EAST GERMANY'S ECONOMIC TIES TO THE USSR

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• Document Release Date: March 6, 2012
• Sequence Number: 2
• Publication Date: March 1, 1986
• Content Type: REPORT

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Directorate of Secret
Intelligence
apa
East Germany's Economic
Ties to the USSR
Secret
EUR 86-10009
March 1986
COPY 13 9
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Directorate of Secret
Intelligence
Ties to the USSR
East Germany's Economic
This paper was prepared by I Office
of European Analysis. Comments and queries are
welcome and may be directed to the Chief, East
European Division, EURA
Secret
EUR 86-10009
March 1986
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Summary
information available
as of 4 March / 986
was used in this report.
iii Secret
EUR 86-10009
March 1986
Ties to the USSR
East Germany's Economic
consumer programs.
Soviet leader Gorbachev's calls for improvement in the Soviet economy
contain demands for growing support from Eastern Europe. East
Germany's comparatively robust economy, sound financial position, large
industrial base, and strong scientific and technological capabilities make it
the best East European candidate to support Soviet modernization and
call in support of Moscow's program to upgrade domestic consumption.
The Soviet Union and East Germany are each other's largest and, in many
respects, most important trade partners. Soviet purchases are almost
exclusively manufactured goods, with machinery and consumer goods
accounting for more than 80 percent of its imports from East Germany.
The Soviets import machine tools, ships, computers, optics, agricultural
machinery, and mining equipment. They use East German equipment
extensively and often praise its high quality and its direct contribution to
Soviet industrial productivity. At the same time, the East Germans are
increasing deliveries of textiles and clothing, furniture, and pharmaceuti-
Deliveries of Soviet energy and raw materials are crucial to East
Germany's heavily industrial, but resource-poor economy. Even after cuts
in Soviet deliveries of some items, the GDR in 1984 received about 73 per-
cent of its oil, two-thirds of its coal, nearly all its natural gas, and all its nu-
clear fuel from the USSR. The Soviets also supply most of East Germany's
cotton, forest products, ferrous metals, and ores. Despite its comparatively
strong financial position, East Germany could afford to replace only a
small share of these supplies through hard currency purchases in the West.
Although the advantages of the trade relationship are numerous, both sides
also incur costs. The major burden on the USSR is the export of
increasingly expensive raw materials and energy that could be used at
home or exported to the West for hard currency. The East Germans' major
disadvantage is the tight linkage of their industry to the USSR. Soviet
customers take, often under long-term contract, the lion's share of output
from many industries, squeezing out domestic and Western demand for
some of East Germany's highest quality goods. Dependence on the Soviet
market also reduces managerial incentives for innovation, quality control,
and service that a stronger orientation to Western markets would require.
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The explosion in world oil prices in 1973 set in motion forces that shaped
the economic relationship for the next decade. Terms of trade shifted
sharply in Moscow's favor, but the USSR chose to reap the new advantage
slowly and to give East Berlin several years to adjust by delaying price in-
creases and allowing large East German trade deficits. By the end of the
decade, however, Soviet payments problems made the diversion of oil from
soft currency markets to hard currency customers appealing; growing
domestic requirements for natural resources heightened the pain of chronic
Soviet trade surpluses with Eastern Europe. In the early 1980s, Moscow
gave substance to earlier warnings to East Berlin by cutting deliveries of
several key products, including a 2-million-metric-ton reduction in annual
oil shipments. For its part, the Honecker regime helped to redress the
imbalance by diverting a larger share of industrial output to the USSR.
East Germany's trade with the USSR shifted from a 643-million-ruble
deficit in 1982 to near balance through the first three quarters of 1985.
The net flow of resources will continue to move in the USSR's favor in the
new five-year plan period, but apparently at a slower rate than in recent
years. The protocol on the coordination of the USSR-GDR domestic
economic plans for 1986-90 calls for trade to grow by roughly 3 percent an-
nually over the 1985 level, a marked slowdown from the double-digit rates
of recent years. We judge it to be likely that East German exports will
grow faster than Soviet exports as East Berlin runs surpluses of perhaps
several hundred million rubles per year to repay the deficit of 3.8 billion
rubles accumulated over the past decade. The resource cost to East
Germany of running these surpluses should be reduced somewhat by the
improvement in its terms of trade with the USSR as declining world oil
prices are gradually reflected in Soviet prices.
In response to Moscow's requirements for more consumer goods, better
quality machinery, and investment in Soviet energy and natural resource
development, East German exports of electrical engineering products,
computers, and information technology are scheduled to more than double
in value over the next five years. Deliveries of chemicals are to grow by 50
percent, consumer goods by 40 percent, and machine tools by 30 percent.
The USSR, in return, has promised to keep the volume of oil exports at the
1985 level and to deliver about 10 percent more natural gas, coal, and iron
ore over the period. The Soviets also will increase exports of some
manufactured goods.
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The evolution of the economic relationship foreseen in the protocol
indicates that the longstanding mutual benefits from bilateral trade will
continue, with a moderate shift in the relative supply burden on East
Germany. The GDR seems likely to maintain or even increase its economic
importance to the USSR, while the Soviets will continue to supply the bulk
of energy and raw materials needed by East German industry. Nonethe-
less, East Berlin will have to devote more of its investment resources and
scientific and technological capabilities to meeting the changing needs of
the Soviet economy, including a huge appetite for higher quality and more
technologically advanced goods.
Markedly worsening Soviet economic conditions-including lagging
growth and hard currency shortages-or changing policies could bring
additional claims on East German resources. Should Soviet economic
problems so dictate, the USSR might demand larger increases in exports
and even higher quality goods from East Germany, or cut back further on
deliveries of oil and raw materials. More production problems could push
Moscow to use its oil at home, while lower world prices could prompt it to
increase the volume of oil exported to the West to maintain earnings; either
possibility would ease East Berlin's task of accommodating Soviet wishes,
while forcing the GDR to seek supplies elsewhere. Beyond the trade
accounts, the Soviets could insist that East Berlin shoulder more of the
burden of Warsaw Pact defense spending or ask East Berlin to provide
more assistance to Moscow's client states in the Third World.
A stable, growing bilateral economic relationship will help Moscow achieve
its major objective of strengthening the economic and technological base of
CEMA and support domestic Soviet needs. It would also help meet
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Moscow's goal of reducing Warsaw Pact vulnerability to Western trade
sanctions. A troubled future economic relationship, however, would dam-
age the GDR and the strength of CEMA. East Germany probably could
cope with moderate reductions in supplies or increases in export require-
ments, but major changes would disrupt the East German economy,
heighten the risk of political unrest, and ultimately reduce East Germany's
value to the USSR.
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Foundations of the Relationship: History, Mechanisms,
and Institutions
Machinery
4
Machine Tools 4
Advanced Technology 8
Transportation Equipment and Agricultural 12
Machinery
Equipment for Energy Production, Industrial 14
Processes
Other Areas 15
The Residual 15
Joint Investments 16
East German Dependence on Soviet Supplies 16
Energy Deliveries 17
Nonenergy Raw Materials and Intermediate Goods 20
Manufactured Goods 20
The Relationship Since the 1970s 21
Soviet Pressures Mount 22
East Berlin Responds and Adjusts 24
Outlook Through 1990 25
Moscow's Hard Line 26
Trade in 1986-90 26
Net Flow of Resources 29
Other Burdens on the GDR 31
Risks for the Relationship 31
D. East German Adjustment to Soviet Pressures
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Figure 1
East Germany-Soviet Union: Transport and Selected Joint Projects
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zhgo rod
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East Germany's Economic
Ties to the USSR
East Germany and the USSR have been each other's
largest trade partner throughout most of the post-
World War II period. The economic relationship is
vital to East Germany, which relies heavily on Soviet
supplies of energy and raw materials. East Germany,
in turn, makes an important contribution to Soviet
industry and consumer supplies by delivering manu-
factured goods that often are of higher quality and
more technologically advanced than those provided by
other East European countries or produced in the
USSR.
Republic was founded, the Soviet Union was by far
East Berlin's largest trade partner, accounting for 38
percent of the GDR's total trade.
The needs and resource endowments of the two
economies facilitated Soviet actions and solidified the
economic relationship. The USSR's abundant energy
and natural resources and weak industrial develop-
ment complemented East Germany's poor natural
resource base, skilled and disciplined labor force, and
well-developed industry. The resulting trade pat-
tern which has remained largely unchanged for 35
years-has centered on Soviet exports of raw materi-
als in exchange for East German machinery and other
This paper examines the content and evolution of
economic relations between the USSR and East Ger-
many. The paper begins with a detailed description of
the goods exchanged and, where data permit, analyzes
the importance of this trade to each economy. The
paper then examines the impact of changing economic
conditions, Moscow's tougher demands in recent
years, and East Berlin's efforts to help satisfy Soviet
domestic requirements. In the final section, we consid-
er the outlook for the relationship through 1990 and
the prospects for changes in bilateral economic links.
Foundations of the Relationship:
History, Mechanisms, and Institutions
The Soviet occupation of eastern Germany in 1945
forced a sharp reorientation of the economy toward
the USSR. Soviet military units seized large quanti-
ties of East German plants and equipment and mobi-
lized thousands of German workers for use on Soviet
projects. Soviet administrators dismantled factories
that had been tied to the economy of western Germa-
ny and restructured eastern Germany's industry to
complement Soviet industry and to produce items
needed to rebuild the USSR. East German statistics
show that by 1949, the year the German Democratic
manufactured goods (see figure 2).
There has been a trend-especially since the mid-
1970s-toward increasing specialization in the pro-
duction of industrial goods. East German data show
that exports to the USSR of goods produced under
specialization agreements represented 49 percent of
all exports in 1984, up from 28 percent in 1975 (see
table 1). This trade results from agreements under
which one party concentrates on production of some
items, while the other concentrates on other products
in the same sector (see inset). Each side increases
output of some goods, presumably benefiting from
economies of scale, and cuts back or eliminates other
production in which it may be less efficient. East
German-Soviet cooperation in the computer industry
has become especially close, partly as a result of the
Council for Mutual Economic Assistance (CEMA)-
wide specialization programs. The two sides exchange
mainframe computers-usually under agreements
that stipulate exchanges rather than sales-and pro-
vide each other with a broad variety of specialized
components. In agricultural machinery, the East Ger-
mans deliver large quantities of field equipment like
combines, while the Soviets provide mostly tractors.
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Figure 2
East Germany: Composition of Trade
With the USSR
Other: 3.4 Other: 1.1
Wood products: 0.5 Consumer goods: 1.4
Raw materials (no fuels): Chemicals: 1.5
Fuels: 11.4
Raw materials
(no fuels):
26.8
Residual:
19.3
Other: 1.6
Chemicals: 3.9
Chemicals: 0.8
Consumer goods: 1.0
Agricultural products: 2.2
Wood products: 4.8 -
Machinery:
64.6
Other: 0.7
Chemicals: 4.0
Residual: 13.5
Consumer goods: 0.5
Chemicals: 1.1
Agricultural products: 1.5
Wood products: 4.0
Machinery: 10.8 -
Consumer Machinery: Residual: 13.4 -
goods: 13.9 67.4
Raw materials
(no fuels): 13.4
ILLEGIB
Fuels:
54.9
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Table 1
East Germany: Share of Exports
to the USSR Produced
Under Specialization Agreements
1970
1975
1980
1981
42
47
51
Moscow and East Berlin over the years have signed
numerous agreements and established institutions to
increase trade, coordinate economic plans and poli-
cies, and make the economic relationship more re-
sponsive to their mutual needs. The general guide-
lines for trade are set forth in five-year bilateral
trade protocols, which are integrated into the five-
year economic plans of both countries. The protocols
provide a framework for the conclusion of annual
trade plans, which in turn are implemented by con-
tracts between economic entities from each country.
Source: Statistisches Jahrbuch der Deutschen Demokratischen
Republik (Statistical Yearbook of the GDR), various years.
East Germany is the USSR's leading supplier of
machinery and consumer goods, receiving in return a
sizable share of Soviet exports of energy and raw
material. Soviet statistics show that two-way trade
with East Germany amounted to 14.8 billion rubles in
1984, or 10.6 percent of the USSR's foreign trade (see
appendix A).' By comparison, Soviet trade with Mos-
cow's next two leading trade partners, Czechoslovakia
and Poland, were 12.6 billion rubles and 11.4 billion
rubles, respectively. Soviet trade turnover with its
largest Western trade partner, West Germany, was
just over half the East German figure.
The GDR has been particularly helpful in supplying
some Soviet industrial sectors and in boosting Soviet
technological development (see tables 2, 3, and 4). A
few East German products, such as optical equip-
ment, rank among the best in the world. While data
Soviet-East German efforts to specialize in the pro-
duction of manufactured goods often proceed under
the auspices of the Council for Mutual Economic
Assistance (CEMA), but the most important and
binding agreements are negotiated and implemented
bilaterally. A prominent recent example is the pact
signed in October 1984 by Soviet Foreign Minister
Gromyko and East German leader Honecker on
cooperation in science and technology through the
year 2000, replacing a 1979 agreement intended to
cover the period through 1990. Individual ministries
often sign agreements for cooperation, specialization,
or joint ventures in their sectors of responsibility. The
East Germans in December 1985 put the number of
pacts at the governmental or ministerial levels at 255,
mostly in scientific and technical areas.
Economic issues are often prominent on the agendas
of meetings between Soviet and East German leaders,
and even relatively minor issues sometimes are set-
tled by the party leaders. The Joint GDR-USSR
Government Commission for Economic and
Scientific-Technological Cooperation, headed by
deputy chairmen of each country's Council of Minis-
ters, oversees the work of organizations responsible
of account. See appendix B for ruble/dollar exchange rates.
for the economic relationship.
25X1
25X1
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Table 2
USSR: East Germany's Share of Imports
by Commodity Group, 1984
Chemical, paper, construction equipment 16.09
Metal-processing equipment 31.18
Power and electrical engineering 16.31
Mining, metallurgy, petroleum 12.20
Material handling 15.82
Electric power and radio
measuring instruments
are reasonably complete on the value of individual
goods traded, other information gaps and methodolog-
ical problems prevent a full analysis of the impact of
trade on the respective economies. This is particularly
true in measuring the importance of individual East
German goods to the Soviet economy because the
GDR's exports usually account for only a small share
of inputs used in individual sectors (see inset).
Machinery
The USSR buys large amounts of East German
equipment for a broad variety of industries. Machin-
ery worth 5 billion rubles comprised two-thirds of
Soviet imports from the GDR in 1984 and one-fifth of
Soviet machinery imports from all sources. Although
knowledgeable Western observers typically rate East
24.35 German equipment several years behind the West, the
Agricultural machinery 43.94 Soviets use East German machinery extensively be-
Railroad rolling stock 35.33 cause it often is better than Soviet products, helps
vessels 27.92 reduce shortages, and saves Moscow hard currency. It
Petroleum refining equipment 42.03 also can be tailored to specific Soviet requirements
Food and light industry equipment 21.09 and can improve productivity. A recent Soviet article,
Raw materials for example, praised an East German contribution to
Fuels the Moscow Automobile Plant. A new East German
Ferrous metals production line will make 5,000 parts per shift with
Nonferrous metals only one worker, replacing a line that produced 1,500
Chemical products 11.10 parts per shift with 12 workers. Tighter COCOM
Of which: restrictions on exports of Western technology in re-
Chemicals 10.18 cent years, in our view, have made East German
Plastics 15.66 equipment even more appealing as a substitute for
Pesticides 9.58 Western products.
Wood and wood products 4.91 Machine Tools. Exports of machine tools are proba-
bly East Germany's most valuable contribution to
Paper 13.00 Soviet industry. According to Soviet statistics, deliver-
Agricultural products ies to the USSR of metalworking machine tools rose
13.57 sharply in 1981-84, reaching 550 million rubles.
Soviet statistics for 1984 indicate that East German
12.32 metalworking equipment accounted for 31 percent of
Clothing and linens 10.52 all Soviet imports of such goods. The Soviets buy
20.73 large quantities of conventional and specialized metal
25.75 cutting tools, stamps, and presses for use in a variety
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Table 3
USSR-East Germany: Value of Trade
by Commodity Group, 1984
Total
East German
Exports
7,367.2
Soviet
Exports
7,481.4
Construction materials
East German
Exports
20.4
Soviet
Exports
20.5
Machinery and equipment
4,962.4
809.7
Other nonfood raw materials
40.0
411.4
Raw materials
5,109.6
Of which:
Of which:
Lumber and wood products
296.8
Ores, ore concentrates,
Grain
5.6
materials
Textile fibers
108.6
Fuels
Food
6.5
Of which:
Other industrial materials
27.7
Petroleum
3,124.8
Consumer goods
1,026.9
36.7
Natural gas
721.9
Of which:
Coal and coke e
213.9
Household goods
152.5
9.8
Electricity
49.5
Textiles
241.2
Ferrous metals
898.8
Furniture
147.8
Of which:,
Pharmaceuticals
261.8
Rolled ferrous metals
718.0
Haberdashery goods
63.7
Pig iron
68.9
Nonferrous metals
Chemical products
Of which:
Chemicals 151.0
72.7
Plastics 74.4
10.2
Fertilizer/pesticides 37.5
Table 4 provides detailed data on the machinery trade.
Much of this "Soviet" coal actually is mined in Poland but is
recorded as a Soviet product under a longstanding trilateral trade
agreement.
of industries, including plastic injection molding,
bearing production, and automobile and agricultural
equipment manufacturing. One East German official
reports that, over the past 30 years, the Soviet Union
has purchased over 150,000 machine tools from the
GDR.
Anedoctal evidence indicates that the GDR delivers steel pipes,
but they do not show up in Soviet or East German statistics.
a The residual entry apparently primarily includes sales of military
hardware and sensitive goods not included elsewhere.
According to Western and East European experts,
East German machine tools lag comparable Western
machinery in quality and efficiency. Among East
European nations, however, East Germany appears
preeminent in the technologies for specialized ma-
chine tools-ones adapted for specific manufacturing
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Table 4
USSR: Imports of Machinery From
East Germany, 1984
Machinery and equipment, total
Metalworking equipment
Metal-cutting machine
tools
Metal-processing
equipment
Power and electrical
engineering equipment
Of which:
Power engineering
equipment
Electrical engineering
equipment
Cables and wires
Mining, metallurgical, and
petroleum equipment
Equipment for surface
mineral extraction
Crushing, grinding, and
dressing equipment
Metallurgical equipment
Petroleum refining
equipment
Material handling equipment
Food and light industry
equipment
Of which:
Food industry equipment
Refrigeration equipment
Textile industry equipment
Chemical, paper, construction,
and other equipment
Chemical industry
equipment
Equipment for
construction
materials industry
Quantity Value
(units) (million rubles)
4,962.4
144.5
30.2
210.3
387.2
208.1
67.4
95.6
631.8
Source: Vneshnvava Torgovlva SSSR (USSR Foreign Trade),
1984.
Quantity Value
(units) (million rubles)
Road and roadbuilding
82.9
machines
Pump and compressor
equipment
Of which:
7,830
19.4
1,000
30.2
Printing industry
61.6
equipment
Typewriters
105,524
39.9
Bookkeeping machines
1,715
33.6
Instruments, laboratory,
209.4
medical equipment
Of which:
Electric power and radio
measuring instruments
Medical equipment
(excluding pharmaceutical)
Agricultural machinery and
equipment
Of which:
6,573
4,585
Grain-cleaning machines
3,688
Motors for agricultural
equipment
Transportation equipment
Railroad rolling stock
Trailers
Ships
Residual
133.5
70.8
33.9
267.8
958.9
380.8
17.4
560.7
909.7
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Analysis of the Soviet-East German economic rela-
tionship is complicated by data problems that limit
our ability to measure the impact of trade on individ-
ual sectors of these economies. Most of the trade data
in this paper are from annual issues of Vneshnyaya
Torgovlya SSSR (USSR Foreign Trade) because So-
viet statistics provide the most complete commodity
breakdown, by value of exports and imports traded.
The main East German source-Statistisches Jahr-
buch der Deutschen Demokratischen Republik (Sta-
tistical Yearbook of the German Democratic Repub-
lic)-since 1974 has reported only total trade (not
disaggregated into exports and imports) with individ-
ual countries. It does, however, report exports and
imports of a few commodities by partner country, and
these data in some cases fill gaps in Soviet statistics.
The East Germans, for example, provide data on the
volume of crude oil imported from the USSR; Mos-
cow has published only value data on oil trade since
1976.
The available data provide the amounts of physical
deliveries for only a few commodities, leaving major
gaps in our knowledge of levels and changes in real
(price-adjusted) flows of goods. The problem is most
serious in estimating East German deliveries, which
are largely heterogeneous manufactured goods for
which we do not have price data. Even when the
number of units of a particular item is reported, the
figure is often nearly meaningless because trade
categories generally encompass a wide range of prod-
ucts whose technical characteristics change over time.
We can better gauge the volume of Soviet shipments
purposes. In 1982, the East Germans accounted for
the largest portion by far (roughly 29 percent) of
CEMA trade in specialized machine tools.
Since the early 1970s, specialized, automated, and
semiautomated machine tools as well as automated
machining lines have accounted for an increasing
share of East German exports of metalworking equip-
ment to the Soviet Union. The portion of standard
because the Soviets report some quantities of key
commodities; in other cases, price information allows
estimation of physical quantities from published val-
ue data.
We present the trade data in foreign trade rubles, the
unit of account in which Moscow denominates and
reports its trade. The exchange rate between the
foreign trade ruble and the dollar fluctuates in line
with the strength of the dollar against major convert-
ible currencies. The Soviet Foreign Trade Bank
issues an official ruble-dollar exchange rate twice a
month. In recent years the average annual "value" of
the ruble has ranged from a high of 0.649 per US
dollar in 1980 to a low of 0.816 per dollar in 1984
(see appendix B).
Both countries report very little in regular statistical
series on how or where imported goods are used in
their economies. This is particularly troublesome for
analysis of Soviet imports because of the large size of
the Soviet economy, the relatively small size of
imports from the GDR in comparison to total imports
plus domestic production, and the heterogeneous
nature of those imports. We can better gauge the
impact of large imports of Soviet raw materials on
the smaller East German economy.
Finally, neither side publishes debt or capital flow
statistics, which hinders our ability to address the
key questions of how much the East Germans owe the
USSR (see appendix Q.
machine tools in the GDR's exports to the USSR
decreased from 75 percent in 1957 to 30 percent in
1985. During the same period, automated machine
tools, including those with numerical controls (NC
machine tools), grew from 20 percent to at least an
estimated 50 percent of machine tool exports.
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The East German deliveries are important to the
USSR because the Soviet machine tool industry is
plagued by obsolescence, inefficiency, and poor quali-
ty. the share of
obsolete equipment (designs at least 10 years old) in
the production of 11 machine-building ministries rose
from 16 percent in 1967 to more than 30 percent in
1981. A recent Soviet article reports that only 60
percent of requirements for machine tools with digital
program control are being met. Serial production of
NC machine tools in the USSR did not begin until
1972, and the Soviets still lag in the production of
advanced equipment such as machining centers and
computer-aided numerically controlled (CNC) ma-
chine tools.
The GDR also is cooperating with the USSR in the
development of flexible manufacturing systems
(FMS)-computer-controlled manufacturing lines. A
source reports that the Soviets were to take delivery of
the first East German FMS in 1985 for installation in
factories in Minsk and Gorky. By 1990, according to
an East German industrial minister, the GDR plans
to supply the Soviets with nine complete FMS and
130 sections of such systems. The Soviets, however,
import most of their FMS from Western countries.
Advanced Technology. In addition to advanced ma-
chine tools, East Germany exports significant quanti-
ties of high-technology items such as computers,
microelectronics products, robots, lasers, and optical
equipment to the USSR. While small in comparison
with Soviet production, the East German deliveries
are generally superior in quality; some-notably la-
sers and optics-even approach Western standards.
The Soviets use much of this equipment in military
applications as well as in scientific research and
industry.
The GDR's major contribution in computers and
related products is the ES-1055 series mainframe
computer produced by the Robotron combine (see
table 5). Like much of East German production, it is
based on an IBM model. The medium-capacity ES-
1055 series is the only CEMA computer of its size
during the past decade the Soviets
obtained 50 to 80 units annually, but this represents a
small contribution to the Soviets' computer stock. In
1984, the USSR contracted for 76 units as part of a
computer swap deal worth 268 million rubles, accord-
ing to Soviet press reports. The Soviets, according to
the press, have purchased over half of Robotron's
production of medium-capacity computers to date.
The Soviets also buy smaller East German computers
and peripherals as well as microcomputers, office
calculators, personal calculators, and magnetic tape
strips and tapes.
nuclear research center
According to press reports, the
Baltic Maritime Shipping Agency has at least one in
Leningrad for controlling its fleet, and the Soviets use
East German data-processing equipment in space
research, the oil refining industry, and at the Dubna
The GDR is a major East European supplier of
microelectronics components to the USSR, mainly for
defense industries. We estimate that the Soviets re-
ceive 50 to 70 percent of East Germany's output,
although these imports cover only a small percentage
of Soviet consumption. Under the terms of a long-
term government-to-government agreement signed in
1982 and previous agreements, the two countries
collaborate extensively in research and development
and exchange growing quantities of products. We
judge the East Germans' strengths to be in design and
quality control, although their products typically lag
state-of-the-art Western electronic products by sever-
al years.
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Table 5
East Germany: Selected Industrial Combines
With Significant Sales to the USSR a
Firm
Headquarters
Employees b
VEB Schwermaschinenbau-
Kombinat "Ernst Thaelmann"
Madgeburg
28,000
VEB Schwermaschinenbau-
Kombinat TAKRAF
Leipzig
40,000
VEB Werkzeugmaschinen-
Kombinat "Fritz Heckert"
Karl-Marx-
Stadt
25,000
VEB Kombinat Umformtech-
nik "Herbert Warnke"
Erfurt
19,000
VEB Kombinat Polygraph
Leipzig
15,000
Kombinat VEB Carl
Zeiss Jena
Jena
58,000,
Heavy machinery
Provides a variety of goods to
the USSR and is building
cranes for new-generation
Soviet nuclear power stations.
(railroad) cranes from subordi-
nate enterprise over half its
output through 1990. Firm
agreed to 372-million-ruble
deal for 1986-88 at Spring 1985
Leipzig Fair.
Machine tools, presses Manufactures some of the
GDR's most advanced machine
tools, including numerically
controlled machine tools.
Machine tools, presses, plastic Combine also has a metalwork-
Printing presses, bookbinding
ing specialization role within
CEMA. Seventy-five percent of
its output in 1984 went to the
USSR, according to press
reports.
Firm's products apparently
used widely in USSR. Quality
is good and some products are
exported to the West, including
to the United States.
Optics, cameras, precision mea- Firm was completely destroyed
suring devices, lasers, micro- in the late I 940s by Soviet oc-
electronic components, scales; cupation forces. Employees who
electronic components such as did not flee to West Germany
magnetic tape measures rebuilt the combine into the
world leader in some technol-
ogies, particularly lasers. R&D
facility employs 7,500, of whom
2,500 are technicians.
Computers, calculators, office Robotron apparently exports
equipment more to the USSR in value
terms than any other East Ger-
man combine.
VEB Mansfield-Kombinat
"Wilhelm Pieck"
Eisenleben
46,000
VEB Kombinat Fortschritt
Landmaschinenbau
Eisenach
64,500
Nonferrous metal refining and Mansfield has been made
fabrication "prime contractor" for East
German contribution to devel-
opment of Krivoy Rog iron ore
deposit.
Agricultural equipment, includ- In 1984, the firm diverted to
ing tractors, plows, harvesters, the USSR about 20 percent of
and milling machines the potato harvesters already
purchased by the GDR Minis-
try of Agriculture.
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Table 5
East Germany: Selected Industrial Combines With Significant
Sales to the USSR a (continued)
Kombinat VEB Mikroelek- Erfurt
tronik
VEB Kombinat Seeverkehr and Leipzig
Hafenwirtschaft-Deutfracht/
seereederei
VEB Kombinat TEXTIMA Karl-Marx-
Stadt
48,000
Microelectronics, integrated
circuits, industrial robotics
Ships, fishing boats, dredges,
inland water craft
NA
33,000
Textile manufacturing equip-
ment
East German industry is organized into Kombinate, or combines,
which typically are vertically integrated monopolies, or near mo-
nopolies, comprised of 20 to 40 "people-owned enterprises" (Volk.s-
eigener Betriebe, or VEBs). Many have subordinate foreign trade
enterprises.
Makes microelectronic compo-
nents in great demand by Soviet
customers. Supplies Robotron
and Carl Zeiss Jena. Is major
importer of legally and illegally
acquired Western microelec-
tronic parts.
Combine operates all six civil-
ian shipyards. Most of output in
recent years has gone to Soviet
customers; building the six rail
ferries for the new Mukran
(GDR)-Kleipeda (USSR) link.
Firm presumably will operate
the Mukran-Kleipeda ferries.
The Soviets buy large quantities
of machines for their natural
and synthetic textile industries.
b Data as of 1979 unless otherwise noted.
As of 1985.
d As of 1984.
Sources: Verzeichnis der Kombinate der DDR, Bonn, 1980. East
German press, CIA estimate.
Soviet institutes such as the Scientific Research Insti-
tute of Semiconductor Electronics in Moscow appear
to be incorporating East German microelectronics
technology into their research and development ef-
forts (see inset). An important GDR contribution is
production of 8- and 16-bit microprocessors based on
the Z-80 and Z-8000 models of the US firm Zilog; the
Soviets apparently are having problems producing
similar microprocessors based on the US Intel Corpo-
ration designs. The 8-bit microprocessor is used in
guidance systems for aircraft and missiles and in
radars.
We believe East Germany produces the best integrat-
ed circuit (IC) manufacturing equipment in CEMA
and is selling some to the USSR. East German
equipment for manufacturing ICs appears to be of
better quality than East German ICs themselves. The
Soviets use these machines to make their own micro-
electronic components.
The East Germans are combining their electronics
and machine-building skills to manufacture robots,
including so-called industrial robots, for sale to the
Soviets. Many of these are not robots by Western
criteria but rather are less sophisticated automated
manipulators. The machines, nevertheless, contribute
substantially to improvements in productivity in both
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Optics is one of the GDR's most advanced industries,
and East Germany exports high-quality optics to 25X1
Soviet customers. The Carl Zeiss Jena (CZJ) com-
The Soviet Union receives technology from East bine-the GDR's main optics producer-has an inter-
Germany in several ways. Some technologically ad- national reputation for technological development and
vanced Western goods acquired by East Germany product quality, and its products are sold extensively
both legally and in circumvention of COCOM restric- in the West. The Soviets purchase microscopes, tele-
tions are shipped directly to the USSR. scopes, cameras, film, precision measuring devices,
I cartographic equipment, and stereoscopes.
Despite the high level of
intraman trade, we have little evidence that a
large flow of restricted goods enters directly from
West Germany. We believe that the East German
Ministry for State Security (MfS), foreign trade
enterprises associated with high-tech industrial com-
bines, and the trading house Intrac Handelsgesells-
chaft are particularly involved in the technology
acquisition effort.
he Soviets may take up to 75
percent of East German production of image process-
25X1
The Soviets employ East German optics in photore-
connaissance cameras, Earth survey equipment
aboard Soyuz and Salyut spacecraft, and Venus plan-
etary probe
The East Germans
supplied some 150 pieces of equipment, according to
the East German press
East German industrial sectors deliver to Soviet
customers technology-both home developed and im-
ported-embodied in their products.
East German industrial com-
bines, many of which have classified research
departments, provide some "homegrown" technology
that is superior to that of the USSR. In some cases,
Soviet acquisition of GDR technology stems from
CEMA specialization agreements.
The two countries also collaborate in basic research.
A 1985 agreement by the respective Academies of
Science furthers the cooperation. Completion of a
data link between the two scientific communities in
October 1984 facilitates the exchange of information.
economies. Even if only a small percentage of these
are multiaxis programmable robots-machines that
can be reprogramed by their operators-they repre-
sent an important contribution to the Soviet develop-
ment of advanced manufacturing practices. Recent
agreements, including the one on bilateral cooperation
through the year 2000, have highlighted further coop-
eration in the robotics field; both countries are count-
ing on the efficiency generated by automation to be a
major source of future economic growth.
ing systems.
East German laser development, the quality of which
a Western physicist rates as "very high," has contrib-
uted significantly to the Soviet program. The East
Germans have developed glass rods that increase the
efficiency of Soviet high-powered lasers by a factor of
two and a half.
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The joint laser effort, which involves close relations
between CZJ and leading Soviet optics research and
production facilities, includes weapons development
(see inset). East Germans 25X1
provide laser rangefinders used in Warsaw Pact mili-
tary equipment. The East Germans also have devel-
oped lasers used to blind enemy sensors. The GDR
produces other military-related optics products, such
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The direct contribution of East German industry to
Soviet and Warsaw Pact military weaponry is small.
The East Germans produce rifles, ammunition, and
trucks for their own Army, and supply support
equipment like radios and chemical protection gear
to their allies, but they do not produce major weap-
onsfor Warsaw Pact ground forces. Poland and
Czechoslovakia, by comparison, produce T-72 tanks
and other armored vehicles for non-Soviet Warsaw
Pact forces, and military aircraft for the Soviets. The
East Germans' largest contribution to the Warsaw
Pact is the production of coastal warships-armed
largely with Soviet weapons-which they use them-
selves. Military observers generally rate the fleet as a
credible force in the Baltic, and it has become more
important given the decline in Polish naval construc-
Table 6
East Germany: Ship Production
and Deliveries
Production Total Exports to
Exports USSR
Sources: Official East German statistics, the East German press,
US Navy estimates.
tion in recent years.
East Germany's contribution of components to de-
fense industry production is greater, though difficult
to quantify. We believe the GDR's most important
deliveries are high-tech items such as microelectron-
ics, computers, night vision devices, laser range-
finders, and optics. Although many of these products
have civilian applications, they almost certainly are
used widely to improve Soviet defense industrial
capabilities.
The small size of East Germany's military-industrial
complex has its origins in World War II, when the
Allies agreed that defeated Germany would be dis-
armed. The Soviets confiscated or destroyed essen-
tially all of eastern Germany's military production
capacity and did not permit establishment of the East
German National People's Army until 1956. Perhaps
because the Soviets are still wary of establishing
significant defense industries in a German state, the
East Germans receive essentially all of their heavy
weapons from their allies'factories-including the
Soviet Union-and produce none for the USSR. F_
as binoculars, infrared cameras and sensors, and night
vision devices. Some of this equipment undoubtedly is
used by the Soviet military.
Transportation Equipment and Agricultural
Machinery. East Germany is the USSR's largest
foreign supplier of transportation equipment and agri-
cultural machinery. In 1984, East German deliveries
accounted for 28 percent of the value of Soviet
imports of ships, 35 percent of railroad equipment,
and 44 percent of agricultural machinery. Because of
specialization agreements and large Soviet orders, the
GDR has geared its production to the Soviet market,
which absorbs well over half of East German produc-
tion in these sectors.
Soviet yards in 1983.
East German shipyards turn out medium-size dry
goods and bulk carriers, roll-on/roll-off (Ro/Ro) ves-
sels, and river passenger ships, many designed exclu-
sively for Soviet customers. Delivery of 53 vessels in
1983 (worth 510 million rubles) made the GDR the
USSR's largest foreign supplier of ships in number;
only Finland delivered a higher tonnage (see table 6).
Moreover, ships received from East Germany equaled
57 percent of the number of commercial ships built in
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The Mukran-Kleipeda Ferry Project
The largest joint transportation project between the
USSR and the GDR involves the linkage by rail
ferries of ports at Mukran, on Ruegen Island, and
Kleipeda, Lithuania (see map). Begun in 1983, the
project involves the construction of piers, rail yards,
and support structures by each side. The East Ger-
mans will build facilities at Mukran to change rail-
cars between the wide Soviet and the narrower Euro-
pean gauges. They also are building six 185-meter-
long, 11,700 deadweight-ton ferries that will carry up
to 103 railcars or wheeled and tracked vehicles on
two decks; three of the vessels will belong to the
USSR. Introduction of service with the first of the
ships-which are modeled after vessels now in opera-
tion between Ilyitschovsk in the Crimea and the
Bulgarian port of Varna-is scheduled for October
1986. (Under construction in October 1984, the ship
was launched in December 1985 and sea trials will
begin in April 1986.) When the last ferry is delivered
in 1990, the East Germans expect the new service to
carry 5.3 million tons of cargo annually, including 3
million tons of East German imports. (For compari-
son, total bilateral seaborne transport was scheduled
to be 8.5 million tons in 1985.)
The project is experiencing some problems-such as
intermittent parts shortages-but it has received
priority in resource allocation and appears to be
approximately on schedule. We do not know the total
cost of the project, but the East Germans in 1985
estimated the cost of the Mukran terminal alone at
nearly 550 million rubles. 25X1
The link will provide both sides with significant
economic benefits.-
- It will cut transport costs by about 80 percent,
and reduce
transit fees to Poland substantially. The GDR, we
believe, now pays most of these costs.
? Ferries will be able to make round trips in 48
hours, cutting delivery times at least by half
? The ships will reduce vulnerability to chronic bot-
tlenecks in the East European, particularly Polish,
rail networks.
? Sea freight is less vulnerable to instability in
Poland than land transportation-a particularly 25X1
great concern in 1981-82 when the project was
initiated.
The project has security implications, explaining
East Berlin's designation of the venture as a "nation-
al defense" effort.
The
Soviets will be able to improve delivery of military
materiel and troops to the GDR both in peacetime
and in the event of war.
The Soviets use East German ships built extensively
in their merchant marine and fishing fleets. Accord-
ing to the East German press, deliveries to the USSR
in 1983 included:
? The first vessel of the Astrakhan-series 18,020
deadweight-ton (DWT) multipurpose "Lo/Ro"
freighter featuring combined Ro/Ro and conven-
tional cargo handling.
? Three 16,030 DWT container ships and three
19,252 DWT special bulk carriers.
? Two Kristall-II-class fish refrigeration and trans-
port vessels, six Atlantik-class supertrawlers, and 24
freezer-trawler-seiner vessels.
? Support craft including refrigerator vessels, inland
passenger ships, coastal and inland waterway motor-
ships, and dredges.
The Soviets bought 57 vessels in 1984 as well as
marine disel engines and related equipment. Some 50
ships slated for delivery to the USSR were under
construction in January 1985, including the first of six
railroad ferries to be used to improve bilateral sea-
borne transport (see inset). Seventy-five vessels were
scheduled for delivery in 1985. August 1985, the
Soviets ordered 16 more Astrakhan-class ships, which
they have been using on routes to Third World ports
and for arms shipments. In total, according to the
press, the GDR has delivered over 3,300 vessels of all
types.
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The East Germans provided railroad equipment, in-
cluding freight cars and passenger coaches valued at
381 million rubles in 1984. A December 1984 pact
extended a logstanding rail equipment agreement
through 1990 and called for increased cooperation in
production of passenger coaches. The Soviets do not
purchase East German autos and buy only small
quantities of trucks and trailers. The GDR does not
manfacture commercial or military aircraft.
Soviet imports of agricultural machinery from the
GDR surged 31 percent in 1983, and another 14
percent in 1984, to 524 million rubles. The basis of
exchange in recent years has been a 1980 ministerial
agreement on specialization in agricultural machinery
production. A follow-on ministerial agreement to ex-
tend until 1990 was signed at the Leipzig Fair in
September 1984. In an implementing contract signed
in March 1985, the Soviet foreign trade organization
Tractorexport and the East German firm Fortschritt
agreed to exchange another 315-million-rubles worth
of agriculture-related machinery. This deal calls for
the Soviets to receive mowers and field choppers as
well as fertilizer technology and seed preparation
plants in exchange mostly for tractors, combines, and
The two sides have concluded agreements to develop
more efficient chemical processes, exchange chemical
equipment, research new products, and collaborate on
water purification and sewage treatment processes.
Under these agreements, the GDR provides equip
ment (worth 189 million rubles in 1984) and assists in
plant construction. The two sides have collaborated on
polyethylene production and since 1969 on polyure-
thane. A ministerial agreement on fiber production
was signed in June 1984.
The Soviet Union also has acquired metal refining
equipment (worth 144 million rubles in 1984) as well
as East German assistance in development of equip-
ment for alloy production and electron beam smelting.
farm implements.
Equipment for Energy Production, Industrial Pro-
cesses. The GDR provides a comparatively small
amount of energy production equipment to the USSR.
The largest item as a share of foreign supplies is
petroleum-refining equipment; East Germany deliv-
ered just over 42 percent of Soviet imports in 1984.
Advanced, high-capacity mining equipment-primar-
ily for coal and lignite strip mining-is probably an
even more important East German contribution to
production. East German equipment is used in the
large Kuzbass and Ekibastuz coalfields and will help
develop the Kansk-Achinsk deposits in Siberia. The
Soviets report that East German machines mine about
100 million tons of coal annually, or about one-third
of surface-mined production and one-sixth of total
output in the USSR. The Soviets also purchase East
German drilling equipment, pipe, gas compressors,
and gas transmission equipment.
East Germany supplied 21 percent of Soviet machin-
ery imports to equip light industrial plants in 1984,
and the amount of deliveries seems likely to increase
significantly in the future. Under an August 1984
agreement, the GDR Ministry for Light Industry will
help modernize 19 Soviet enterprises in the textile,
clothing, and shoe industries. Perhaps the leading
area for growth will be agricultural and food-process-
ing items to support the USSR's Food Program.
Announced in May 1982, this program is designed to
improve the Soviet diet by increasing food output and
boosting the efficiency of agriculture and food pro-
cessing. Agreements on the books in 1984 called for
USSR-GDR cooperation in more than 500 specific
projects, including the bakery, dairy, confectionary,
and beverage industries. Soviet-East German agree-
ments also call for the construction and modernization
through 1990 of agricultural cold storage facilities,
development of other storage processes, and develop-
ment of refrigerated railroad cars. The first East
German refrigerator units were delivered in February
1984.
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Other Areas
Apart from machinery deliveries, East German ex-
ports to the USSR include consumer products, food,
and some intermediate goods. The GDR also provides
a large quantity of goods reported only as an unex-
plained residual
East German deliveries of industrial consumer goods
amounted to 1 billion rubles in 1984, up 68 percent
over 1980. Many of the purchases come under cooper-
ation agreements intended to foster improvements in
quality and expansion of product variety. The increase
is similar to the trend for other East European
countries and reflects Moscow's effort to have CEMA
countries make a larger contribution to improving
consumer supply in the USSR. Soviet statistics indi-
cate that in 1984 the USSR imported from East
Germany finished clothing, cotton and woolen tex-
tiles, toys, haberdashery items, furniture, and phar-
maceuticals and personal care products. East Germa-
ny is particularly important in supplying furniture,
accounting for 27 percent of Soviet imports in 1984.
East Germany has begun providing some food, al-
though neither country's official statistics show the
flow. In the fall of 1985 the GDR delivered on an
emergency basis about 250,000 tons of potatoes-
apparently to ease local shortages in the northwestern
USSR-with the help of nearly 20,000 Soviet sol-
diers. Another shipment of over 210,000 tons is
scheduled for delivery in April 1986. Together, these
sales would cost some $50 million if purchased at
current US prices. In May 1984 over 38,000 tons of
pork were awaiting delivery to the USSR at the East
German port of Wismar.
The East Germans use some of the oil and gas
obtained from the USSR and their own lignite as
feedstocks for chemicals exported to the USSR.
Chemical product sales totaled 293 million rubles in
1984, according to Soviet statistics; plastics accounted
for about one-quarter and dyes about 20 percent of
sales. Although chemical purchases from the GDR
account for only a small part of overall Soviet chemi-
cal needs, the GDR is the USSR's largest foreign
supplier of pesticides, with 22,846 metric tons deliv-
ered in 1984, according to Soviet statistics.
The two sides collaborate on development of construc-
tion technologies and construction materials, and East
Germany exports modest quantities of insulation. The
respective Ministries of Construction in October 1984
signed an agreement to improve construction of hous-
ing and public buildings and increase mechanization
during 1986-90.
staffed in part by Soviets.
The Soviets import one of East Germany's few natu-
ral resources-uranium-which East German mines
produce exclusively for the USSR. Both countries are
sensitive about the project and do not report amounts
or quality of production.
exploitation of
some good veins continues although some deposits
have been exhausted. Production at the several mines
is controlled by the Soviet-German Mining Company
Wismuth, headquartered in Karl-Marx-Stadt and
East German miners.
The Residual
The Soviets hide their most sensitive trade in unspeci-
fied "residual" categories. In 1984, unspecified East
German machinery exports to the USSR totaled 910
million rubles and residual exports for the other
commodity groups were 997 million rubles; together,
these accounted for over 25 percent of East German
exports. Some of the machinery residual may include
research and development services, repairs, licenses,
and patents that the Soviets include in merchandise
trade, whereas Western practice treats such items as
invisibles. Western studies of Soviet trade statistics
have concluded that the Soviets also lump into the
overall residual sensitive items such as precious met-
als, strategic materials, and military-related goods
that they do not wish to disclose. East German
deliveries in these categories could include uranium,
some chemical products, military equipment, high-
tech goods (particularly for defense industries), and
some steel products that are not reported elsewhere
despite Soviet and East German reports of such
deliveries.
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Joint Investments
Some East German exports to the USSR have been to
support joint investment projects, organized either
bilaterally or under CEMA auspices. These involve
primarily energy development and exploitation of
other Soviet natural resources. The East Germans
contributed goods and labor worth about 1.7 billion
rubles for such projects in 1976-80, according to the
East Germans, and an unknown amount in 1981-85.
The major efforts have centered on gas pipeline
construction, development of iron ore deposits, and
the production of cellulose and asbestos.
Between 1974 and 1978 the GDR joined the other
East European countries in the construction of a
natural gas pipeline from the Orenburg gasfield in the
USSR to Eastern Europe-the largest CEMA-spon-
sored project to date. East Berlin ultimately provided
perhaps $300 million to $400 million in hard currency
financing, materials, and labor in return for 2.8 billion
cubic meters of gas annually over 15 years. Its main
responsibility was to build pipeline and infrastructure
in the European USSR.
East Germany agreed in August 1981 to participate
in the construction of the Urengoy-Uzhgorod natural
gas pipeline to Western Europe in return for mainte-
nance of the level of Soviet gas deliveries, which then
totaled 6.3 billion cubic meters annually. East Berlin
agreed to supply materials and labor to build 546
kilometers of line and seven compressor stations.
Some 8,000 to 10,000 East Germans continue to work
on the project.
East Germany has begun preparations for its part in
the development of the Krivoy Rog iron ore deposit in
the Ukraine, which is scheduled for completion in the
late 1980s.
In early
July 1985, Mansfield created a new firm specifically
to manage the East German participation in the
construction, and the combine has already begun
delivering materials.
In early 1986, the GDR agreed to help build the
"Progress" Pipeline from the Yamburg gasfield in
return for natural gas supplies. According to the
Soviet press, the East Germans will construct com-
pressor stations and some pipeline. The project is
scheduled for completion in January 1989.
The bilateral economic relationship is critical to East
Germany, which in 1984 conducted 38.6 percent of its
total trade with the USSR. The GDR's dearth of
natural resources makes it highly dependent on im-
ports of raw materials from the Soviet Union and
obligated to ship a major share of its industrial output
to pay for Moscow's deliveries (see inset).' Moscow
provides by far the largest share of East Germany's
needs for oil, natural gas, forest products, and ferrous
metals (see table 7). East Berlin's limited hard curren-
cy resources, a transportation system built to receive
Soviet supplies, and the close overall relationship with
the USSR give East Germany little alternative to the
USSR as a major source of imports.
Soviet exports, however, have not kept pace with the
growth of the East German economy in recent years.
Deliveries of many raw materials were lower in 1984
than they were in 1975, while official GDR statistics
show that industrial production grew 49 percent
during the period (see table 10 foldout at back of
book). Although Soviet oil deliveries fell in the early
1980s, East German industrial production in 1984
was 17 percent higher than in 1980.
Gradually declining Soviet deliveries have prompted
the Honecker regime to try to replace imports from
the USSR by increasing domestic production-partic-
ularly of lignite-and by buying from other countries.
2 The GDR's major resource is lignite, which the country uses
primarily as fuel for electricity generation. The East Germans also
use it for industrial boiler fuel, home heating, chemical feedstocks,
and conversion into liquid and gaseous fuels. The GDR has
exportable quantities of potash and small quantities of copper and
natural gas. Uranium mined in the southern part of the country has
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East Germany's major disadvantages in the relation-
ship stem from the high degree of dependence of
many of its specialized industrial combines on the
Soviet market. Entire industries are so tightly linked
to Soviet customers that their freedom of action is
severely restricted and their bargaining position
weakened. A variety of sources indicate that the
USSR buys large shares of East German production
of mainframe computers (70 percent), railcars (75 to
80 percent), cranes (50 percent), machine tools (40
percent), and fishing boats (100 percent).
Dependence on the USSR for markets and supplies
has made East Germany vulnerable to changes in
Soviet trade policy. A variety of sources, including
the East German and Soviet press, indicate that the
Soviets occasionally have both increased orders
sharply and unilaterally cut back deliveries. The
1982 reduction in oil sales on soft currency terms was
the most prominent example
Because the Soviets have first claim on many of East
Germany's most technologically advanced goods,
East Berlin is often faced with tough decisions on
how to allocate the remaining output between domes-
tic use and export to the West. For example:
At the same time, East German managers have also
been forced to improve efficiency and introduce con-
servation measures. Consumption of energy and raw
materials per unit of production fell a reported 2.3
percent in 1984 but still exceeds that in many West
European countries.
Energy Deliveries
We estimate that the USSR currently supplies about
20 percent of East German energy consumption,
primarily in the form of crude oil. On a fuel-equiva-
lent basis, oil accounts for 79 percent of Soviet energy
? Soviet demand is limiting East German ability to
export to the West its U880 model 8-bit micro-
processor, which is based on the Zilog Z-80 device.
The GDR has been successful in selling the device
in the West on the basis of good quality and low
price.
? Over 30 potato harvesters purchased by the GDR
Ministry of Agriculture from a domestic producer
were diverted to the USSR. The loss could not be
recouped because of a shortage of imported parts.
This tight long-term linkage also reduces East Ger-
man managerial incentives for innovation, quality
control, and service. The Honecker regime has tried
to reduce enterprise complacency, but Western ob-
servers still criticize GDR foreign trade enterprises
for having poor service capabilities and for being slow
to respond to changing market conditions.
deliveries, while natural gas provides 9 percent and
coal 10 percent. Domestically produced lignite, by
contrast, supplied 72 percent of primary energy con-
sumption in 1984, according to GDR statistics. The
Soviet share in recent years has declined as East
Germany has been forced to shift to lignite and seek
other sources of oil in response to reduced Soviet
supplies.
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Table 7
East Germany: The USSR as a Source
of Selected Imports
Crude oil
89.5
88.8
86.9
81.4
75.3
Natural gas
70.5
66.3
(excluding anthracite) b
Hard coal coke b
36.9
52.2
56.3
Cotton
92.0
87.3
Cut wood
93.7
64.6
99.6
99.6
99.6
49.9
54.4
52.5
51.5
53.7
Steel bars
NA
55.7
54.0
47.9
40.3
Rolled steel
NA
NA
72.2
36.7
NA
99.0
NA
33.0
25.2
22.3
27.3
2.9
Slightly less than 100 percent.
b includes some Polish coal and coke sold on Soviet account.
In value terms.
a Number of units.
Source: Statistisches Jahrbuch der Deutschen Demokratischen
Republik, various years.
Soviet energy is even more vital than the one-fifth
share implies, however, because lignite cannot easily
be substituted for Soviet oil, natural gas, and hard
coal deliveries. Moreover, East Germany cannot
readily replace Soviet imports because it does not
have an alternative delivery system that could handle
the required volumes. The gas pipeline from the
USSR is the only existing delivery means from any
source, and the Friendship Pipeline is the most practi-
cal, inexpensive way to meet East Germany's oil
needs.'
' The pipeline linking East Germany's main port of Rostock to its
refinery at Schwedt is smaller than the Friendship Pipeline that
carries Soviet oil to the GDR; we are unsure if it could transport the
22 to 23 million metric tons of oil imported annually from all
sources if the Friendship line closed, even if Rostock dock facilities
could handle this volume. Alternate supplies would have to be
carried from Rostock or Hamburg or Polish ports by rail, barge, or
The USSR's major delivery is crude oil. Shipments
worth 3.1 billion rubles accounted for 42 percent of all
exports to East Germany in 1984, according to Soviet
statistics. Moscow for years delivered steadily increas-
ing quantities of oil on soft currency account-
growing from 1.8 million tons in 1960 to a peak of 19
million tons in 1981 (see figure 3). Since then, soft
currency deliveries have fallen to 17 million tons
annually, and the East Germans have sought replace-
ment suppliers.' As a result, the Soviet share of
reported East German oil imports in 1984 fell to 73
percent.
East German statistics show actual Soviet deliveries in 1982 above
contracted soft currency sales, indicating that East Berlin paid hard
currency for some of its imports about 600,000 tons. Deliveries in
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Figure 3
East Germany: Sources of Imported Crude Oil,
1960-84
^
^n
Source: Statistisches Jahrbuch der Deutschen Demokratischen
Republik (various pears).
Much of the Soviet oil is refined for use in the
transportation sector, which relies heavily on liquid
fuels despite the increased electrification of rail lines
in recent years. The GDR also uses substantial
amounts of oil for feedstocks in its petrochemical
industry and burns some as an industrial heating fuel.
Unlike other East European countries, the East Ger-
mans apparently have not reexported much Soviet oil
to the West to earn hard currency. Although informa-
tion on this trade is scant, we believe most oil that the
GDR refines for reexport to such places as West
Berlin is procured from Middle Eastern sources by the
East German trading firm Intrac.
The Soviet Union provides nearly all of East
Germany's natural gas imports. Deliveries worth 722
million rubles accounted for 9.6 percent of Soviet
exports to the GDR in 1984. East Germany uses gas
much less extensively than oil, and Soviet supplies are
supplemented by domestic sources. Deliveries began
in 1973 with the completion of a pipeline to the coal
gasification and petrochemical complex at Schwarze
Pumpe in the southeastern GDR. GDR imports in
recent years have been 6.2 to 6.4 billion cubic meters,
according to East German statistics, and deliveries in
1985 were scheduled to be 6.2 billion cubic meters.
The East Germans use the gas for feedstocks for
petrochemical combines located mainly in the south-
ern and eastern parts of the country. They use Soviet
gas as well as gasified lignite to upgrade domestically
produced gas that generally is not suited for petro-
chemical plants because of low heat and high nitrogen
content. Soviet gas also supplements the country's
"city" gas (Stadtgas) system-the domestic network
that provides gas to heat homes and factories and for
some industrial purposes. Virtually no Soviet-origin
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gas is used for electricity generation. The East Ger-
mans recently have experimented with liquified natu-
ral gas as a fuel for vehicles, but no major program
has been implemented.
Soviet deliveries of hard coal and coke are fairly
small-about 4 million tons annually in recent
years-but important because East Germany has
exhausted its deposits of hard (bituminous) coal. We
believe that the GDR uses these imports almost
exclusively in industry-particularly in the metallur-
gical and chemical sectors-while relying on domestic
lignite for home heating and electricity generation.
Much of this "Soviet" coal actually is mined in
Poland but sold on Soviet account under a complicat-
ed trilateral trade agreement. The Honecker regime is
trying to reduce coal imports from all sources by
increasing lignite production and making more lignite
coke.
Purchases of electricity on Soviet account delivered
through the CEMA power grid accounted for 43
percent of East Germany's electricity imports in 1984,
while Soviet statistics show sales of 1.8 billion kilo-
watt hours, worth 50 million rubles. Total domestic
electricity consumption in 1984 was 110.4 billion
kilowatt hours, according to East German statistics.
Nonenergy Raw Materials and Intermediate Goods
East Germany receives most of its imported nonen-
ergy raw materials and intermediate goods from the
USSR. Ranging from cotton to platinum group met-
als, these deliveries are crucial to East German
industry and the country's hard currency solvency.
Imports of ferrous metals, the most important catego-
ry, totaled 899 million rubles in 1984. The East
Germans bought 718 million rubles' worth of rolled
product for their metal-fabricating and machine-
building industries. They also purchased pig iron,
steel scrap, and iron ore.
The East Germans use some Soviet chemical prod-
ucts-84 million rubles' worth in 1984-in their large
chemical industry. Deliveries are concentrated in
high-energy content and low-value-added categories
such as phenols, alcohol, and carbon black. The East
Germans typically process them further.
Soviet deliveries of lumber and wood products-297
million rubles in 1984-account for nearly all GDR
wood imports. Supplies include lumber, paper, wood
pulp, timber, beams, plywood, and cardboard. The
East Germans use these products in their paper
industry, for printing and construction, and for the
manufacture of furniture and toys. The GDR sells
some of these products to the USSR.
1970 to 1.5 percent in 1984.
The Soviets' main agricultural delivery is cotton.
Sales of 86,700 tons, worth 109 million rubles, ac-
counted for 58 percent of East German cotton imports
in 1984. The East Germans use the fiber in their large
textile industry and return some of the cotton to the
USSR as clothing. They also depended significantly
on Soviet grain deliveries until the early 1970s. Grain
shipments of 3.3 million metric tons in 1970, for
example, covered most of the GDR's import needs.
But as agricultural problems and increasing demand
at the beginning of the 1970s forced the USSR to
import Western grain, the Soviets curtailed and then
ended grain deliveries to East Germany before resum-
ing small deliveries in 1984. The Honecker regime has
since relied on imports from the West at considerable
cost in hard currency. Because of this shift to the
West, the share of agricultural products in total GDR
imports from the USSR fell from 14.1 percent in
Replacement of Soviet deliveries of nonenergy natural
resources by Western sources would constitute a
major drain on East Berlin's hard currency earnings;
replacement at prevailing Western prices would have
cost considerably more than the GDR's estimated
hard currency trade surplus of $1.1 billion in 1984.
Alternate supplies of these commodities are available
in the West-COCOM-controlled nuclear fuel is the
major exception-but Soviet soft currency payment
terms are more favorable than replacement purchases
for hard currency.
Manufactured Goods
While considerably less important to the East Ger-
man economy than raw materials, the GDR neverthe-
less imports a substantial volume of Soviet manufac-
tured goods. Machinery deliveries totaled 810 million
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rubles in 1984, according to Soviet statistics, and
consumer goods shipments accounted for an addition-
al 37 million rubles. As the East Germans have been
pressed in the 1980s to trim their trade deficits, they
have reduced imports of Soviet manufactured goods.
From 1980 to 1983, the value of such shipments
declined 9 percent, according to Soviet statistics,
before beginning to rise again in 1984.
The East Germans bought 272 million rubles' worth
of electronics and electrotechnical products in 1983,
according to East German statistics. These items
generally are exchanged under the specialization
agreements that send East German manufactures to
the USSR in return. In computers, for example, the
Soviets provide high- and low-capacity computers that
complement the GDR's medium-capacity mainframe
output. the Soviets
also deliver components, including microelectronics,
used in manufacturing computers.
The Soviets also supply electric power generating
equipment, mostly major components for nuclear and
thermal electric power plants, including generators.
Soviet statistics show deliveries of power engineering
equipment worth 139 million rubles in 1984.
45 percent of the
electricity generated in the GDR comes from Soviet-
supplied equipment. The East Germans operate four
440-MW nuclear units and an experimental 70-MW
station. They are constructing more 440-MW units
and are building 1,000-MW units at the "Bruno
Leuschner" Station, but their nuclear program-part
of the CEMA effort led by the USSR and Czechoslo-
vakia-is progressing slowly. Installed nuclear capaci-
ty of 1,830 MW produced 11.7 billion kilowatt hours
of electricity in 1984-10.7 percent of the electricity
generated in the GDR.
The Soviets exported 202 million rubles' worth of
transportation equipment to the GDR in 1984. Large
Soviet locomotives are used extensively for hauling
intercity passenger and freight trains. Soviet truck
sales are minimal, in part because the GDR itself
makes good trucks. Soviet auto deliveries, particularly
the Lada, help keep down the waiting time for
prospective car buyers. The Soviets in the past have
provided aircraft for the national airline Interflug and
may again in the future. The Soviets also supply
engines for vehicles manufactured in East Germany.
The USSR is East Germany's major source of import-
ed agricultural equipment. Under specialization
agreements calling for more than 500 million rubles'
worth of bilateral trade in 1983, the GDR bought 74
million rubles' worth of agricultural equipment, in-
cluding tractors and tractor engines. Although tractor
sales fell 61 percent during 1980-84, the Soviets have
delivered over 70,000 tractors to East German farms
since the 1940s.
Among the other trade categories, the East Germans
receive small amounts of machine tools and construc-
tion machinery from the USSR (valued at 31 million
and 23 million rubles, respectively, in 1984). The
unspecified residual totaling 1 billion rubles in 1984
presumably consists largely of military equipment,
platinum and other precious metals, and certain
chemical products such as nuclear fuel.
The trade ties described above reflect more than three
decades of development of the USSR-GDR economic
relationship. Trade rose steadily through the 1950s
and 1960s as the USSR supported the expansion of
East Germany's economy through growing deliveries
of energy and raw materials in return for ever greater
amounts of East German machinery and consumer
goods. Although there were disputes and hard bar-
gaining, both sides generally perceived substantial
benefits from the economic relationship because trade
was roughly balanced, relative prices were stable, and
each needed what the other offered.
The explosion in OPEC oil prices beginning in 1973
set in motion forces that jolted the equilibrium. Terms
of trade shifted sharply in Moscow's favor, which in
effect provided the Soviets with a claim to a net
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Figure 4
East Germany: Terms of Trade
With the USSR, 1960-84
I I I I I I i J I I I I I I I J I X 1 1
40 1960 65 70 75 80 84
largest of any East European country-averaged 444
million rubles annually from 1977 through 1982.
Soviet statistics show an accumulated East German
deficit of nearly 3.8 billion rubles in 1974-84 com-
pared with a small East German surplus during 1949-
74, generating a debt that must ultimately be repaid
(see appendix Q. The trade deficits reflected higher
Soviet export prices, Soviet tolerance of moderate
growth in GDR exports to the USSR, and Moscow's
continued willingness to make good on planned in-
creases in the volume of exports to the GDR. Crude
oil deliveries, for example, more than doubled from
9.2 million tons in 1970 to 19 million tons in 1980.
Soviet Pressures Mount
Beginning in the late 1970s, however, Moscow be-
came increasingly adamant that the days of contin-
ually growing Soviet supplies and large East German
deficits must finally come to an end.
increase in East German exports that also fluctuated
on the basis of the relative value of the dollar (see
figure 4). The ultimate effect on USSR-GDR trade
mirrored to a large degree the change in relative
economic positions in the 1970s between OPEC and
Western oil-importing nations-oil exporters enjoyed
large gains while importers were forced to divert a
larger share of their resources to cover higher oil
payments.
The USSR was slow to reap full advantage of the
changes in world market prices, allowing East Berlin
several years to adjust. CEMA oil prices rose more
slowly than OPEC's because of lags built into the
CEMA pricing formula (see inset). Although East
Germany had to pay somewhat higher prices than
previously, Soviet prices remained well below Western
Deliveries of Soviet raw materials established in the
1981-85 trade protocol were held basically to 1980
levels.
Despite their promises in the trade protocol, the
Soviets began to enact actual cuts in deliveries of key
raw materials early in the 1981-85 plan period.
Moscow reduced exports of oil on soft currency
account to 17.1 million tons in 1982 from 19 million
tons in 1980-81.5 Deliveries of Soviet iron ore fell 17
percent in 1982 and another 12 percent in 1983,
according to East German statistics. The Soviets also
cut deliveries of coal and coke in 1981-82 because the
political and economic crisis in Poland caused cut-
backs in deliveries of Polish coal to the USSR. East
German statistics show that sales of Soviet hard coal
fell 22.5 percent in 1981 and coke deliveries declined
8.7 percent in 1981-82. These cuts aggravated prob-
lems caused by shortfalls of Polish coal sold to the
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prices through the early 1980s (see figure 5).
The Soviets initially eased the blow of deteriorating
terms of trade by allowing the GDR to run trade
deficits. These deficits-which for a time were the
GDR directly by Warsaw.
` The Soviets also cut deliveries to Hungary and Czechoslovakia by
about 10 percent. Diplomatic sources report that the USSR also
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The CEMA pricing mechanism granted some relief to
Eastern Europe from the inflation of the 1970s in
world energy and raw materials prices. Before 1975,
commodity prices in CEMA trade for each five-year
plan period were fixed at the average of world prices
from the previous five-year period. The 1973 OPEC
oil price increase thus had no immediate impact on
the price of Soviet oil deliveries to Eastern Europe.
Because this formula entailed a rapidly growing
subsidy from the USSR to its allies and minimal
incentives for the East Europeans to conserve energy
and raw materials, Moscow pushed through a new
price formula-the so-called Bucharest formula-
that set CEMA prices equal to the moving average of
world prices of energy, raw materials, and some
manufactured goods in the five years immediately
preceding the current trade year. It also introduced
the effects offluctuations in the relative prices of the
Western currencies used in benchmark prices. For the
transition year of 1975, CEMA prices were the
average of those in the previous three years. The five-
year moving average formula took effect in 1976.
CEMA oil, for example, was priced in 1976 at the
average of world (OPEC) prices during 1971-75.
The new formula made CEMA prices more respon-
sive to changes in world prices while continuing
initially to give the East Europeans a considerable
price break. During the period of rising world oil
prices, the formula admitted Western inflation into
CEMA trade with a lag by annually introducing the
impact of high prices from the previous year while
eliminating the influence of an earlier year. The
recent decline in world energy prices, however, has
caused CEMA oil prices under the CEMA formula to
exceed world prices since 1984 (see figure 4). Al-
though the Soviets and East Europeans have periodi-
cally discussed changing the mechanism, CEMA has
consistently renewed the five-year moving average
formula. In January 1985, CEMA's Executive Com-
mittee announced that it would continue to be used
for the 1986-90 period.
Figure 5
Eastern Europe: Crude Oil Prices,
1975-86
f OPEC price
0 1975 76 77 78 79 80 81 82 83 84 85 86
u Preliminary estimate for OPEC price. Market developments
during 1986 could alter this estimate by several dollars in
either direction. The 1986 CEMA price is based on OPEC
prices in 1981-85.
Moscow's tougher line on trade reflected its own
growing economic problems:
? Rising grain import needs and the reluctance of
Western bankers to lend to the Soviets in the early
1980s made diversion of oil from soft currency
customers to hard currency markets appealing (see
inset).
? The Soviet need for natural resources at home grew,
and the cost of developing new reserves became
increasingly expensive.
? The accumulating Soviet surpluses represented a
drain of real resources and made desirable the
return of trade to approximate balance.
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The East German burden on the Soviet Union stems
mainly from the delivery of natural resources. Soviet
production and exploration costs are rising sharply
and, in some cases, production is declining. However,
the share of output exported to East Germany is
small. Oil deliveries accounted for less than 3 percent
of production in 1984, according to Soviet statistics,
while natural gas shipments accounted for 1 percent
of production. Figures on Soviet exports of coal and
coke, about one-half of I percent of production in
recent years, are overstated because much actually is
mined in Poland. It is transferred to a Soviet account
under a trilateral trade arrangement.
From Moscow's perspective, the key opportunity
costs of natural resource deliveries to East Germany
are reduced supplies for the domestic economy and
lost hard currency export earnings. With both oil and
coal production declining and domestic demand
growing, the Soviets could well have used those
resources at home. At the same time, Soviet hard
currency constraints have further enhanced the desir-
ability of exporting oil and other materials to the
West. While these potential oil revenues have de-
clined recently as the international market weakened,
East Berlin Responds and Adjusts
By 1981, the Honecker regime finally felt obliged to
redress the trade imbalance by increasing deliveries to
the USSR. The pressure from Moscow, however,
coincided with a rapid deterioration in East Ger-
many's hard currency financial position, considerably
complicating the process of adjusting to foreign ex-
change constraints. Despite higher requirements for
hard currency receipts, the regime
ordered industrial combines to increase
the USSR's priority for exports. East German eco-
nomic managers faced new penalties for failure to
fulfill export goals to the USSR
they nevertheless represent "losses" of about $3.5
billion on the 17.1 million metric tons delivered to
East Germany in 1984.
Soviet opportunity costs over the years have been
increased by the generous price and credit terms
offered East Germany. Western analysts differ sharp-
ly on the magnitude of these "subsidies, " but it is
certain that the CEMA price formula-basically a
five-year moving average of world market prices-
represented a significant Soviet price concession in
the period of rising world energy prices through the
early 1980s. This price burden has shifted in recent
years, however, as the CEMA formula price matched
and then exceeded the OPEC benchmark price. East
Germany continued to benefit from Soviet trade
credits covering East German deficits in bilateral
trade; in effect, the Soviets delivered real resources in
exchange only for bookkeeping entries on nontrans-
ferable soft currency account. Soviet statistics show a
cumulative East German deficit in 1974-84 of 3.8
billion rubles.
East Berlin's efforts resulted in declining GDR trade
deficits in most years of the early I 980s. Exports rose
19 percent in 1981, partly to offset worsening terms of
trade in the wake of the second oil price shock of
1979-80, and the deficit declined to 372 million
rubles. Efforts lagged in 1982, during the worst of
East Berlin's hard currency crisis; imports from the
USSR rose sharply and the deficit surged to 643
million rubles. A decline in growth in East German
imports in 1983 cut the trade deficit to 202 million
rubles. In 1984, exports increased nearly 12 percent
and imports climbed 10 percent, allowing East Ger-
many to close the trade gap to 114 million rubles, the
smallest in a decade.
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The pressures to balance trade continued in 1985. The
1985 protocol called for balanced trade based on
greater deliveries of high-quality East German goods.
East Berlin reported that, in the first
quarter of 1985, despite severe winter weather that
cut the growth of both industrial production and the
growth of exports to the West, exports to the USSR
exceeded plan. For the first three-quarters of 1985,
the GDR shrank the deficit to only 300,000 rubles,
according to Soviet statistics.
The tougher Soviet trade terms-and East Berlin's
efforts to meet them-have tightened the economic
partnership through a greater East German commit-
ment to the Soviet market. The GDR has boosted
trade with the USSR faster than with other parts of
the world; the Soviet share of East German foreign
trade rose from 31 percent in 1974 to 38.6 percent in
1984. Industries such as shipbuilding and consumer
goods have become more tightly bound to Soviet
customers as large Soviet orders have altered the
composition of GDR exports to the USSR. Long-term
contracts and more specialization agreements are
furthering the linkages.
Soviet pressures to close the trade gap-as well as
coincident Western financial pressures-forced the
Honecker regime to enact stringent domestic adjust-
ment measures (see appendix D). The effort to respond
to Soviet demands for consumer goods and other
industrial products, along with the need to export
more to the West, contributed to the stagnation of the
East Germans' real personal consumption in 1982-83.
The regime also had to make large reductions in total
investment and to embark on an expensive program of
energy conservation and substitution.
To accommodate Moscow, as well as to adjust to its
other external constraints, East Berlin has restruc-
tured portions of its industry, including:
? Electronics and electrical engineering, which in
recent years has been among the most favored
industrial sectors. East Germany especially is push-
ing microelectronics and robotics, accounting for
the relatively rapid growth of output in this sector in
recent years.
? Machinery, where the regime is pushing develop-
ment of more sophisticated and efficient machines,
many with microelectronic components. Honecker
has made it clear that he intends to continue to
restructure the economy along these lines and that
the sector is slated to continue to grow rapidly. In
1985, East Berlin established a new combine exclu-
sively for the production of complete manufacturing
lines.
? Consumer goods, which even heavy industrial com-
bines are now being ordered to produce. While the
regime is promising better supplies for the domestic
consumer, much will be exported to the USSR and
the West.
? Shipbuilding, where the press reports that Soviet
orders are keeping shipyards operating at capacity.
The East Germans are designing and building new
classes of vessels for Soviet customers exclusively
and are making major investments to boost produc-
tion and expand the variety of output.
? Food-processing equipment, for which the GDR
restructured its farm equipment combine in order to
support the Soviet Food Program
Growth of East German and Soviet trade is slated to
slow during 1986-90 and its composition will change.
Because the trade imbalance of the past decade has
been largely corrected, a continuation of recent trends
would move the trade balance in East Berlin's favor.
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This reversal in trade balance could repay East
Germany's accumulated trade deficits and ultimately
weaken the Soviet claims on East German exports.
Moscow's Hard Line
Moscow has talked tough about trade with Eastern
Europe during the 1986-90 plan period. In bilateral
negotiations, during the CEMA premiers' session in
East Berlin in November 1983, at the June 1984
CEMA summit, and in subsequent regular CEMA
meetings and the S&T talks, the USSR has stated
that it wants a more "balanced" economic relation-
ship. In a message that has changed little despite the
succession of party leaders in recent years, the Soviets
have stressed that continued exports of energy and
other raw materials depend on more East European
investment in Soviet development projects and that
the East Europeans must put a higher priority on
supplying the Soviet market. The Soviets have singled
out machinery, food, and consumer goods for special
attention and have emphasized quality, complaining
about the traditional East European practice of ship-
ping the best products to the West for hard currency.
The USSR's policy probably reflects concern about
prospects for its trade with the West as well as its
domestic economic problems. We expect that Soviet
hard currency oil revenues will continue to decline for
the remainder of the decade, constraining hard cur-
rency import capacity. At the same time, resource
development costs are rising sharply, and the domestic
economy remains inefficient. In these circumstances,
one of the Soviets' most attractive options is to obtain
substitutes from Eastern Europe for goods that are
unavailable at home or are purchased from the West
for hard currency.
Public statements) I on trade
negotiations indicate that Moscow believes that East
Germany-with the most highly developed industrial
base, significant research and development capabili-
ties, and probably the most politically stable regime in
Eastern Europe-is capable of delivering more of the
goods the Soviets want. The Soviets know that the
GDR has recovered from many of the economic
problems it faced in the early 1980s. East Germany's
hard currency financial position appears sound, West-
ern banks now are eager to lend, and West Germany
continues to provide a substantial flow of economic
and financial assistance. Moreover, the GDR has
managed to run surpluses in hard currency trade and
roughly balanced trade with the USSR while posting
robust economic performance-an estimated 3-per-
cent growth in GNP in 1984. Its economic and
financial strength give East Berlin more scope than
most East European governments to cope with tough-
er Soviet requirements.
The East German leadership acknowledges in public
statements that it has little choice but to meet Mos-
cow's demands. Honecker told the 9th Central Com-
mittee Plenum in November 1984, "It is necessary
continuously to ensure an attractive offer by the GDR
that corresponds to the requirements of the Soviet
economy." Premier Willi Stoph made the same point
to the legislature (Volkskammer) in presenting the
1985 economic plan: "In the next years we will even
more strongly change our production and export
structure in accordance with the demand of the
USSR."
Trade in 1986-90
The agreement on economic plan coordination for
1986-90 signed by East Germany and the USSR in
October 1985 (and the trade protocol signed 2 months
later) generally reflect Moscow's requirements for
future economic relations. Press releases indicate that
the East Germans complied with Moscow's demands
for more consumer goods, better quality machinery,
and investment in Soviet resource development. While
the East Germans apparently warded off threatened
cutbacks in deliveries of some Soviet raw materials,
Moscow did not promise major increases in its key
exports The agreement indicates that
nominal trade will grow at a much slower pace than in
1981-85. Trade of 82 billion rubles during the five-
year period is 24 percent higher than in 1981-85,
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indicating a roughly 3-percent annual growth rate
over the projected 1985 level. This is the slowest
planned growth rate in 15 years and only about one-
quarter of the actual growth in trade in 1981-84. A
leveling off-if not an outright decline in Soviet
prices is an important factor behind the slowdown in
trade growth.
East Berlin agreed to increase deliveries of some key
commodities to support Soviet domestic priorities.
The protocol calls for GDR exports of consumer goods
and chemicals to increase 40 percent and 50 percent,
respectively, over the 5-year period. The protocol also
stresses the importance of greater cooperation in
science and technology and increased trade in goods
to improve labor productivity such as computers,
electronics, robotics, numerically controlled machine
tools, and flexible manufacturing systems. According-
ly, East German exports of electrical engineering
products, computers, and information technology are
scheduled to more than double over the next five years
(see table 8).
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Table 8
East Germany: Selected Machinery Exports to the
USSR in 1986-90 a
1980-84
1981-85b
1986-90
1986-90/
1986-90/
(billion
(billion
(billion
1980-84
1981-85
rubles)
rubles)
rubles)
(percent
change)
(percent
change)
2.00
0.97
This table includes only those machinery categories for which
fairly explicit figures for 1986-90 were given in press reports.
b CIA extrapolation of 1980-84 trend.
2.33
2.40
2.67 21 6
-7
23
Announced increases in machine tool deliveries are
more modest-roughly 34 percent or just over half the
growth rate of the current five-year plan. We surmise,
however, that the slowdown reflects cutbacks in ex-
ports of conventional metal-cutting tools while ship-
ments of numerically controlled and specialized tools
will grow more rapidly. The East Germans will also
increase significantly deliveries of equipment to the
Soviet consumer goods and food-processing industries
and invest in energy and raw material projects in the
USSR.
The overall growth rate for trade is held down in part
by small increases in several traditionally important
East German exports to the USSR. Deliveries of ships
and agricultural machinery will rise only marginally
in value in 1986-90. Increases in equipment for the
chemical industry will total only 23 percent over the
period. Sales of railroad equipment are slated to
decline.
Moscow promised to at least maintain current deliver-
ies of key raw materials and energy (see table 9). The
Soviets agreed to ship 85.4 million metric tons of
crude oil, or an average of 17.08 million tons annual-
ly. The total projected over the five years is a decline
from the amount supplied in 1981-85 but equals, on
average, a continuation of the 1985 level of shipments.
The USSR will increase its sales of natural gas, coal,
and iron ore.
The East Germans probably have
prepare for these cutbacks and have the financial
resources to buy replacements in the West. While
probably more than East German planners initially
anticipated, the projected levels of energy and raw
materials deliveries will force the GDR to continue
improving the efficiency of the economy to maintain
growth.
The Soviets will deliver more manufactured goods.
Moscow promised increased deliveries of microelec-
tronic components, many of which may return to the
USSR in finished products. As part of the increased
effort in technical cooperation and production special-
ization, the USSR will deliver more machine tools
and begin supplying flexible manufacturing units. The
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Table 9
USSR: Projected Resource Deliveries to
East Germany in 1986-90
Annual
Average
Crude oil (million tons)
85.4
17.08
17.05
17.07
Natural gas (billion cubic meters)
34.5
6.9
6.412
6.167
Hard coal h (million tons)
22.5
4.5
3.98 h
3.55h
Iron ore (million tons)
8.5
1.7
1.37
1.215
Rolled steel (million tons)
16.0
3.2
NA
NA
Crude iron (million tons)
4.8
0.96
NA
NA
Cellulose (million tons)
0.49
0.098
0.80
0.86
Pulp wood (million cubic meters)
4
0.8
NA
Sawn timber (million cubic meters)
1.3
1.286
Deliveries on soft currency account.
Combined hard coal and coke.
Sources: Official East German and Soviet trade statistics and press
releases.
Soviets also will build a 2.5-million-metric-ton hot-
rolled steel mill during the period at the GDR's main
steel complex at Eisenhuettenstadt. {
Net Flow of Resources
While press reports announced some targets for trade
in 1986-90, they did not reveal the projected trends in
prices and trade balances that will determine the net
flow of resources between the USSR and the GDR.
Forecasts
through 1990, however, can only be tentative given
our limited knowledge of the details of the plan
coordination protocol and a history of midperiod
alteration in plans. Moreover, the actual outcome will
be shaped by future movements in world prices for oil
and machinery as well as by the terms of annual trade
protocols and East German investments in Soviet
resource development.
Terms of trade may turn in East Germany's favor for
the first time since the early 1970s. The price of
Soviet oil, for example, should fall if Moscow contin-
ues to adhere strictly to the CEMA price formula. If
the OPEC contract price of oil (as opposed to the
often lower spot price) collapses to $20 per barrel in
1986 and remains there through 1990, the CEMA
formula would have Soviet prices decline steadily to
$21.86 in 1990-nearly 30 percent below the 1985
price. This would reduce the USSR's export receipts
from East Germany by about I billion rubles annual-
ly. Moreover, falling oil prices would put downward
pressure on prices of natural gas and coal, and prices
of nonenergy raw materials may soften as well. Thus,
the cost of some 70 percent of Soviet exports could
well decline, a substantial gain for East Berlin. East
Germany's terms of trade would improve still further
if world prices of manufactured goods continue to rise.
The Soviets, however, apparently already are trying to 25X1
reduce, if not eliminate, the prospective improvement
in the GDR's terms of trade.
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GDR
planners, nevertheless, accepted price hikes amount-
ing to 1 billion rubles for natural resources in 1986-90
and incorporated the increases into their planning.
The extra 1 billion rubles would correspond to an
average annual price increase of 2.5 percent over the
five-year period; by comparison, East German export
prices have been rising at an estimated rate of 4.5
percent annually.
We conclude from this evidence that prices incorpo-
rated in the plan coordination agreement probably
will result in some deterioration in the USSR's terms
of trade. East Berlin may not capture all the gains due
it under strict application of the CEMA price oil
formula, but this outcome is still more favorable for
East Germany than the trend of the past decade.
Modest changes in the terms of trade imply that price
movements are unlikely to be a major determinant of
trade balances, or shifts in real resource flows, as they
were during the years of spiraling Soviet oil prices.
Even if the terms of trade are no longer moving in its
favor, the USSR can obtain more exports from East
Germany by insisting on repayment of East Berlin's
accumulated trade deficits. Repayment would be in
keeping with the CEMA principle that trade, over
time, should be in balance. Moreover, Moscow can
boost its real resources receipts under the rubric of
On balance, we believe that the plan coordination
protocol probably calls for East German surpluses,
averaging perhaps several hundred milion rubles an-
nually. Moscow has provided no recent indications
that it is concerned about receiving too much from
East Germany, and the trade imbalance issue has not
"burden sharing."
reappeared
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Soviet public statements have repeated the theme of
more goods and investment from Eastern Europe in
return for, at best, current levels of exports from the
USSR. We judge that the projected East German
surplus for 1986-90 is probably on the order of 1.5
billion rubles
The meager details of the plan coordination agree-
ment, added to what we know about prices and the
trade balance, suggest that East Germany has largely
completed adjustment of its overall trade with the
USSR to the price shocks of the 1970s. Slow trade
growth and modestly improving East German terms
of trade imply that increases in real resource deliver-
ies to the USSR are likely to be less than in recent
years even if East Berlin begins to repay its debt. If
we assume a 2-percent annual improvement in East
Germany's terms of trade and surpluses of 300 million
rubles annually, net East German exports would grow
by about 4 percent per year in real terms. By compari-
son, real net exports grew by an estimated 8 percent
annually in 1981-84 when the East Germans acceler-
ated deliveries to offset worsening terms of trade and
to reduce the deficits.
Other Burdens on the GDR
The trade accounts, however, do not measure all the
costs of meeting Moscow's requirements. With the
trade relationship now much closer to balance, the
GDR's main task is shifting from increasing deliveries
to improving the quality and composition of its ex-
ports
private consumption, will receive a declining share of
output. Furthermore, research and development tasks
arising from closer S&T cooperation could mean that
more of East Germany's own capabilities as well as 25X1
technology acquired from the West will be directed to
the needs of the Soviet economy.
The evolution of the bilateral economic relationship
set forth in the protocol will test East German
management skills, but we expect East Berlin to meet
most of its commitments. The longstanding mutual
benefits from the relationship will remain largely
unchanged. The GDR seems likely to maintain or
even increase its importance to the USSR as a
supplier of more technically advanced machinery and
better quality consumer goods than are available
elsewhere in CEMA. At the same time, the Soviets
will continue to supply most of the energy and raw
materials that undergird East German industry. Sovi-
et demands for improved quality and greater conser-
vation may even prove beneficial in the long run if
they spur the East Germans to continue improving the
efficiency of their economy and to develop new tech-
nologies useful to both countries
up in trade accounts.
Risks for the Relationship
The outlook for trade could be altered significantly,
however, by serious changes in economic conditions or
Soviet policies. If actual performance shows the
USSR's five-year domestic economic plan to be much
too optimistic, Moscow could reopen terms of the plan
coordination protocol. The Soviet decision to cut oil
deliveries in 1982, in violation of the 1981-85 trade
protocol, is a precedent. The most likely areas for
changes are further reductions in deliveries of Soviet
raw materials, additional demands on East German
industry, and Soviet requirements that may not show
Shipments of some raw materials and energy could be
curtailed if Soviet production problems increase, Mos-
cow's hard currency earnings falter, or East Berlin
fails to meet its trade and investment commitments.
Rumors have recurred in East European capitals
during the past two years that the Soviets will make
reater investment requirements-coupled with
moderate growth in real exports to the USSR-may
well mean that domestic uses, possibly including
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another cut in soft currency oil exports during the
1986-90 plan period. Another reduction of 2 million
tons would take about 350 million rubles off East
Germany's soft currency import bill at current prices,
but could cost about $300 million to replace by
purchases on the world market or from the USSR for
hard currency. Given its presently strong financial
position, East Germany could manage another cut of
this size without major difficulty, but replacement
would cost East Berlin about half of its estimated
1985 hard currency trade surplus.
Natural gas shipments could fall below projected
levels. Most of the increase in planned gas deliveries is
scheduled to begin in 1989 when the Yamburg (Prog-
ress) pipeline is completed. Deliveries may not rise,
however, if the project experiences construction de-
lays. Cutbacks in deliveries of less important natural
resources could also occur.
Steep declines in the volume of Soviet raw material
exports, particularly oil, would have serious implica-
tions for both sides. At a minimum, a large cutback
would push the USSR deeply into deficit in trade with
East Germany or weaken Moscow's claim on GDR
exports. More seriously, severe cutbacks could disrupt
the East German economy, including production for
the USSR, threaten East Berlin with a hard currency
financial crisis, and heighten the risk of political
unrest. These factors presumably would weigh heavily
against a decision to slash exports vital to East
Germany.
The Soviets could insist on additional GDR deliveries,
or ask for a shift in the composition of deliveries, in
return for maintaining exports of energy and raw
materials. Additional East German deliveries could
replace goods now obtained by the USSR from hard
currency suppliers while shielding the GDR from a
severe cutback in oil supplies brought on by oil
production problems.
increase ast
erman shipments of consumer goods in recent years,
for example, may not have been part of the 1981-85
trade protocol. Changing or increased orders probably
would be less disruptive to the East German economy
in the short run than reductions in Soviet exports, but
could force significant longer term adjustments.
Markedly increased Soviet demands on East German
industry could require more changes in the level and
allocation of East German investment, depressing the
economy's growth prospects. Increased Soviet orders
also could prove costly to East Berlin by forcing a
reduction in East Germany's trade with the West and
other CEMA countries. The Soviets presumably are
aware of these risks and would try to limit injury to
the GDR's economy except in the case of major
domestic need.
Should Soviet needs so require, Moscow might justify
new demands on the basis of greater "burden shar-
ing," insisting on additional East German contribu-
tions to:
? Defense spending. Over the longer term, the USSR
could ask East Berlin to shoulder more of the
economic cost of stationing Soviet forces in the
GDR, to increase military R&D efforts, or to
accelerate modernization of East German military
forces. East Berlin would find it very difficult to
resist Soviet requests during defense coordination
talks for more hardware procurement-much of
which comes from the USSR-if it has a significant
trade surplus with the USSR or its economic growth
and financial position remain strong. Defense spend-
ing in 1986 is slated to rise 7.7 percent, somewhat
above the growth rates of recent years, and
Honecker has publicly indicated that East Berlin
must pay some of the costs of the Soviet "counter-
deployment" of short-range nuclear missiles in East
Germany.
? Foreign aid. The Soviets could ask East Berlin to
shoulder a larger share of assistance to Third World
client states.
The amount of resources East Germany could provide
in response to such demands would not markedly
improve the Soviets' overall economic position but
could reduce Soviet costs and impose noticeable addi-
tional burdens on the East German economy.
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Appendix A
East German
Balance (million
Million current
rubles
Percent change over
previous year
Million current
rubles
Percent change over
previous year
current rubles)
946.5
NA
110.1
1,088.2
15.0
-299.9
1,235.5
13.5
-270.1
1,182.5
-4.3
44.9
1964
1,194.9
-2.6
1,246.7
5.4
-51.8
1965
1,156.2
-3.2
-1.6
-70.5
1,266.1
3.2
- 151.9
1,274.6
0.7
-3.2
13.6
1,355.8
6.4
-89.0
1969
1,565.1
15.4
-98.7
1970
1,738.1
I I.I
- 181.2
1,715.9
- 1.3
11.6
1972
2,034.7
17.8
1,670.8
-2.6
363.9
1973
2,108.9
3.6
1,856.4
I 1.1
252.5
1974
2,150.7
2.0
2,164.6
16.6
-13.9
1975
2,643.1
22.9
2,980.3
37.7
-337.2
1976
2,779.3
5.2
3,217.9
8.8
-210.8
3,661.2
13.8
-594.9
1978
3,771.2
23.0
3,982.0
8.0
-438.6
1979
3,917.0
3.9
4,216.5
5.9
-299.5
1980
4,326.6
10.5
4,873.4
15.6
-546.8
1981
5,154.6
19.1
13.4
-371.5
1982
5,776.2
12.1
6,419.6
16.2
-643.4
1983
6,595.7
14.2
6,797.8
5.9
-202.1
1984
7,367.2
11.7
7,481.4
10.1
- 114.2
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Appendix B
1950-71
0.900
1972
0.823
1973
0.739
1974
0.758
1975
0.720
1976
0.754
1977
0.737
1978
0.681
1979
0.655
1980
0.649
1981
0.719
1982
0.726
1983
0.743
1984
0.816
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Appendix C
The Financial Relationship
The East German-Soviet financial relationship con-
sists of two distinct aspects-soft currency financing
of bilateral trade in goods and services and East
German borrowing from Soviet-owned banks in the
West to help meet hard currency needs. Neither side
reports data on these financial transactions, but the
limited information available indicates that East Ger-
many's soft currency obligations to the USSR are the
larger of the two debt components.
By allowing East German deficits of 3.8 billion rubles
in bilateral trade in 1974-84, the USSR authorized
the growth of an East German debt that apparently
had been minimal previously. Estimating this debt
from cumulative trade deficits is open to challenge
because it presumably does not account for transfer
and service payments nor compensation for East
Germany's role as a Soviet surrogate in Third World
countries.
We are un-
aware of service earnings large enough to offset the
major share of the accumulated trade deficits. We
also are unsure of the terms of payment by the Soviets
for East German support of Soviet military forces in
the GDR; the expense of some of these activities may
be borne entirely by the GDR. We believe that most
financial obligations stemming from military-related
trade are implicitly counted in the trade balances
under the "residual" and unspecified "machinery"
of East Germany's debt to the USSR. We believe tha25X1
this debt is almost entirely in soft currency because
there does not appear to be any significant amount of
hard currency trade between the two countries.
We estimate that East Germany's outstanding hard
currency borrowing from Soviet-owned banks in the
West totaled roughly $200 million to $300 million in 25X1
late 1985. This almost certainly represented a sub-
stantial reduction from the levels of a few years
earlier.
trade accounts.
East Berlin's debt could be lower than 3.8 billion
rubles if capital flows and labor services for East
German investment in natural resource projects in the
USSR are not captured in the trade statistics. At least
some of the East German deliveries for the Orenburg
gas pipeline project, however, were counted in Soviet
imports. Thus, we think the summation of trade
deficits gives the best-albeit rough-approximation
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Appendix D
East German Adjustment to
Soviet Pressures
Soviet demands for a reduction in East Germany's
trade deficit, coupled with Western financial pres-
sures, forced the Honecker regime to enact stringent
domestic adjustment measures. While depressing liv-
ing standards and dislocating investment plans, we
believe these measures helped to improve the efficien-
cy of the East German economy, including a reported
2.3-percent decline in unit production costs in 1984
and a 2.5-percent reduction in 1985.
Reduction in Soviet energy supplies and rising prices
prompted the regime to impose conservation meas-
ures-largely by reducing fuel allocations-while en-
couraging increased usage of domestically produced
lignite. The regime devoted 78 percent of investment
in industry to the energy sector in 1984, according to
State Planning Commission chief Schuerer. As a
result, lignite's share of East Germany's primary
energy consumption rose to 72 percent in 1984 from
54 percent in 1980
The oil constraint prompted East Berlin to shift its
transportation mix markedly. The regime accelerated
its rail electrification program-from 93 kilometers in
1980 to a projected 300 kilometers in 1985 in order
to save diesel fuel. The regime also pushed the use of
inland water transportation and issued strict new
regulations on the use of motor vehicles; the reserve of
idled vehicles probably contributed to the sharply
lower East German purchases of Soviet motor vehicles
in recent years. The result has been a 23-percent
reduction in tonnage hauled by motor vehicles be-
tween 1980 and 1984.
East Germany's external adjustment forced tough
choices in division of an investment pie that shrank
2.6 percent in nominal terms during the period 1980-
84. The share of investment in national income
dropped from 22.7 percent to 16.9 percent as the
regime postponed imports of capital goods in order to
redress the trade imbalance. The share of investment
devoted to industry grew largely because of efforts to
modernize facilities, develop and conserve energy, and
meet new Soviet demands-while the shares going to 25X1
construction, agriculture, domestic trade, and "non-
productive" sectors such as government declined.
At the same time, increasing Soviet demands for East
German consumer goods cut the supply available for
domestic use. This factor, along with the need to
export more to the West, has caused a stagnation of
East German real personal consumption in recent
years. We estimate that personal consumption de-
clined absolutely in 1982 after years of consistent
increases, and that real growth has been modest in
1983-85.
The changing bilateral economic relationship has
affected East German economic activities with other
countries, particularly by forcing the regime to look
elsewhere for needed supplies. East Berlin has:
? Expanded its use of barter and countertrade. East
Berlin has, for example, boosted imports of oil from
Iran and Iraq in return for greater deliveries of
military and military-related goods, including
trucks. Oil imports from non-Soviet sources reached
6.2 million tons in 1984, up from 2.9 million tons in
1980, and accounted for over one-fourth of oil
imports, the highest percentage ever.
? Sought alternative suppliers, including international
commodity markets, for a broad spectrum of other
commodities.
The East Germans,
for example, have sought manganese ore from
Ghana -a metal the Soviets have threatened to cut.
While East Berlin has signed some agreements, it
also has been rebuffed by LDC's, such as Indonesia,
apparently wary of East Germany's political links to
the USSR.
? Used the intra-German "special relationship" where
possible to acquire alternative supplies.
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Table 10
East Germany: Imports of Selected
Commodities From the USSR
Crude
Oil
(thousand
tons)
Natural
Gas
(million
cubic
meters)
Bituminous
Coal ,
(thousand
tons)
Bituminous
Coal
Coke
(thousand
tons)
Iron
Ore
(thousand
tons)
Steel
Bars
(thousand
tons)
Steel
Shapes
Rails and
Accessories
(thousand
tons)
Rolled
Steel
Sheet
(thousand
tons)
Phosphate
P.O,
(thousand
tons)
Cut
Wood
(thousand
cubic meters)
Cotton
(thousand
tons)
Cellulose
Acetate
(thousand
tons)
1970
9,233
0
3,471
1,520
1,510
336
369
572
449
1,439
97.3
42.9
1971
9,754
0
42252
1,321
1,540
383
361
531
448
1,386
83.8
45.4
1972
11,213
0
4,272
1,082
1,558
391
478
457
453
1,405
82.0
31.5
1973
13,025
NA
4,801
1,065
1,531
414
329
497
431
1,308
79.8
32.9
1974
14,134
2,900
4,219
1,020
1,494
457
314
467
239
1,707
90.8
31.1
1975
15,097
3,226
4,411
1,076
1,581
406
333
436
473
1,871
87.6
28.0
1976
16,012
3,369 h
4,089
1,085
1,355
397
315
499
477
1,166
68.3
20.1
1977
17,007
NA
4,310
1,088
1,559
388
347
541
430
1,539
156.2
21.5
1978
17,760
3,601 n
3,910
960
1,382
352
330
488
363
1,471
73.8
17.2
1979
18,536
4,400 n
4,456
903
1,531
285
331
464
451
1,224
66.9
13.8
1980
19,011
6,431
3,376
1,156
1,679
232
322
517
460
1,290
87.2
15.3
1981
19,036
6,265
2,615
1,261
1,866
269
332
512
394
1,440
76.6
10.6
1982
17,709
6,391
2,897
1,055
1,550
250
274
475
416
1,427
90.8
75.3
1983
17,051
6,412
2,958
1,025
1,369
249
227
479
419
1,286
77.9
80.0
1984
17,068
6,167
2,399
1,153
1,215
211
235
473
425
1,366
86.7
85.9
Much of these deliveries originate in Poland but are credited to
Soviet account under a complicated trilateral trade arrangement.
b Estimated.
Source: Statistisches Jahrbuch der Deutschen Dentokratisehen
Republik, various years, Soviet statistics.
Declassified in Part - Sanitized Copy Approved for Release 2012/03/06: CIA-RDP08SO135OR000601980002-2
 Declassified in Part - Sanitized Copy Approved for Release 2012/03/06: CIA-RDP08SO135OR000601980002-2
Secret
Secret
Declassified in Part - Sanitized Copy Approved for Release 2012/03/06: CIA-RDP08SO135OR000601980002-2