IMPLICATIONS OF THE DECLINE IN SOVIET HARD CURRENCY EARNINGS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP08S01350R000300860003-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 18
• Document Creation Date: December 22, 2016
• Document Release Date: March 20, 2012
• Sequence Number: 3
• Publication Date: September 1, 1986
• Content Type: NIE

Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08SO135OR000300860003-8
IJIrv 1V[ Vl ;3ecrei
Central 25X1
Intelligence
FA-
Implications of the Decline
in Soviet Hard Currency Earnings
Secret
NCE 11-23-86
September 1986
Copy 4 9 9
Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08SO135OR000300860003-8
 Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08S01350R000300860003-8
THIS ESTIMATE IS ISSUED BY THE DIRECTOR OF CENTRAL
INTELLIGENCE.
THE NATIONAL FOREIGN INTELLIGENCE BOARD CONCURS.
The following intelligence organizations participated in the preparation of the
Estimate:
The Central Intelligence Agency, the Defense Intelligence Agency, the National Security
Agency, the intelligence organization of the Department of State.
Also Participating:
The Assistant Chief of Staff for Intelligence, Department of the Army
The Director of Naval Intelligence, Department of the Navy
The Assistant Chief of Staff, Intelligence, Department of the Air Force
The Director of Intelligence, Headquarters, Marine Corps
Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08S01350R000300860003-8
 Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08S01350R000300860003-8
SECRET
N I E 11-23-86
IMPLICATIONS OF THE DECLINE
IN SOVIET HARD CURRENCY EARNINGS
Information available as of 12 September 1986 was used in
the preparation of this Estimate, which was approved by the
National Foreign Intelligence Board on that date.
Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08S01350R000300860003-8
 Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08SO135OR000300860003-8
SECRET
CONTENTS
Page
SCOPE NOTE ...................................................................................... 1
KEY JUDGMENTS .............................................................................. 3
DISCUSSION ........................................................................................ 7
Declining Export Earnings ............................................................... 7
Options and Constraints ................................................................... 8
The Soviet Strategy ........................................................................... 10
Gauging the Import Cuts ................................................................. 10
Alternative Scenarios ........................................................................ 12
Foreign Policy Implications ............................................................. 13
w
SECRET
Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08SO135OR000300860003-8
 Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08S01350R000300860003-8
SECRET
SCOPE NOTE
This Estimate looks at the implications through 1990 of the decline
in hard currency purchasing power of the Soviet Union. The key issues
are (a) the extent of the decline, (b) how Gorbachev will deal with the
shortage, and (c) how Gorbachev's tactics will affect foreign relations
and domestic spending priorities. A major variable is the price of oil,
which is assumed to be $18 per barrel throughout the period for the av-
erage blend of Soviet crude oil and refined product exports. This is
equivalent to $15 per barrel for benchmark global crude oil prices such
as Saudi light.
t
SECRET
Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08S01350R000300860003-8
 Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08S01350R000300860003-8
SECRET
KEY JUDGMENTS
We expect Soviet hard currency export earnings during the period
1986-90 to average roughly 30 percent below those attained over the
last several years-when favorable raw material prices allowed the
Soviets to import record quantities of agricultural goods and Western
equipment and technology:
- The decline in Soviet purchasing power will be even greater,
amounting to a 40-percent reduction compared to the early
1980s because of the lower value of the dollar, in which about
two-thirds of Soviet exports are denominated.
In an attempt to limit the impact of these coming declines on the
domestic economy and on Moscow's policies abroad-especially Eastern
Europe and the USSR's Third World clients-the Soviets are cutting
back on a wide range of foreign purchases. The range and nature of the
cuts indicates Moscow is still in the process of developing priorities for
spending its limited earnings.
Should the drop in purchasing power of exports remain in fact on
the order of 40 percent during the period 1986-90, we expect the Soviets
to take some measures to improve earnings and gradually evolve a set of
priorities to allocate scarce hard currency among nonstrategic domestic
needs:
- They will be likely to raise the inflow of hard currency by
increasing foreign borrowing-perhaps $1-2 billion per year-
and boosting gold sales. These and other less significant mea-
sures would only replace a small portion of lost revenues,
however, and import capacity would still drop by one-third
from the 1984 level.
- On the import side, nonstrategic purchases will be cut by:
- Reducing expenditures on consumer goods and agricultural
imports, the latter made easier by the continuing world grain
glut that depresses world prices.
- Cutting imports of machinery and equipment deemed not
vital to modernization.
- Scaling back purchases of turnkey projects.
The Soviets also will make a major effort to convince Western firms to
accept more barter and buyback arrangements.
3
SECRET
Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08S01350R000300860003-8
 Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08S01350R000300860003-8
The impact of such cutbacks on broad gauge economic measures
such as overall growth and labor productivity will not be significant.
Nevertheless, the foreign exchange limitation poses a serious challenge
for Gorbachev both in terms of internal discussions over allocation of
scarce resources and as a constraint in responding to any other
economic setbacks, at least some of which, in all probability, will take
place in the next few years.
Each setback would require an offsetting, and, in some instances,
painful response:
- A resumption of the decline in oil output would compel
Gorbachev to take some combination of measures-further
reduction in imports, additional cutbacks in oil deliveries to
Eastern Europe, and/or reductions in oil deliveries to the
domestic market. An alternative view, held by the Director,
Defense Intelligence Agency, holds that the Soviets will not be
forced to reduce oil consumption whether or not oil production
declines or is maintained at current levels. For a complete
discussion of this view, see footnote 2 on page 8 of this Estimate.
These differences of view, however, do not materially affect the
magnitude of the decline in Soviet purchasing power:
- One or more poor harvests would force choices between badly
needed Western machinery and grain imports.
- Failure of the economy to deliver adequately the machinery for
modernization would result in more pressure to import, espe-
cially from Eastern Europe, to make up the deficiency.
We do not believe the hard currency constraint will spur a major
shift in foreign policy or significant moves toward economic reform.
Nevertheless, the need for Western credits and high-technology goods
will encourage Moscow to consider Western attitudes, particularly those
of Western Europe and Japan, when formulating foreign policy,
resulting in some new initiatives to improve relations. New initiatives
toward China in hopes of promoting barter trade are also likely to
occur. The hard currency constraint will force the leadership to make
tough choices among resource claimants, will create problems in
relations with Eastern Europe, and will undermine Gorbachev's "hu-
man factors" campaign by failing to improve living standards:
- Unlike Brezhnev, who used hard currency to paper over
agricultural failures, Gorbachev would have to ask consumers to
sacrifice if faced with a bad harvest in order to maintain
important machinery imports.
4
SECRET
Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08S01350R000300860003-8
 Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08S01350R000300860003-8
SECRET
- Even though we do not expect substantial aid cutbacks to key
client states, the Soviets will be likely to become more niggardly
in their aid programs and Gorbachev will most likely call for
improved economic performance on the part of the clients
when the aid is not being well used.
- Also, we can expect Gorbachev to be more demanding for
machinery deliveries from Eastern Europe as setbacks to his
modernization program occur.
The timing and seriousness of these pressures depend in large
measure on factors beyond Gorbachev's control such as weather-related
domestic agricultural problems and global oil and grain prices. Should
oil prices decline once again and remain in the $10 per barrel range,
deep cuts would be needed in imports of agricultural goods and
machinery. On the other hand, events that would raise significantly the
price of oil-such as a major disruption of Persian Gulf oil supplies-
could boost Moscow's import capacity substantially above our baseline
projection and alleviate Soviet problems. Other events-particularly
related to higher prices and increased demand for Soviet gold, plati-
num-group metals, and diamonds-could also boost Soviet import
capacity substantially.
Although the hard currency dilemma is unlikely to cause Moscow
to be conciliatory enough to achieve major breakthroughs in East-West
negotiations, the initiatives that Moscow is likely to undertake will have
some impact on US policy interests:
- Soviet attempts to maximize hard currency earnings, particular-
ly from arms sales, will result in a more aggressive search for
markets in Third World countries.
- The Soviets also will be tempted to supply more state-of-the-art
weaponry to secure sales, a tactic that will be likely to spur
sharp internal debate.
- The Soviet desire to expand export markets and tap internation-
al financial markets will lead them to press more aggressively
for greater participation in the international economic arena,
exemplified by recent overtures to GATT.
- Added pressures on the East Europeans to aid Moscow will
exacerbate economic, political, and social problems in the
region.
- Moscow's difficulties in earning hard currency raise the oppor-
tunity costs of aiding its client states and may reduce prospects
for new economic aid to non-Communist LDCs.
5
SECRET
Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08S01350R000300860003-8
 Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08SO135OR000300860003-8
DISCUSSION
Declining Export Earnings
1. From the mid-1970s through 1984 the Soviets
benefited from a substantial rise in hard currency
export earnings spurred by high dollar prices for
energy. Their foreign purchasing power was further
enhanced by the decline of the West European cur-
rencies against the US dollar in the latter part of this
period. Most hard currency imports are purchased in
Western Europe at national currency prices, and the
bulk of Soviet exports are sold for dollars. This peak
allowed the Soviets to import record amounts of grain
and food to cover a string of poor harvests and to
import Western equipment and technology. The
favorable hard currency position was one of the few
bright spots in an economic picture otherwise clouded
by slowing growth and low productivity, a growing
technology gap with the West, and a heavy defense
burden.
2. That strong position has changed radically over
the last year. Moscow's favorable trade position began
to deteriorate in 1985, the result of reduced earnings
from both oil exports (lower prices and lower volume)
and arms sales. We expect Soviet hard currency
earnings in 1986 to total only $23-26 billion, compared
with a peak of $34 billion in 1984, as energy prices are
expected to remain depressed. The accident at Cher-
nobyl will add to the hard currency problem as the
Soviets are forced to use oil-fired power to make up
for electricity shortages in peak demand periods and
to compensate for generating capacity lost over at least
the next year or two during shutdown and modifica-
tion of other nuclear reactors.'
3. Although there naturally exists great uncertainty
surrounding projections of international commodity
and foreign exchange markets, we believe that for the
rest of the decade Moscow's hard currency export
earnings will average roughly 30 percent below the
level of recent years:
- Surplus capacity in oil worldwide will keep
downward pressure on prices throughout the rest
of the 1980s.
Figure 1
USSR: Hard Currency Trade,
1970-86
Exports
Imports
I I I I I I I I I I I I I I I I I
85 86
Est.
- An increase in gas sales will only partially com-
pensate for falling oil revenues because the price
of gas-following that of oil-will limit gas
revenues.
- Arms exports will also be likely to remain
depressed as long as low oil prices limit the
ability of oil exporters in the Middle East to
import goods.
- Attempts to increase exports of other nonoil
items-such as machinery and equipment, tim-
ber, and other raw materials-are likely to have
limited success given generally weak demand for
raw materials and Western resistance to shoddy
Soviet-manufactured items.
Moreover, the low value of the dollar vis-a-vis other
Western currencies will reduce the value of Soviet
exports, because about two-thirds of their exports are
7
SECRET
Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08SO135OR000300860003-8
 Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08SO135OR000300860003-8
denominated in dollars, while roughly 70 percent of
Soviet imports are purchased with other hard curren-
cies. This amounts to about a 40-percent reduction in
Soviet purchasing power during the period 1986-90
compared to the early 1980s. Although there is some
disagreement within the Community about the future
path of Soviet oil production and demand,2 the differ-
ences materially do not affect the magnitude of the
decline in Soviet purchasing power, which is driven
primarily by price changes
Options and Constraints
4. The Soviets have a variety of policy options that
could reduce the impact of the downward trend in
export earnings on their capacity to import, but
numerous constraints-economic, political, and strate-
gic-will limit their ability to exercise these options to
mitigate the effect of the earnings decline. Moreover,
' The Director, Defense Intelligence Agency holds an alternative
view that the Soviets can continue to produce oil at current or
slightly higher rates, continue to reduce domestic oil demand, and
maintain or increase hard currency exports of oil throughout the
rest of the decade:
- If, as expected, current investment priorities are main-
tained, the Soviets will be in an excellent position to
maintain current levels of production because the energy
industry remains strong and Soviet oil reserves are more
than adequate. Because of hard currency shortages, howev-
er, the focus of investment will be the domestic production
of required equipment. The Soviets will also continue to rely
on soft currency purchases of supplies from Finland and
East Europe, particularly for exploration and development
of the Arctic offshore areas. Because hard currency energy
imports will not be a high priority, relatively minor develop-
ment projects, such as in the Pre-Caspian area, have been
postponed.
- This view further holds that the Soviets will make every
effort to gain additional oil through the continuation of
their substitution and conservation programs, which have
already allowed them to reduce domestic demand by about 2
percent since 1982. Considerable opportunities still remain
for substitution of gas for oil, which could free yet another
90-110 million metric tons. It is not likely that the Soviets
would force additional reductions in demand beyond cur-
rent programs in response to any future economic setbacks.
- This view further holds that the Soviets appear to be in an
excellent position to expand oil exports through 1986 (be-
cause of the current production increase) and to maintain
this level over the next several years. The Soviets would most
likely reduce oil exports to Eastern Europe if they needed
still more oil. Such a reduction would not significantly
disrupt the East European economies because they should be
in a position to absorb a substantial amount of Soviet gas
exports through the major "Progress" gas pipeline, which
should be fully operational by the late 1980s. Furthermore,
this view holds that the Soviets will not have to, nor would
they want to, divert oil from hard currency exports to oil-
fueled powerplants to make up for lost production from
Chernobyl and the resulting shutdown of similar nuclear
Assumptions Underlying Projections of
Soviet Hard Currency Balance of Payments
Export Projections
- Oil exports fall from 1.3 million b/d in 1986 to
800,000 b/d by 1990. An alternative view holds
that oil exports will probably remain at this 1986
level or be slightly higher for the remainder of the
decade. a
- Gas exports rise from 33 billion cubic meters in
1985 to 48 billion cubic meters in 1990.-
- Real arms sales show no growth during the period
1986-90 after dropping an estimated 30 percent in
1985.
- Real nonenergy, nonarms exports are held
constant.
- Real net earnings from invisibles (excluding inter-
est) remain constant. (c NF)
Price Projections
- The overall annual inflation rate applicable to
exports and.imports is 3 percent during the period
1986-90.
- Nominal oil prices decline from $28 per barrel for
the mix of crude and petroleum products exported
to hard currency countries in 1985 to an average
of $18 per barrel in 1986-90.
-Nominal gas prices drop from the 1985 level of
$119 per thousand cubic meters to an average
price of $84 in 1986-90.
- The nominal gold price grows at the rate of
inflation from its current price of about $400 per
ounce.
- Interest rates average about 9 percent.
- The average repayment period is eight years on
Western government-backed credits and five
years on medium- and long-term commercial
credits.
- The dollar depreciates 30 percent by 1990, with
much of the decline occurring in 1986. (c NF)
some measures will have only long-run benefit, pro-
viding little relief within the current five-year plan-
ning period-a crucial testing period for Gorbachev's
leadership and his modernization program.
5. Moscow is in an excellent position to tap West-
ern credit markets. The USSR is in a healthy financial
8
SECRET
Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08SO135OR000300860003-8
 Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08SO135OR000300860003-8
Soviet Oil Production and Domestic Demanda
The substantial increase in investment in the oil
industry since 1985 has increased production, but this
effort can increase output only temporarily. Depletion
and rising resource costs of sustaining production will
outrun the capability to introduce capacity, resulting in
a decline in output, probably before the end of this
decade. The Barents Sea may hold considerable poten-
tial, but any sizable commercial production from this
area is unlikely to occur before the 1990s.
Domestic demand for oil during the period 1986-90 is
likely to remain close to 9 million b/d. Although there is
room for additional substitution of gas for oil mo of
the easy changes have already been made.
position in terms of the balances; it has about $12
billion on deposit in Western banks, its hard currency
debt was about $26 billion at the end of 1985 (a net in-
crease of $4 billion from yearend 1984), and it has a
very high credit rating. Moscow will become even
more creative in the use of international financial
instruments such as bonds and currency and interest
rate swaps, which would lower borrowing costs and
cut potential losses as exchange and interest rates
fluctuate. Moscow will remain judicious in interna-
tional financial matters, however, and will be reluc-
tant to become overly dependent on Western banks
and their governments. A large drawdown in assets
would mean giving up a cushion of reserves that could
be used to finance key imports such as grain in bad
harvest years.
6. The Soviets also have some flexibility with regard
to gold sales. They have an estimated 2,800 tons of
gold (worth roughly $13 million per ton at the current
price of about $400 per ounce) in reserve and annual
production of 340 tons. By using the physicals market,
the futures markets, and direct bilateral sales, the
Soviets probably could sell as much as 450 tons in 1986
without causing a major price decline. Should they
increase sales for several years at that rate, however,
they would risk driving the price down substantially.
Annual world supply of new gold, both for industrial
use and for investment and stockpiling, is fairly con-
stant at roughly 1,500 tons per year. If traders and
gold consumers believed that the USSR intended to
begin selling larger amounts on a continual basis, this
would cause substantial downward pressure on the
price and reduce Soviet proceeds from the sales.
7. The USSR could put pressure on Eastern Europe
to reduce further its imports of Soviet oil or to increase
its exports to the USSR above planned levels. Howev-
er, changes of the order of magnitude required to
provide substantial relief to the Soviets are not likely to
occur:3
- Large cuts in oil deliveries, which force Eastern
Europe to look westward for supplies and financ-
ing, would run counter to Moscow's policy to
expand intra-Bloc trade.
- Such cuts also risk undermining the hard-won
political stability achieved by these regimes in
recent years.
- The Soviets also would find it difficult to wrest
substantial increases in exports from Eastern
Europe because falling oil prices will bring Soviet
trade deficits with the region toward the end of
the decade.
- Moreover, most East European trade is comple-
mentary to, not a substitute for, hard currency
purchases.
8. Most of the Soviets' other short- to mid-term
options are extremely limited. The Soviets will attempt
to increase arms sales, probably by offering state-of-
the-art equipment, but financial difficulties in the
OPEC countries will limit Moscow's ability to increase
earnings in this way. Moscow will be likely to barter
arms for increased deliveries of Libyan oil but even
here we expect the amounts involved to be rather
small. Moscow also may increase its efforts to negotiate
barter arrangements, particularly with the LDCs, for
desired agricultural commodities. Faced with financial
problems of their own, the LDCs may become more
receptive to such Soviet overtures. The Soviets will
take advantage of opportunities to expand their soft
currency grain purchases with countries such as India
and China.
9. In a move with longer term payoff, Moscow
could alter the nature of its relationship with West-
ern firms in order to enhance the effectiveness of
imported technology and equipment. Before the sharp
downturn in oil earnings, Soviet officials had expressed
interest in joint ventures entailing Western profit
sharing and managerial presence. Also considered
were closer engineering and production consultations
with Western firms and the creation of more training
facilities with Western participation. Traditional
Soviet suspicion of a foreign presence and continued
9
SECRET
Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08SO135OR000300860003-8
 Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08SO135OR000300860003-8
concern over US export controls will limit Soviet
actions in these areas. Moreover, Western businessmen
are likely to react cautiously to Soviet proposals calling
for coproduction and profit sharing.
The Soviet Strategy
10. The Soviets have not yet implemented and most
likely have not yet fully developed a long-term strate-
gy for dealing with the decline in hard currency
earnings. Moscow responded at first to reduced export
earnings by increased borrowing and gold sales. In
1985 it took advantage of favorable borrowing condi-
tions to build its assets to a level about $2 billion higher
than at yearend 1984. For most of the year it contin-
ued to negotiate and sign major contracts with West-
ern firms for projects to be constructed during the
period 1986-90. Then, in late 1985 Soviet purchasing
activity began to slow, and by early 1986 there were
sweeping cutbacks in purchases. The major emphasis
so far has been on cutting and delaying equipment
orders rather than reducing purchases of other items-
agricultural products and intermediate goods-needed
to meet current output and consumption targets.
5-percent reduction in oil exports to its Commu-
nist allies would enable Moscow to earn an
additional $1 billion over the period 1986-90
from increased exports to the West.
- Efforts to maximize hard currency earnings from
arms sales.
- Attempts to expand participation by Western
firms in Soviet development projects, perhaps to
include production-sharing arrangements.
Under this strategy, we estimate that annual average
hard currency import capacity will fall to $18.5 billion
during 1986-90-a cut of one-third from the 1984
level. The alternative assumption" on oil exports would
yield an import capacity of $19.9 billion during 1986-
90. In any case, the Soviets will need to continue
selective reductions of imports
12. We do not believe that, within the 1986-90 time
frame, the Soviets will see major economic reform
designed to improve economic efficiency as a viable
option for eventually reducing the need for imports. In
the short run, decentralizing reforms that give factory
managers the power to make decisions on imports
would be likely to increase the demand for imports.
Moreover, the political and economic ramifications of
11. We believe that over the next year or so the
Soviets will develop a longer range and relatively
conservative strategy to minimize the impact of the
decline in hard currency earnings. This strategy will
include elements of present ad hoc measures as well as
some new initiatives. The major elements of this
strategy will be:
- An average annual increase in international bor-
rowing of perhaps $1-2 billion, which would raise
the debt-service ratio from the present 19 to 20
percent to about 30 percent. This would repre-
sent a somewhat less conservative strategy than
in the past but would still allow room for addi-
tional loans to cover events such as a harvest
disaster.
- A drawdown in assets in Western banks by as
much as $4 billion from the current $12 billion.
A drawdown of this magnitude would not seri-
ously jeopardize their liquidity position.
- Increases in gold sales from recent levels of 100
to 200 tons to 300 tons annually. Sales of this
magnitude seem possible without a major effect
on gold prices.
- Efforts to push the East Europeans to absorb a
reduction in oil deliveries over the next few
years, especially if world oil prices remain low. A
serious, systemic reform-alienation of the bureaucra-
cy, economic dislocations, reduced control over re-
sources for military production-would seriously cir-
cumscribe Gorbachev's initiatives in this area.
Gauging the Import Cuts
13. Consumer-related purchases are likely to be cut
back the most. A Soviet official recently remarked that
consumer goods imports from the West would be
practically eliminated this year. Spending for agricul-
tural imports could absorb a major part of the reduc-
tion relatively easily, given a scenario of average
weather, improved agricultural practices, and a con-
tinued world grain glut, which depresses agricultural
prices. Each 1 million ton reduction in wheat imports
saves the Soviet Union $100 million at current prices.
Assuming the value of total hard currency agricultural
imports is cut by roughly 50 percent from the 1981-85
level, some growth in farm products per capita would
still be possible, although at rates below the 1986-90
goals.
14. Moscow will be extremely selective in reducing
imports of machinery. Although hard currency im-
ports of machinery supply only about 10 percent of
Agency.
10
SECRET
25X1
25X1
Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08SO135OR000300860003-8
 Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08SO135OR000300860003-8
Figure 2
USSR: Grain Production and Imports
a Gross grain production minus deduction for
excess moisture, and extraneous matter.
1970- 71-2 72-3 73-4 74-5 75-6 76-7 77-8 78-9 79-80 80-81 81-2 82-3 83-4 84-5 85-6
71
Crop years
1970- 71-2 72-3 73-4 74-5 75-6 76-7 77-8 78-9 79-80 80-1 81-2 82-3 83-4 84-5 85-6
71
Crop years
Grain
production (net)"
11
SECRET
Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08SO135OR000300860003-8
 Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08SO135OR000300860003-8
Soviet Dependence on Western Machinery
Although imports of Western machinery and equip-
ment account for only about 10 percent of total Soviet
investment in machinery and equipment, these imports
have been carefully selected to meet the needs of
priority sectors of the economy. Since 1980, purchases
for the chemical, energy, and metallurgical sectors have
accounted for almost 70 percent of total Soviet orders of
machinery and equipment
The Soviets often complain that they have been
disappointed with the results of Western machinery,
but the degree of success in using such imports often
depends on whether they must be interfaced with
Soviet-built machines or can be used in a stand-alone
manner (for example, turnkey plants). The latter have
contributed substantially to growth in output and en-
hancement of technology in selected industries, notably
chemicals, automotive and truck, pulp and paper, and
several defense-oriented machine-building industries.
Imports of Western technology have helped the
Soviets overcome some shortcomings in their tech-
nology:
- In the steel sector, purchases of Western technol-
ogy for rolling operations and pipe production
have been particularly important.
- In the chemical sector, Western imports have
provided key technologies for the production,
handling, and storage of fertilizers and for produc-
tion of plastics and synthetic fibers.
- In the oil and gas sectors, recent imports of such
items as Western pipe, pipelayers, offshore drilling
equipment and technology, and well-completion
equipment have provided substantial aid to Soviet
oil and gas development. Looking a few years
ahead, the Soviets will be in the market for
corrosion-resistant pipe and other production and
processing equipment for Astrakhan, Karacha-
ganak, and Tengiz.
- The acquisition of a Japanese drydock gave an
added capability to Soviet ship-repair facilities.
total investment, they are important to key sectors
critical to the modernization program (see box). We
believe top priority will be given to imports of energy-
related equipment 5 and advanced machine tools.
Without Western imports, development of the Pre-
Caspian oil basin would be further delayed, as would
exploration and development of the Arctic offshore
areas.
Defense Intelligence Agency.
15. We believe Moscow will cut some machinery
imports as long as the cuts do not seriously jeopardize
Gorbachev's industrial modernization program. The
Soviets have recently canceled or reduced five con-
tracts for large chemical complexes. Import cuts for
the pulp and paper and cement industries also might
be made. The Soviets could take a variety of actions
that would minimize the cuts in machinery imports.
For example, they will continue to push for more
buyback and barter arrangements. Expensive, turnkey
projects will likely be scaled back, with the Soviets
providing more of the civil engineering work and
plant infrastructure themselves. The Soviets could save
additional foreign exchange by selectively cutting
imports of industrial materials without causing serious
bottlenecks.
16. Soviet weapons producers will be relatively
unaffected directly by the decline in import capacity,
whatever its size. Soviet imports of Western equip-
ment to help modernize their defense industrial base
probably peaked in the mid-1970s to early 1980s, and
now established weapons plants will support the great
majority of planned Soviet military procurement over
the next decade. Moreover, weapons producers in most
cases do not depend on Western production equip-
ment or components. Most Soviet weapons industry
acquisitions of such items from the West have been
one-time, relatively small purchases rather than con-
tinual or plant-scale purchases. Moreover, the priority
the Soviets traditionally accord this sector will most
likely protect defense-related imports.
17. Because trade is a small component of Soviet
GNP and critical imports will not be sacrificed, we
estimate that average annual GNP growth in the 1986-
90 plan would be reduced by about one-tenth of a
percentage point out of our total projected growth rate
of about 2 to 3 percent per year if the Soviets follow
this scenario. Even so, the cutbacks will be a signifi-
cant problem for Gorbachev because they limit severe-
ly the flexibility of Moscow to respond to shortfalls in
key sectors. Increased inputs of Western automated
equipment, for example, would be useful in meeting
Gorbachev's goals of improving efficiency in machin-
ery use and boosting productivity in the Soviet econo-
my. Also, unlike Brezhnev, Gorbachev will not be able
to use grain imports to increase the availability of meat
if his program to improve the efficiency of livestock
feeding falls short of goals.
Alternative Scenarios
18. Lower oil prices and/or adverse weather would 25X1
change this picture dramatically, forcing the regime to
make tough choices about the relative priorities of its
12
SECRET
Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08SO135OR000300860003-8
 Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08SO135OR000300860003-8
Figure 3
USSR: Average Annual GNP Growth
by Five-Year Period a
1951- 56-60 61-65 66-70 71-75 76-80 81-85
55
modernization and consumer goals. Crude oil prices of
around $10 per barrel for the rest of the decade could
reduce Moscow's annual hard currency import capaci-
ty to $10-12 billion versus our projection of $18.5
billion. Weather approximating the unfavorable con-
ditions that existed during the period 1961-65 would
slow growth in farm output and raise agriculture
import costs considerably. In this case, hard currency
cutbacks could not fall largely on agricultural imports
from the West without jeopardizing per capita avail-
ability of several quality foods such as meat, vegetable
oil, and sugar. Moscow could only partially compen-
sate for this shortfall by importing more meat from
such soft currency suppliers as Eastern Europe and
Mongolia.
19. Increased expenditures on grain could force
deep cuts in machinery imports from the West and
have serious consequences for Gorbachev's moderniza-
tion program. The program's lofty goals-when
matched against a realistic assessment of the capabili-
ties of domestic industries-imply that some highly
specialized imports from the West for such sectors as
energy, microelectronics, and telecommunications
must be continued, if not increased. Similar cuts in
other industry-related imports could exacerbate al-
ready taut production schedules, threatening other
aspects of Gorbachev's plan to accelerate economic
growth. Shortages of needed intermediate goods and
spare parts that have been imported in the past to
prevent bottlenecks could slow or even temporarily
halt production in some enterprises. Imports of spe-
cialty steels, in particular, are important to a number
of sectors of the economy, including machine building.
In addition, some sectors of the chemical industry
require imports of key ingredients such as superphos-
phoric acid. Imported replacement parts are regularly
needed in the energy and mining sectors for pipelayers
and heavy earthmoving equipment
20. On the other hand, a substantial rise in world
raw material prices could bolster Moscow's hard cur-
rency position. For example, if world oil prices quickly
recover to $20 per barrel, Moscow's annual import
capacity would be almost $2 billion higher than the
$18.5 billion projection. Similarly, the Soviet trade
position could be changed by effective sanctions on
South Africa or internal disruptions there that would
reduce the supply of gold, diamonds, and platinum-
group metals on international markets. We estimate
that the combined effect of higher prices and larger
Soviet exports of these commodities, particularly gold,
could boost Soviet import capacity substantially over
the projection.'
Foreign Policy Implications
21. The hard currency dilemma is only one of
many pressing economic problems faced by the lead-
ership. We believe that, at present, the Soviet leader-
ship does not view it as sufficiently important by itself
nor intractable enough to effect major changes in
foreign policy areas, nor does the situation provide the
West with large opportunities for leverage.
22. Moscow's economic problems are unlikely to
cause the Soviets to act more aggressively abroad or,
on the other hand, to be conciliatory enough to
achieve major breakthroughs in East-West negotia-
tions, or to significantly pullback from commitments
to client states. Soviet foreign policy will continue to
be determined largely by strategic and geopolitical
considerations, with economic factors playing a com-
plementary role. Nevertheless, the initiatives the Sovi-
ets are likely to take in response to the hard currency
shortage could have some impact on US foreign policy
interests. The USSR's continued need for Western
goods-particularly in the high-tech areas that are
most subject to COCOM restrictions-their interest in
13
SECRET
25X1
25X1
Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08SO135OR000300860003-8
 Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08S01350R000300860003-8
Gorbachev's Initiatives
Indicator Measure of Success
Efficiency in the use of Goal of 5-percent increase in amount of capital
automated machinery in relationship to production
Consumer welfare Production of new housing, availability of meat,
collective farm prices
Productivity of the Soviet Renewal of capital stock and improvement in "human
economy factors" (reduced absenteeism, alcohol consumption,
accidents at the workplace)
obtaining concessionary trade terms to save foreign
exchange, and the need for credits will encourage
Moscow to consider Western attitudes and reactions,
particularly those of Western Europe and Japan, when
formulating policy. This might result in greater coop-
eration by Moscow in some areas of arms limitation,
commercial exchange, and social interchange but not
at the cost of abandoning major foreign policy objec-
tives
23. At the same time, Moscow will continue to
exploit opportunities to split the Western alliance in an
attempt to encourage greater opposition to the more
hardline policies of the United States toward East-
West trade. West Germany and Japan seem likely to
be targets for Moscow's efforts. The expectation that
lower hard currency earnings might force Moscow to
reduce the scope and nature of its trade with the West
could make many Western governments and business-
es more amenable to granting preferential trade terms
in an attempt to beat out the competition. Unemploy-
ment remains high in Western Europe, where the job-
creation benefits of East-West trade are an important
political issue, and some West European plants rely
almost exclusively on trade with the East.
24. Soviet attempts to maximize hard currency
earnings, particularly from arms sales, will result in a
more aggressive search for markets in the Third
World. This sales campaign will be concentrated on
OPEC members and others that have had large hard
currency surpluses with the USSR such as Malaysia.
Despite declining oil revenues, a few opportunities for
expansion still exist, and Moscow could decide to offer
state-of-the-art arms as an incentive. Libya, for one,
apparently intends to give high priority to procure-
ment of Soviet arms. Moscow also may increase its
14
SECRET
Goal of 4-percent output growth with emphasis on key
sectors such as energy, machinery
26. Increased pressure by Moscow on Eastern
Europe to supply goods that will serve as substitutes
for imports from the West, particularly machinery
and equipment, and to reduce their use of raw
materials traditionally supplied by Moscow such as oil,
run the risk of overburdening their already tautly
stretched economies. Economic stringencies could lead
to declining living standards and popular discontent,
which could undermine existing popular support for
current regimes. Moscow's attempts to transfer some
of its hard currency problems to Eastern Europe will
also make the East Europeans even more reluctant to
shoulder the burden of upgrading Warsaw Pact forces.
West and Third World.
25. Moscow's interest in developing an export mar-
ket for manufactured goods, combined with the need
to use international financial markets to cover its hard
currency shortfalls, probably will result in new, more
aggressive, demarches to participate in the interna-
tional economic arena, as exemplified by Moscow's
recent bid to join in the forthcoming GATT negotia-
tions. Although Moscow's stated objective is economic
gain, it probably would exploit opportunities to create
dissension within the West and between the developed
consumer goods production.
Machinery for production lines,
technology
Machinery and technology
imports and continued
imports of key consumer goods
Equipment to aid production in
key sectors
efforts to negotiate barter arrangements, particularly
with the LDCs, for desired agricultural commodities.
Faced with financial problems of their own, the LDCs
may become more receptive to such Soviet overtures.
Moscow's search for alternatives to hard currency
trade will be a factor behind its continued efforts to
renew trade ties to China, particularly in light of the
latter's recent successes in raising agricultural and
Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08S01350R000300860003-8
 Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08SO135OR000300860003-8
SECRET
27. The hard currency shortage will raise the op-
portunity cost of Soviet aid to its client states in the
Third World. Evidence indicates that Moscow will be
even more insistent that these countries increase their
exports to the USSR, pay their debts, and use Soviet
aid more wisely. Some countries' difficulties in making
debt repayments to Moscow already have become an
important irritant in relations (Libya, for example).
Moscow probably will focus new economic assistance
to non-Communist LDCs only on projects with large
economic or political payoffs. Moscow has long in-
curred criticism in the Third World for its meager
economic assistance, and its increased scrutiny of
potential projects will reinforce this judgment, further
tarnishing Moscow's image as a role model for devel-
opment in the eyes of the Third World.
15
SECRET
Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08SO135OR000300860003-8
 Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08SO135OR000300860003-8
Iq
Next 1 Page(s) In Document Denied
Declassified in Part - Sanitized Copy Approved for Release 2012/03/21 : CIA-RDP08SO135OR000300860003-8