25X1
2 A11
25X1
25X1
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Saudi Arabia: Selected Oilfields
ZULUF 1 / FFRFID00N
SAFANI YA
Fazran
Saudi Arabia
'Ain Dar_
Secret
28 January 1983
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Figure 1
Aramco Business Plans: Projected Productive Capacity
1981-85 B.P.
1979-83 B.P.
1980-84 B.P.
1982-86 B.P.
1983-87 B.P.
1984-88 B.P.
I I I I I I I I I I I I
8 1977 78 79 80 81 82 83 84 85 86 87 88
Aramco capital spending targets-which must be
self-financed under Saudi regulations-have been
sharply reduced in recent months. As of November
1982, total Aramco capital spending for the
1983-87 period was already down about 40 percent
from the amount targeted in mid-1981. Since then,
the government has directed Aramco to recalculate
the budget based on lower production projections.
Thus far, most cuts have come in heavy crude
development. We expect this trend to continue
because the Saudis can meet capacity targets less
expensively by emphasizing maintenance of light
crude capacity.
A major victim of the Saudi budget cuts is Ri-
yadh's long-term goal of matching the composition
of production by crude type with the composition of
reserves. The existing physical crude production
system remains heavily geared toward producing
Arab Light. To balance production among the
crudes, it would be necessary to either reduce light
crude production or to develop medium and heavy
crudes. While recent planning emphasizes develop-
ment of medium and heavy crudes, these projects
have been delayed because of the greater market-
ability of lighter crudes and Sandi need for the gas
associated with the Arab Light production. Recent
production figures indicate that Arab Light again
comprises over 70 percent of total production. 25X1
Secret
28 January 1983
25X1
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The Saudi Government's goal of balancing produc-
tion of the light, medium, and heavy crudes in
accordance with their reserves could conflict with
domestic requirements for associated natural gas.
Most of the existing gas-collection facilities are
designed to gather gas produced at onshore Arab
Light crude fields. These oilfields have a higher
gas-oil ratio than the medium and heavy crude
fields, and the volume of gas collected per barrel of
oil produced is considerably higher if Arab Light
crude output is emphasized. The Saudis now want
to develop gas facilities at medium and heavy crude
fields and nonassociated gas deposits. Over the
longer run, the Saudis are planning to advance
development of the Khuff gas formation and possi-
bly the Abqaiq and Aindar gas caps to eliminate
gas requirements as a constraint on oil production.
Aramco's financial limitations might force further
delays in expansion of Saudi oilfields. The Khurais,
Manifa, and Qatif oilfields, for example, would
require expensive pressure maintenance systems to
boost capacity. Expansion at the Marjan oilfield
also may be delayed; the impetus to increase
capacity here has been Saudi concern that Iranian
production in the extension of this offshore field in
Iranian waters would deplete its reserves. Iran,
however, has not produced from the field in two
years. Postponement of these projects alone would
reduce projected Aramco capacity in 1987 by more
than 500,000 b/d in the absence of other less
expensive development programs.
Secret
28 January 1983
25X1
^
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USSR: The Astrakhan' Natural Gas Project
Having secured Western assistance in developing
the Siberia-to-Western Europe gas pipeline, Mos-
cow is again turning to the West for equipment to
develop its natural gas reserves at Astrakhan'.
Astrakhan' gas, however, will be used primarily for
domestic purposes rather than export. A revitalized
Soviet interest in developing the Astrakhan' deposit
reflects the USSR's need to restore gas supply to
the Caucasus region following the cutoff of Iranian
gas in 1979, to increase chemical fertilizer produc-
tion, and to activate backup capacity for the Soyuz
export pipeline.
Negotiations with potential Western suppliers for
$1.5 billion worth of pipe and equipment needed to
develop the gasfields have accelerated since the
summer of 1982; the Soviets-perhaps optimisti-
cally-hope to conclude most if not all of the
contracts early this year. The Western countries
involved in the bidding are considering ways of
accommodating Soviet demands for highly conces-
sionary interest rates.
Dimensions of the Project
Soviet geologists estimate that the Astrakhan' gas-
field may contain up to 6 trillion cubic meters of
gas, making it nearly as large as the one at
Urengoy. When brought on stream, the project
could eventually produce 30-60 billion cubic meters
of gas, nearly 3 million tons of sulfur, and 1.8
million tons of stable condensate annually. The
sulfur and condensate will be used as feedstock for
chemical plants. The Soviets were forced to halt '
deep exploratory drilling at Astrakhan' in the late
1970s because they lacked sulfur-resistant tubing,
casing, and drill pipe.
Development of the Astrakhan' gas reservoirs will
be extremely difficult and time consuming. Over
one-third of the gas consists of noxious, noncom-
bustible contaminants-about 25 percent hydrogen
sulfide and 12 percent carbon dioxide-which are
highly corrosive and hazardous. Moreover, the gas
reservoirs are located at depths of more than 4,100
meters-twice as deep as those at Urengoy-with
extremely high reservoir pressures of 630 atmos-
pheres (9,300 psi) and temperatures of up to 150
degrees Celsius.
The Need for Western Technology 25X1
The Soviets will require substantial Western equip-
ment and technology to ultimately drill and equip
some 2,000 wells, construct gathering systems, and
build gas-processing and sulfur recovery plants to
develop the Astrakhan' deposits. We expect the
hard currency cost to be about $1.5 billion, of
which as much as $650 million may be needed for
special corrosion-resistant seamless tubular steel
and large-diameter pipe. About $100 million is to 25X1
be spent on well equipment, $250-300 million on
the gathering system, and perhaps $550-650 mil-
lion on the gas and sulfur processing plants. An
additional $350-450 million could be spent on
pipeline construction. Maintenance of the gas com-
plex will be tied to the procurement of Western
equipment and technology.
The Western Players
Negotiations for Western equipment began in 1977
and continued sporadically over the next four years.
Field development that had been scheduled for the
1981-85 Plan was canceled but has since been
the Soviets were delaying the
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1
Baltic Sea
Secret
28 January 1983
The United States Government has not recognized
the incorporation of Estonia, Latvia, and Lithuania
into the Soviet Union. Other boundary representation
is not necessarily authoritative.
Karashaganak
Astrakhan'
ogasfield Gur'yev
AstrakhaTengiz
asloilfief
Caspian
Sea
Aral
Sea
I Lake
Balkhash
fChinese D
Line of Controls
C
~
Pakistan -t?. India
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Orenburg
gas field
Orenburg
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Secret
bidding process for the new Tengiz field in order to
proceed with development of Astrakhan'.' The tem-
po of the talks, however, did not pick up much until
the summer of 1982, when Moscow stationed a
negotiating team in Cologne.
At least 15 major Western firms reportedly are
vying for Astrakhan' contracts. A French consor-
tium led by Technip signed a $400 million contract
for the gas plant and related pipe and tubes on 21
In their negotiations with the West European and
Japanese firms, the Soviets have stipulated that
equipment is to be purchased from the United
States only if it is unavailable elsewhere. Some US
equipment and special corrosion resistant seamless
tubular steel are likely to be needed.
Financing the Project
The Soviets are pressing hard to obtain concession-
ary Western loans. They would probably balk at
interest rates over the 7.8 percent obtained on
Western government-backed credits for equipment
for the new Siberia-to-Western Euro a natural gas
pipeline.
The Western governments are complaining that
they are being whipsawed between a desire for their
firms to win contracts and the wish to at least
appear not to be straying too far from the OECD
interest rate consensus. In July 1982 the OECD
countries agreed to fix minimum interest rates to
be charged on official lending to the USSR at
12.4 percent for high interest rate countries and at
0.3 percentage point above the long-term domestic
market rate for low-interest-rate countries.
' With the momentum of the Astrakhan' negotiations well under
way, Soviet negotiators reportedly are now moving ahead with
discussions on other sour gas projects-at Karashaganak roughly
120 kilometers southwest of Orenburg and at Tengiz some 500
The Astrakhan' Natural Gas
Project in Brief
Development Stage
Up to 66 producing wells in
the two stages, including 10
observation wells (eventually
up to 2,000 wells); well main-
tenance equipment.
Cost: $100 million
500-kilometer gas-gathering
system.
Cost: $250-300 million
Natural gas plant.
Cost: $550-650 million
Production pipelines:
A 360-kilometer gas pipeline
(Astrakhan'-Kamush-
Burun) to the North Cauca-
sus.
A 580-kilometer condensate
pipeline to transport natural
gas liquids to petrochemical
plants.
A 630-kilometer carbon di-
oxide pipeline to the Gur'yev
oilfields for use in enhanced
oil recovery.
Cost: $350-450 million
Requirements for Western Goods
Special drill pipe; corrosion-resis-
tant, high-pressure blowout pre-
venters; casing and tubing; well-
heads, Christmas trees, and valves.
Well maintenance equipment in-
cludes workover rigs, snubbing
equipment, and replacement casing
and tubing with leakproof joints;
special equipment tools and supplies
to break out hydrate and sand plugs,
and to prevent formation of same in
producing gas wells. ~
Some US investment is likely.
Corrosion-resistant linepipe for the
collection manifolds and gathering
lines along with associated comput-
er systems and valves. In late No-
vember, three competing firms were
in the bidding: Mannesmann (West
Germany), Technip (France), and
Partec-Lavalin (Canada) with the
Canadian firm favored.
Equipment for removal and recov-
ery of natural gas liquids, sulfur,
and carbon dioxide from natural gas
streams. The cost of the sulfur
recovery plant alone may be as high
$300 million, and the cost of related
pipe and tubes could be $250-350
million. Technip of France signed a
$400 million contract in late De-
cember. Western firms competing
for the contracts include Mannes-
mann, Sumitomo, Nippon Steel,
Nissho IWAI, Marubeni, Nichi-
men, ENI, Lurgi, and Creusot-
Loire.
Major bidders for pipe are Mannes-
mann (West Germany), four Japa-
nese steel companies, and Voest-
Alpine (Austria).
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28 January 1983
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In an attempt to get around the new OECD
consensus guidelines, the Western countries have
been considering "grandfathering" offered rates to
earlier periods and-in some cases-raising equip-
ment prices to compensate for reduced interest
rates. Although there apparently is as yet no
agreement on credits for the French contract, the
press reported that earlier in December French
banks offered financing at 7.8 percent.
Canada (a high-interest-rate country) was
considering offering a stated loan rate below the
consensus by "grandfathering" the rate to 1977,
when negotiations on Astrakhan' began. Japan (a
low-interest-country) could come close to the Soviet
interest rate requirement by offering 8.7 percent
and still be within the OECD consensus. The
Japanese long-term prime rate was 8.4 percent
when. ne otiations got under way in earnest last
summer.
We have little information on the repayment terms
for the Astrakhan' credits, but Moscow probably
will attempt to procure terms of eight years or more
with an initial grace period. The OECD consensus
agreed to in July stipulated that no East European
country would be eligible. for credits of more than
eight and a half years. Financing of machinery and
equipment for the Siberia-to-Western Europe
pipeline included credits with repayment periods
over eight years after an initial three-year grace
period on repayment of principal. In the case of
financing for pipe, it is likely that the Western
lenders will insist on annual negotiations and will
not offer repayment periods of more than five
years.
The Astrakhan' project is important to the USSR
as a source of additional gas and sulfur and natural
gas liquids needed for expanding production of
Secret
28 January 1983
fertilizers and petrochemicals. Kremlin leaders
want to use Astrakhan' natural gas to compensate
for depleted gas-producing capacity at the vast
Orenburg field and to replenish nearly exhausted
supplies in the Transcaucasus and North Caucasus.
Iranian gas was being imported at the rate of 10
billion cubic meters a year when shipments were
halted in 1979. Natural gas from Astrakhan' could
flow at a rate of 3 billion cubic meters a year by
1985 and perhaps 30 billion to 60 billion cubic
meters a year by 1990. Present Soviet output of
natural gas is about 495 billion cubic meters a year.
Although intended primarily to fill domestic gas
requirements, the Astrakhan' fields will help main-
tain Soviet gas exports to both Eastern and West-
ern Europe via the Orenburg pipeline by making up
for any production decline elsewhere. At present,
the Orenburg line carries some 16 billion cubic
meters a year to Eastern Europe, and it could carry
another 13 billion cubic meters to Western Europe.
In 1981, hard currency receipts from sales of gas
totaled $4 billion, or about 15 percent of total
Soviet commodity export earnings.
When the new Siberia-to-Western Europe pipeline
is completed, the Astrakhan' project will give the
Soviets even greater flexibility to maintain or-as
has been hinted-to increase gas exports to Eastern
and Western Europe. An offer of stepped-up gas
deliveries would help offset the impact of cutbacks
in oil shipments to Czechoslovakia, East Germany,
and Hungary.
The Astrakhan' project includes ambitious plans
for sulfur production of about 3 million tons a year,
larger than any sulfur complex in the world. Al-
though the USSR, with an output in excess of 11
million tons, is second only to the United States in
production, sulfur is in tight supply in the USSR.
Because there are few large reserves of sulfur
suitable for mining, the Soviets are turning increas-
ingly to recovery of byproduct sulfur from sour gas,
oil, metal smelters, and possibly coal. Moreover,
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Poland-which in 1980 provided about 7 percent of
Soviet sulfur consumption-cannot be counted on
for large increases in deliveries. Thus, the USSR
has had to turn to Western countries to help meet
its domestic needs.
Finally, the project is expected to make available
1.8 million tons of stable condensate for feedstocks
at petrochemical plants. In addition, the carbon
dioxide recovered from the gas will be transported
via a 630-kilometer pipeline for injection into the
Gur'yev oilfields to enhance oil recovery
27 Secret
28 January 1983
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