USSR REVIEW - IN THIS ISSUE: SOVIET POLICY IN EASTERN EUROPE JANUARY-FEBRUARY 1986

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP87T01145R000100070003-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 64
• Document Creation Date: December 22, 2016
• Document Release Date: August 15, 2011
• Sequence Number: 3
• Publication Date: February 1, 1986
• Content Type: REPORT

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Directorate of
Intelligence
Z
USSR Review
In this issue:
Soviet Policy in Eastern Europe
SOV UR 86-002X
February 1986
Copy
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Directorate of Secret
Intelligence
USSR Review
articles are welcome.
The USSR Review is published by the Office of
Soviet analysis. Comments and queries regarding the
Secret
SOV UR 86-002X
February 1986
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Contents
Soviet Policy in Perspective
Eastern Europe
The Gorbachev succession occurs at a time when the Soviets face
both new opportunities and problems in their relations with Eastern
Europe, as highlighted by the theme essays. Although Moscow's
policies toward its allies to date have been more restrained than its
rhetoric might suggest, the Gorbachev leadership has brought a new
sense of urgency and vitality to the Soviet approach to longstanding
problems and has not hesitated to apply direct pressure. In the short
run, the Soviets probably will continue to rely chiefly on East
European uncertainty as a cheap way of producing conformity with
Moscow's wishes. In the longer run, US policy is likely to encounter
increasing Soviet efforts to integrate the East European and Soviet
economies while diminishing East European maneuvering space
between the superpowers.
Soviet Policies Toward Eastern Europe Under Gorbachev
Since Gorbachev took power, high-level bilateral and multilateral
contacts between Soviet and East European leaders have multiplied,
accompanied by blunt reminders of Moscow's diminishing tolerance
of East European economic problems. Moscow's ability to tie
Eastern Europe closer to the USSR economically and to impose
more political uniformity remains limited by Soviet resource con-
straints and the Kremlin's conflicting objectives in the region.
Nevertheless, increased Soviet attempts to strengthen Bloc solidarity
in the long run will work against US efforts to promote diversity
among the East European states through differentiated trade and
diplomatic approaches.
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Eastern Europe Looks to Gorbachev
Four East European countries-Bulgaria, East Germany, Czecho-
slovakia, and Poland-will hold their party congresses by the end of
June, after the Soviet party congress in February. East European
leaders are hoping that the Soviet conclave will help clarify what the
Gorbachev era will mean for them. So far, the Soviet leader has paid
more attention to his allies than his predecessors, raising hopes and
fears within Eastern Europe about the direction and extent of
changes that could be forced upon them. While the East Europeans
have readily echoed Moscow's foreign policy initiatives, they have
been less certain-despite Soviet exhortation-about precisely how
Moscow expects them to resolve deep-seated domestic problems. In
the absence of direct Soviet pressure, they are likely to continue to
seek closer ties to the West within the constraints of their limited
economic possibilities and to shun major shakeups in their leader-
ships.
Soviet-East European Trade Plans for 1986-90
Plans call for trade between the Soviet Union and Eastern Europe to
grow more slowly in the next five years than at any time since the
1960s. Rapid increases in East European exports in recent years
have resulted in roughly balanced trade with the USSR, and we
expect both the value and volume of these exports to grow much
more slowly. Soviet pressure is likely to focus on improving the
quality of East European exports and forcing the East European
regimes to make tough choices about exporting to the West and
supplying domestic needs. Moscow's ability to export to Eastern
Europe will be limited by declining oil production and a hard
currency squeeze. A key unknown is whether Moscow will meet its
commitment to maintain oil deliveries during the next five years.
Major cuts in oil exports could well disrupt East European econo-
mies and dramatically alter Moscow's economic relations with
Eastern Europe.
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Slower Growth in Non-Soviet Warsaw Pact Defense Costs
Between 1973 and 1983 there was little growth in the defense costs
of the non-Soviet Warsaw Pact (NSWP) nations. The main reason
for the slower growth in defense costs was a virtual halt in the
growth of NSWP procurement. While we cannot account for all the
reasons for the East European procurement plateau, the available
evidence suggests that policy decisions in response to domestic
economic conditions played an important role. The leveling off of
NSWP procurement is a serious matter for Moscow because NSWP
capabilities are falling behind those of the Soviets in precisely those
categories of equipment most critical to Soviet conventional strategy
in Europe. Soviet options for improving their allies' capabilities are
few and unappealing.
The Warsaw Treaty was renewed in 1985 for another 30 years.
Although the Pact has evolved both organizationally and functional-
ly since its founding in 1955, its members were unable to agree on
revisions to the text of the treaty that would reflect the new
arrangements, and merely reaffirmed the original agreement. Soviet
control over the Pact's military structure has been strengthened
during the past decade, but this domination has not been duplicated
in other spheres of Pact policymaking.
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Romania's deteriorating domestic situation and the possibility of a
contested succession before long offer both a challenge and an
opportunity to the USSR. The Soviets apparently hope to stem the
drift of recent years that allowed the East Europeans to assert
greater independence, and specifically want to bring the uncoopera-
tive Romanians back into line. They appear to believe Bucharest's
domestic problems could open the door for them to increase their
currently meager influence there, particularly after President
Ceausescu leaves the scene, and are likely to condition any signifi-
cant assistance on greater Romanian adherence to Soviet policy
lines. Moscow also desires, however, to maintain stability in Roma-
nia and avoid being confronted with a choice between intervention
and acceptance of an even more hostile Romanian regime. How
Moscow manages these concerns could prove a litmus test of the new
Kremlin leadership's diplomatic skills and the challenges Moscow
poses to Western interests in Eastern Europe.
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The Soviet Construction Materials Industry:
Its Role in Economic Expansion
Gorbachev's aggressive program for economic
expansion will put great pressure on the industry to modernize what,
by world standards, is comprised of a largely obsolescent stock of
plant and equipment. It is the first in a series of studies on Soviet ci-
vilian industries that focus on their ability to support his moderniza-
tion program and, in turn, the potential impact of his initiatives on
industrial performance.
Soviet Oil Production and Exports: Prospects for 1986
The Soviet plan for 1986 calls for raising oil production to more
than 12.3 million b/d, but the production outlook is precarious. At
the extreme, export reductions, compounded by anticipated oil price
declines, could cost Moscow as much as $4-6 billion in hard
currency earnings.
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Soviet Policy in
Eastern Europe
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New developments in both the USSR and Eastern Europe promise to
reshape bilateral and Warsaw Pact relations over the next few years. On
the Soviet side, for example, a more decisive and energetic leadership in the
Kremlin is committed to modernizing the economy, reducing Soviet
subsidies to Eastern Europe, and increasing the region's exports to the
USSR. The East Europeans, for their part, are uncertain about how far
they will have to go to meet Moscow's minimal demands. Uncertainties in
the East European economies and resource constraints probably will make
them reluctant to dramatically increase their participation in Soviet
resource development projects. The East Europeans' need to purchase
Western technology for their own industrial modernization also makes
them anxious to keep open the option of expanding economic ties to the
West.
Moscow's perceived security needs, nevertheless, will continue to define the
basic dimensions of the relationship:
? The Warsaw Treaty Organization (WTO) provides a mechanism for
Soviet command and control over East European forces in wartime and
the forward basing of Soviet troops in peacetime.
? The Council for Mutual Economic Assistance (CEMA) gives Moscow
leverage to expand intra-Bloc trade and economic cooperation, tying East
European industry to Soviet markets and raw materials and providing
additional mechanisms for controlling the region.
? East European ties to the West, although troublesome, serve both the
Soviets' requirements for Western technology and their "Pan-Europe"
campaign.
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SO V UR 86-002X
February 1986
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The Gorbachev succession occurs at a time when the Soviets face a number
of problems in their relations with Eastern Europe. The article "The
Warsaw Pact at 30" shows that, although the Pact over the years has
grown more complex organizationally and has increased the mechanisms
for Soviet control, its members last spring failed to agree on major new in-
stitutional arrangements to formalize these changes. In particular, the
Soviets and East Europeans were unable to reach a consensus on a
permanent political infrastructure that would simultaneously preserve
Soviet dominance and increase Eastern Europe's voice in Pact affairs. The
essay "Slower Growth in Non-Soviet Warsaw Pact Defense Programs"
indicates that the East Europeans have been increasingly prone to deflect
more of the Pact's defense burden onto Moscow's shoulders. The East
Europeans' share of WTO defense costs slipped from 18 percent in 1970 to
15 percent in 1983, although they contributed 28 percent of the WTO's
gross national product in 1984.
On the political front, the Soviets were forced to rein in independent
initiatives toward West Germany by two of their closest allies-East
Germany and Bulgaria-in the fall of 1984. Romania, meanwhile, remains
as reluctant as ever to follow the Soviet lead on foreign policy.
Opportunities for Moscow, however, do exist. For example, as the essay
"Soviet-Romanian Relations" demonstrates, the Soviets see Romania's
deteriorating domestic situation and the possibility of a contested succes-
sion as working to their advantage. From a different perspective, the
mounting evidence that Gorbachev has initiated radical personnel shifts
within the USSR has already raised a host of uncertainties in the minds of
long-established East European leaderships. Their unease has made them
unusually attentive to what they perceive to be the current Soviet line on
ties to the West, as pointed out in "Eastern Europe Looks to Gorbachev."
Many of the key issues the Gorbachev, administration has chosen to
highlight in its relations with Eastern Europe-improved economic perfor-
mance, greater economic integration, more Bloc unity on international
matters-are identical to those stressed by his predecessors.. Gorbachev,
nevertheless, brings a new sense of urgency and vitality to these themes, as
shown in "Soviet Policies Toward Eastern Europe." High-level bilateral
and multilateral contacts between Soviet and East European leaders, which
were allowed to languish since the late Brezhnev era, have been revived.
Gorbachev has been unusually blunt and outspoken on economic misman-
agement and corruption within the Bloc, even with such stalwart political
allies as Bulgaria. Under his guidance, the idea of CEMA science and
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technology (S&T) cooperation has received a new impetus; the closing days
of 1985 witnessed the passage of a long-term CEMA S&T program that
Gorbachev boasted was not deemed possible by most observers when he
took office.
To date, Soviet pressures on the East Europeans to toe the line politically
and economically have been largely verbal. On occasion, to be sure,
Moscow has not hesitated to tighten the screws. For example, the Soviets
ordered the Bulgarians to redraft their 1986 economic plan and fire their
planning chief, and Sofia complied. Also, in late 1985 the Soviets once
again vetoed a visit by East German party chief Honecker to West
Germany, in part to signal their displeasure with West German support of
the Strategic Defense Initiatives (SDI) and in part to remind East Berlin
that it, too, would share the burden of a response to SDI.
But the theme essays also highlight the formidable problems Moscow
confronts in any attempt to mobilize greater East European support for its
political and military goals. The virtual halt in the growth of non-Soviet
Warsaw Pact military procurement since 1973 has seriously widened the
quality gap between Soviet and East European forces. It has accentuated
intra-Bloc differences in capabilities critical to Soviet conventional war
strategy, leaving open the possibility that Moscow eventually will have to
shoulder an even larger share of the Pact's wartime missions.
On the economic front, despite Moscow's advocacy of increased intra-
CEMA economic contacts, the series of protocols between the USSR and
Eastern Europe signed in late 1985 call for trade to grow more slowly than
at any time since the 1960s. Although the Soviets apparently are reconciled
to a slower growth in the overall volume of East European exports, they
still demand that a larger share be comprised of quality goods to help meet
their ambitious plan targets and to repay East European debts to the
USSR.
Pressuring the Bloc allies to increase exports, however, works against other
Soviet goals such as increased East European defense spending. Attempts
by Eastern Europe to satisfy Moscow's demands, in the absence of rapid
economic growth, would force reductions in standards of living in the
region. This, in turn, raises the specter of regional political instability,
which Moscow is determined to avoid. A reduction in Soviet hard currency
revenues from the West-as a product of falling oil prices and faltering
production-could force Moscow to delay or curtail deliveries of oil to
Eastern Europe, thereby forestalling closer economic ties from yet another
perspective.
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The East Europeans, meanwhile, anxiously await the Soviet party congress
opening on 25 February as a bellwether of Moscow's intentions. Soviet
criticism of Eastern Europe's economic performance, which has gone hand
in hand with increased bilateral contacts, has already pointed up the
possible costs of increased attention from Moscow. The thorniest question
for the East Europeans, however, remains the latitude the Soviets will
allow for dealings with the West-a matter of particular importance to the
East Germans and Hungarians.
To date, Moscow's policies toward Eastern Europe have been more
restrained than its rhetoric might suggest. The modest targets for CEMA
trade in the five-year protocols suggest that the Soviets recognize the
inadvisability of squeezing the East Europeans too hard and will be
satisfied if trade remains roughly balanced. On the political front, Gorba-
chev has yet to visibly maneuver to place his men in power in Eastern Eu-
rope. In the short run, he probably is content to exploit East European un-
certainties as a cheap way of guaranteeing conformity with Soviet wishes.
For the longer term, the Soviets will probably step up the pressure to bind
Eastern Europe more closely to the USSR's goals-if only because of the
growing pressures and constraints on Moscow's own resources. The Soviets
might undertake organizational changes in CEMA-such as abandoning
the "interested party" rule allowing some to opt out of CEMA projects-to
ensure greater cooperation in S&T ventures. Moscow might also agree to
suspend its drive for debt repayment from East European trade surpluses in
return for a commitment to increased defense spending and procurement.
The Soviets will certainly think twice about moving quickly to replace
existing East European leaders at the risk of fomenting local political
instability. The passage of time, however, will do much of the Soviets' work
for them. Moscow will, in the meantime, undoubtedly look at possible
successors to push when the transitions occur. These new leaders would be
preoccupied with consolidating their own domestic power and hence would
hardly be inclined to get out in front of the Soviets on questions of serious
interest to the Kremlin.
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Moscow's apparent decision to limit near-term pressures on the East
Europeans to exhortations has left them some room to maneuver. But East
European uncertainty over Soviet intentions has already created a more
difficult environment for the US policy of differentiated trade and
diplomatic approaches to individual East European countries. In the longer
run, US policy is likely to run up against increasing Soviet efforts to push
CEMA economic integration and to diminish the room that East European
states have for maneuvering between the superpowers.
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Europe Under Gorbachev
During the first 10 months of Gorbachev's tenure as
General Secretary, the Soviet Union has stepped up
pressure for improved East European economic per-
formance and Bloc unity. Gorbachev's new team and
his cultivation of an image of resolve have helped the
Soviets regain the initiative in their relations with
Eastern Europe. His new approach is underscored by
messages to Sofia and other capitals that lipservice to
Soviet foreign policy positions is no longer enough and
by demands for more and better quality exports to the
USSR without additional Soviet assistance. Still,
Moscow's concern for maintaining political stability
in the region, and its recognition of the importance of
Eastern Europe's economic ties to the West for the
region's future growth, constrain Moscow's ability to
lean on its allies.
Soviet Objectives: Eastern Europe
Through Soviet Eyes
Soviet policy goals in the region have remained
largely constant since the Gorbachev succession. They
include:
? Maintaining military and political control over the
East European allies in the interest of Soviet nation-
al security and upholding Moscow's right to inter-
vene militarily whenever it decides a socialist regime
is threatened.
? Ensuring Bloc agreement on the extent and timing
of foreign policy initiatives to the West and a
recognition that Moscow sets the pace.
? Expanding intra-Bloc economic ties along bilateral
lines to increase Soviet control and further Mos-
cow's domestic economic goals.
? Confining East European economic and political
experiments to the limits set by the "general laws of
socialism" as defined in Moscow.
under Gorbachev the
Soviets attach greater weight to certain objectives
than they did under his immediate predecessors.
the General Secretary
has said privately that he will not permit weaknesses
in East European economies to stand in the way of
Soviet economic growth. In May 1985 Gorbachev
warned a special conference of Bloc party secretaries
for economic affairs that "something is rotten in
Denmark," referring to reports of East European
economic mismanagement and corruption. Soviet tol-
erance for economic inefficiency among Moscow's
East European allies at Soviet expense appears to be
diminishing.
Bulgaria has long served as Moscow's most loyal ally
on political and military issues. But last year the
Soviets did not hesitate to take Sofia to task for
economic mismanagement and corruption.
the Soviet leadership in mid-1985
was angered by Bulgarian planners' blithe assumption
that increased Soviet energy and raw materials deliv-
eries would be forthcoming in 1986 despite explicit
warnings to the contrary. The Soviets probably sin-
gled out Sofia-whose economic plight by East Euro-
pean standards was not unusually severe-to make
the point that political fealty can no longer compen-
sate for economic shortcomings.
Such perspectives presage Soviet determination to
hold all East Europeans to higher performance stan-
dards than previously and a willingness to actively
manipulate political or economic levers to generate
pressure on Bloc members. These views mirror Gorba-
chev's determination to root out corruption and mis-
management within the USSR, and they probably
will play a more important role in policy toward
Eastern Europe as Gorbachev moves to implement his
economic agenda at home.
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The Soviets also appear more determined than before
to push the Bloc's economic and political unity and to
make clear the limits to the diversity they will toler-
ate. In a major unpublished speech delivered in late
summer 1985 to Bloc economic secretaries, Gorba-
chev reportedly warned against market-oriented
mechanisms as a panacea for domestic economic ills
and told the participants to pay more attention to the
"ship" of socialism than to market "lifesavers"
(Seweryn Bialer and Joan Afferica, "The Genesis of
Gorbachev's World," Foreign Affairs, forthcoming in
1986).
On the foreign policy front, strengthening the cohe-
sion of the socialist community took on "priority
significance" in the draft of the revised CPSU Party
Program published in late October 1985 and formed
the dominant theme of the section on "Cooperation
With the Socialist Countries." The program warns
that efforts by the West to take advantage of national
differences in economic, historical, and cultural condi-
tions render "firm unity and close solidarity" of
"particularly great importance."
he
reestablishment of a "conventional" Bloc political
structure in Poland ranks high on Moscow's list of
priorities, especially the rebuilding of the Communist
party and a lowered profile for the Polish military.
For Hungary
the Soviets agreed in the second half of 1985
to "tolerate" Budapest's economic reform policies as a
"showpiece" for Western consumption, but extracted
a commitment from Kadar barring further expansion
of the private sector.
To be sure, similar Soviet perspectives on Eastern
Europe appeared under previous Kremlin leaderships.
Nevertheless, Moscow's brusque, businesslike tone, its
blunt demands for results, and its reaffirmation of a
pressing need for Bloc cohesion in the face of alleged
Western efforts to divide the socialist community
testify to the increased importance the new leadership
attaches to these objectives.
decades, Gorbachev visited only three countries in
Eastern Europe (Czechoslovakia in 1969 and 1979,
Hungary in 1983, and Bulgaria in 1984) before
becoming party chief. Foreign Minister and Politburo
member Shevardnadze traveled to Hungary twice
(1975, 1981) and once each to Bulgaria (1974) and
Czechoslovakia (1981). Other Gorbachev Politburo
appointees had limited responsibilities for Eastern
Europe in their previous positions. Overall, there is
little in the background of this group to suggest
particular empathy with the region's problems.
Still, the shakeup of Soviet government officials that
has been under way for the past year-especially in
the economic ministries-has brought to the fore
individuals with considerable East European experi-
ence (see photos). Gorbachev himself has held four
summits with all East European leaders, and by the
time of the 1986 Party Congress had conducted
bilaterals with each except Romania's Ceausescu.'
consisted largely of verbal pressure. Still,
the new leadership
has not hesitated to take more substantive steps:
Moscow ordered
Sofia to redraft its 1986 plan and replace Bulgarian
planning chief Bonev following public and private
criticism of Bulgarian economic management by the
Soviet Ambassador in the summer of 1985.
? According to diplomatic report-
ing, the Soviets have decided not to allow East
German party chief Honecker to visit West Germa-
ny in the near future. Although the Soviets have
been evasive on this decision, on at least two
occasions they have passed on explanations suggest-
ing that West German support for SDI, and East
Germany's failure to prevent it, were factors in
Moscow's decision.
The Gorbachev Team and Its Political Tactics
The new crop of top Soviet party leaders had limited
East European experience and contacts before assum-
ing power. In a party career spanning almost two
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New Soviet Government Officials
With East European Expertise
N. V. Talyzin ... Head of Soviet State Planning
Committee since October 1985... served as Mos-
cow's Permanent Representative to CEMA, 1980-
85 ... made candidate Politburo member upon his
Gosplan appointment, a promotion his predecessor
never attained ... expected to push for CEMA inte-
gration ... as Minister of Communications, 1970-80,
extensive experience with defense-related high
technology.
B. I. Aristov ... Soviet Minister of Foreign Trade
since October 1985... Ambassador to Poland at
height of crisis ... has firsthand knowledge of East
European economic problems and potential impact on
political stability and military capabilities of Bloc
members.
K. F. Katushev ... Since November 1985 head of
State Committee for Foreign Economic Relations,
body that has dealt chiefly with Soviet aid to Third
World ... since appointment has met with Czechoslo-
vak and Romanian foreign trade ministers to discuss
economic cooperation ... head of Central Committee
(CC) Bloc Relations Department, 1968-77.
A. N. Aksenov ... Appointed head of State Commit-
tee for TV and Radio Broadcasting in December
1985... previously Ambassador to Warsaw, 1983-
85 ... full CC member since 1976.
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the Soviets
has he yet made confirmed changes in the Central
Committee Bloc Relations Department or made wide-
spread replacements in ambassadors to Eastern Eu-
rope. once
Gorbachev has put his seal on the Soviet leadership at
the party congress scheduled for late February, a
changing of the old guard within Eastern Europe will
have made it clear to the East Germans that they
will bear part of the cost of Bloc efforts to match
SDI and that, therefore, East Berlin has an interest
in pressing West Germany harder on this issue.
Soviet pressure on the East Europeans also takes
other forms. Hardline Soviet views on differences
within the Bloc received a fresh airing soon after
Gorbachev took office. The June 1985 "0. Vladimir-
ov" article in Pravda-probably authored by O. B.
Rakhmanin, first deputy chief of the Central Com-
mittee Bloc Relations Department-served as a harsh
reminder to the East Europeans that there are those
in the Soviet leadership arguing strongly for a return
to Stalinist-style monolithism. Publication of this
article in Pravda demonstrates that these voices have
sufficient political clout to receive an authoritative
hearing, despite subsequent Soviet disclaimers that
the Vladimirov piece did not represent an official line.
In fact, the article probably represented a shrewd
opening gambit in a carefully crafted "good cop/bad
cop" routine and did not simply reflect policy differ-
ences within the Soviet leadership. Gorbachev took
the opportunity in his October 1985 Central Commit-
tee plenum speech to emphasize that a "dialectic
unity" in the "diversity" of the socialist world was a
central part of the draft party program. This complex
characterization showed Gorbachev as a "good cop"
even though the actual document is more ambiguous
on the extent of the "diversity" the Soviets actually
endorse.
Such a routine might be designed to make East
Europeans grateful to the Soviets for small favors.
More specifically, the tactic could be calculated to
forestall grumbling over Soviet economic pressure and
temporary shortfalls in oil deliveries, such as the ones
the Czechoslovaks might possibly face in 1986,
The Soviets, meanwhile, have not yet moved decisive-
ly to micromanage East European affairs. Gorbachev
has not visibly maneuvered supporters of his policies
into positions of power within Eastern Europe. Nor
be high on his list of priorities.
more efficient and productive.
Moscow's Economic Policies
Soviet economic policies toward the East European
allies reflect the high priority Gorbachev assigns to
revitalizing the domestic economy. He values in-
creased trade and economic cooperation with Eastern
Europe as an important source of new machinery and
technology to supplement the ambitious output and
investment targets of the new five-year plan. Accord-
ing to a source of the US Embassy in Prague, during
private meetings with Warsaw Treaty Organization
party chiefs in Sofia in October 1985 and in Prague in
November 1985, Gorbachev spoke forcefully of the
need to find ways to make East European economies
surplus.
On the surface, Gorbachev's objectives for Eastern
Europe-for example, eliminating Moscow's trade
surplus with these countries and encouraging them to
pay off their debt to the USSR-echo earlier themes.
The Gorbachev leadership, however, has pursued
these aims more aggressively. One indicator is that,
despite their domestic economic difficulties, Bulgaria
and Czechoslovakia during the first nine months of
1985 reduced their trade deficit with the USSR below
1984 levels, as the Soviets had urged. Hungary also
managed to convert its deficit into a moderate
The Gorbachev succession has breathed new life into
Moscow's longstanding push for economic integration
within the Council for Mutual Economic Assistance
(CEMA) along lines laid down at the June 1984
CEMA summit:
the May 1985 conference of Bloc party secretaries
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for economic affairs discussed ways to speed up the
implementation of decisions taken at the June 1984
summit.
? Soviet press coverage of Gorbachev's trip to Sofia in
October 1985 stressed the merits of linking enter-
prises across national boundaries while largely ig-
noring integration based on a division of labor
within CEMA, an apparent shift in position
? Even though the response to Gorbachev's proposed
"Eastern Eureka" project at the Sofia WTO sum-
mit last summer was lukewarm, Gorbachev pushed
ahead to elaborate an even more ambitious proposal
for a giant joint-venture firm using Soviet and East
European capital
Despite some East European foot-dragging, the ex-
traordinary CEMA council session that convened in
Moscow in mid-December 1985 produced a long-term
science and technology (S&T) program. According to
a reliable source of the US Embassy in Prague,
Gorbachev proudly contrasted his ability to convene
such a session and win agreement on S&T cooperation
with the delays in finalizing such a program under his
predecessors. He also boasted that in the spring of
1985 no one in CEMA believed that a consensus by
the end of the year would be possible. Soviet influence
over the program's drafting is apparent in the call for
development of joint enterprises, direct contacts be-
tween Soviet S&T complexes and their CEMA coun-
terparts, and joint S&T production associations simi-
lar to existing Soviet-Bulgarian machine tool
groupings. On the basis of Soviet assessments of
export plans for these groupings, we judge that the
USSR will be the prime beneficiary of any break-
throughs the CEMA initiative produces.
Constraints
Moscow's ability to press the East Europeans hard on
closer economic ties and on tailoring their domestic
political arrangements to suit the Kremlin's tastes
remains limited by cross pressures from other Soviet
objectives for the region. The Soviets undoubtedly will
think twice about replacing existing East European
leaders-despite Gorbachev's evident impatience with
the region's old guard-owing to concern over possi-
ble political unrest. Gorbachev stressed the impor-
tance Moscow attaches to political stability across its
borders at last December's CEMA S&T session,
according to a reliable source of the US Embassy in
Prague.
On the economic front, Moscow's interest in improved
East European productivity and more high-quality
goods for export to the USSR requires increased 25X1
rather than diminished East European exposure to the
West.' Eastern Europe remains an important channel
for bringing Western technology to the USSR. Both
considerations at some point will probably limit Mos-
cow's push for CEMA economic integration. Soviet
efforts to squeeze much more out of East European
economies, without new growth or increased produc-
tivity, also would have a negative effect on the
standards of living in the region. This, in turn, would
raise the prospect of political unrest, which Moscow
wishes to avoid.
Prospects and Implications
Moscow's failure to date to take decisive action equal
to the verbal pressure applied to Eastern Europe-
with the exception, perhaps, of the push to finalize the
CEMA S&T program-probably reflects a pragmatic
assessment of the potential costs involved. The Gorba-
chev leadership also may rely on current East Europe-
an uncertainty over the Soviet line in the region-an
uncertainty of which Moscow is fully aware-to
provide a short-term guarantee of East European
compliance with no visible arm twisting. Meanwhile,
selective and closely monitored East European deal-
ings with Western Europe continue to serve Moscow's
"Pan-Europe" campaign
Over the longer term, and despite limits on Moscow's
ability to pressure the East Europeans, the US policy
of encouraging a loosening of the Bloc through differ-
entiated trade and diplomatic approaches to East
2 See "Soviet-East European Trade Plans for 1986-90," this issue,
for evidence that trade between the USSR and Eastern Europe
probably will grow more slowly during the next five years than
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European states most likely will come up against
increasingly concerted Soviet efforts to strengthen
Bloc solidarity. Growing Soviet concern for economic
integration, political unity, and improved East Euro-
pean economic performance that benefits Moscow in
the short run suggests that Eastern Europe's maneu-
vering room between East and West will not expand
radically and may even diminish. Soviet steps to
integrate CEMA economies-especially organization-
al changes for cooperation in R&D and production to
give the integration concept some teeth-almost cer-
tainly would slow down or even halt any trends toward
diversity among the region's economies. Moscow's call
for direct economic ties between CEMA and the
European Community, with no guarantees that bilat-
eral links between members of both groupings will be
preserved, illustrates one way the Soviets are already
pushing to manage East-West dealings more directly.
Meanwhile, given the ages and/or poor health of most
East European leaders, a wholesale turnover is inev-
itable even without a Soviet push. Any new leaders
will initially be absorbed in securing their domestic
power bases and may therefore be less interested in
carving out room for maneuver on international is-
sues-especially in the face of Soviet opposition-
than their predecessors.
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Eastern Europe Looks to
Gorbachev
In the year that Gorbachev has been in power, he has
altered some of the dynamics of the relationship
between the Soviet Union and its East European allies
and has raised the prospect among them of more
intense Soviet involvement in the management of Bloc
affairs. In pressing his case inside the USSR for
domestic changes-personnel changes in particular-
Gorbachev has raised the hopes of some in Eastern
Europe who believe that new leaders and policies are
needed for the tough problems facing the region.
Many officials, however, are understandably worried
by Gorbachev's example and fret over the loss of
power and perks that such changes could introduce
into their lives.
The perception in Eastern Europe of an invigorated
Soviet leadership contrasts with the cynicism and
disgruntlement of recent years over the immobility
and "irrationality" of Soviet policymaking, in particu-
lar on East-West issues. The skepticism and accompa-
nying gallows humor at the expense of the Soviet
leadership has, by and large, disappeared
The East Europeans, nonetheless, are frequently still
not clear about what is expected of them or how far
they will have to go to meet minimal demands from
Moscow. Some expect the guidelines to become clear-
er at the Soviet party congress in late February, and
there has been speculation that this congress could
rival the 1956 20th Party Congress in importance.
Whatever its outcome, it will affect the ensuing
congresses of four other Warsaw Pact parties and will
be monitored closely by the Yugoslav party congress
planners as well (see table 1).
More Contact
One of the more striking aspects of Soviet-East
European relations since March 1985 has been the
increased frequency in bilateral as well as multilateral
meetings at the most senior levels (see table 2). These
meetings, we believe, have been welcomed by the East
Europeans who, in recent years, have complained
about not being informed of Moscow's views. In some
Table I
Party Congresses Scheduled in 1986
June Poland 10th
Yugoslavia 13th a
a Hungary held its 13th Congress in March 1985 and Romania its
13th Congress in November 1984. Albania may hold its next 25X1
congress toward the end of the year.
cases, Moscow's allies were convinced that the Soviets
did not have a good grasp of what the USSR's goals
were. The briefing in Prague following the Geneva
summit, therefore, was an important precedent- 25X1
setting event that demonstrated Gorbachev's com-
mand of the substantive issues discussed in Geneva
and his concern for achieving a unified response to the
summit from Moscow's allies. His well-articulated
policy preferences lessen the possibility of the con-
fused signals that seemed so evident in 1984 over the
planned visits to West Germany by the East German
and Bulgarian party chiefs Honecker and Zhivkov.
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has had the least official exposure. This relative
neglect probably reflects dissatisfaction in the Krem-
lin with these two leaders. Jaruzelski's meeting in
April 1985 was not even cast in the jargon of an
"official friendly visit."
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Table 2
Summit Meetings
13 March Chernenko's funeral in Moscow.
25-26 April Warsaw Pact summit in Warsaw to renew
Warsaw Pact Treaty.
21-23 October Warsaw Pact Political Consultative Commit-
tee (PCC) meeting in Sofia.
21 November Post-Geneva summit briefing of Warsaw Pact
leaders in Prague.
17-18 December Council for Mutual Economic Assistance
(CEMA) premiers in Moscow.
The bilateral meetings have been seen by the East
European leaders as bestowing legitimacy on incum-
bent party secretaries.
Gorbachev's private "meeting" in
April with Jaruzelski, instead of with the entire Polish
leadership, demonstrated to Jaruzelski's opponents
that Moscow was not interested in dumping the Polish
party leader. The fact that Czechoslovak party leader
Husak was the first to pay an "official friendly visit"
to Moscow and that Gorbachev then chose Prague as
the city for the post-Geneva summit have been taken
as signs that the young dynamic leadership in Moscow
accepts the stodgy leadership in Prague.
Gorbachev, of course, is well aware of the value of his
implied endorsement. Bulgarian and Polish officials
apparently were kept dangling on strings up to the last
27 April Gorbachev met with Jaruzelski in Warsaw moment about whether Gorbachev would extend his
following Warsaw Pact summit. stays at multilateral meetings for bilateral sessions in
4-5 May East German leader Honecker met Gorbachev
in Moscow.
30-31 May Czechoslovak leader Husak met Gorbachev in
Moscow.
Bulgarian leader Zhivkov met Gorbachev in
Moscow.
24-25 September Hungarian leader Kadar met Gorbachev in
Moscow.
23-25 October Gorbachev met with Zhivkov in Sofia follow-
ing Political Consultative Committee (PCC)
meeting.
21 November Gorbachev met with Husak prior to briefing
of Warsaw Pact leaders.
and the Soviet leader reportedly criticized Ceausescu
by name at the Warsaw Pact summit in October
1985.
Some East Europeans may yearn for the days when,
in the absence of firm direction from Moscow, they
had more of a role in deciding their own affairs. But
Gorbachev does appear to be taking their views into
account. The US Embassy in Sofia noted, for exam-
ple, that Bulgaria as well as other states in Eastern
Europe managed to get some of their pet viewpoints
included in the formal communique from the October
Warsaw Pact Political Consultative Committee (PCC)
session.
the respective capitals. In either case, failure to meet
personally with the two leaders would have been
interpreted domestically as a sign of a lack of confi-
dence and probably would have encouraged domestic
political maneuvering.
The Downside
These meetings have also had a downside for the East
Europeans, however, because they have served as a
vehicle for the Soviet leadership to convey demands
and criticism. There is, in fact, a substantial body of
reporting to confirm that Gorbachev has been outspo-
kenly critical of the East Europeans.
Gorbachev complained to
Jaruzelski at their April meeting about the failure of
the Poles to contain the radical elements of the Polish
underground, called for a strengthening of the Polish
United Workers' Party, and suggested a reduction of
the military's influence in the state and economic
apparatus.
During Husak's visit to Moscow in May,
Husak was subjected to some very "com-
bative" complaints about the relatively high standards
of living of East European workers and to some hard
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words about the level of Russophobia in Czechoslova-
kia. The final communique from that visit suggested
that Husak was put under pressure to seek more
dynamic solutions to Czechoslovakia's economic stag-
nation. The US Embassy in Sofia noted that Gorba-
chev's visit in October was more correct than warm,
suggesting a reserved attitude by Gorbachev toward
Zhivkov. Subsequently, Gorbachev commented that
"sharp curves" had not been avoided in the
discussions.
Although Hungarian officials have been upbeat about
Kadar's trip to Moscow in September 1985,
the Hungarian leader agreed to go
no further with liberalization of the economy, and, in
particular, not to permit further expansion of private
enterprise. In addition,
Gorbachev was openly critical at the PCC
session in Sofia of Ceausescu and some other party
leaders for their preference for economic ties to the
West.
In general, Gorbachev has been unwilling to give
blanket endorsement to any of the party leaders and
seems disinclined to display the effusive signs of
fraternal support to which the current East European
leaders had become accustomed under Brezhnev.
The Word According to Moscow
The East Europeans have fallen into line relatively
quickly behind policy lines set forth by Moscow-
partly to impress the new boss that they are team
players but also because Gorbachev has yet to make
demands on them that they believe would seriously
undermine their own interests. Gorbachev has raised
to new rhetorical heights the emphasis on the "unity
and cohesion" of the alliance, and this has been
echoed by the East Europeans. They have loudly
proclaimed their support for Soviet foreign policy
initiatives. Support for Soviet efforts to derail the
Strategic Defense Initiative probably is strengthened
by the fact that Gorbachev made it clear to his allies
at the November summit in Prague that they will be
expected to share in the economic burden if Moscow
feels compelled to proceed with major new arms
development programs. If Moscow carries out this
threat, we would expect to see some of the same
grousing from the East Europeans that followed the
Soviet decision to put new missiles in East Germany
and Czechoslovakia following Moscow's failure to
sidetrack INF deployment.
Relations With the West
Probably the thorniest foreign policy issue for the
East Europeans is how far they can go in establishing
relations with the West. For the Hungarians, followed
by the East Germans and the Romanians, this is of
particular significance. There has been considerable
concern that the toughly worded "Vladimirov" article
in June was intended to signal a severe tightening of
Soviet controls on such contacts. Even though Soviet
officials denied that the article represented official
policy, the East Europeans remain wary and uncer-
tain and may take only limited comfort in the more
moderate statements contained in the draft CPSU
Program.
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the visit to West Germany he postponed in September
1984, despite continued intra-German activity on a
range of topics.
Gorbachev is playing a more aggressive and
nys.
energetic role in the policies of East European states,
and in particular in relations between the two Germa-
Prospects for a Honecker visit to West Germany
in 1986 seem dim. A senior Soviet-German affairs
expert commented to an Embassy officer in mid-
December 1985 that, in light of policy "reevaluation,"
this is not the proper moment for a visit.
Kadar is seeking to maintain his Western contacts.
He has traveled recently to the United Kingdom and
Austria. During the latter visit he reasserted his belief
that small states have a legitimate role to play, a view
that the East German media has occasionally echoed,
and that clearly irritates Moscow. The Poles are also
vigorously pursuing Western contacts not only in an
effort to restore their wounded national pride but as a
way of restoring their economy. The East Europeans
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may be hoping that they have a better chance of
selling the argument to Gorbachev that political and
economic relations with the West can be used to the
and shifted investment strategies to meet Soviet re-
quirements, apparently without seriously undercutting
its economic stability.
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East's benefit.
On Domestic Issues
There is even less clarity among the East Europeans
about what Gorbachev expects from them on domes-
tic policies. The Soviet leader has directly and consis-
tently told his allies that changes in economic man-
agement practices are necessary if productivity and
efficiency are to be increased.
chev spoke forcefully about the need to find new and
better ways to make Bloc societies more productive.
The East Europeans have responded to these general
exhortations in various ways.
East Germany. The East Germans seem the least
affected. They are riding atop probably the best
managed and most productive economy in the Bloc
and have what is, arguably, the most cohesive party
leadership. According to assessments of the US Em-
bassy in Berlin, these strengths have created a cocki-
ness and self-assurance among the East German elite
that suggest they believe they have more to teach
their colleagues, including the Soviets, than they have
to learn. They probably take some pride in positive
Soviet references to the East German industrial
"combines," which lie at the heart of the country's
economic structure. In preparation for his congress,
Honecker executed the most extensive personnel
changes in recent years, ousting his adamant critic
Konrad Naumann. This move further paves the way
for Honecker's preferred eventual successor, Egon
Krenz. There was no obvious Soviet involvement in
this change, and Honecker may have been able to
take advantage of the removal from the Soviet leader-
ship of former senior Secretary Romanov, who report-
edly was Naumann's protector.
Despite the confidence derived from its domestic
successes, the East German leadership is well aware
of its need to court Soviet good will and continues to
be responsive to Soviet economic demands. Over the
past several years, East Berlin has increased deliveries
Bulgaria. The most nervous reactions to Gorbachev's
injunctions have come from Prague and Sofia. The
Soviets have addressed their sharpest public criticism
to Bulgaria, where the Soviet Ambassador chastized
the political leadership for economic mismanagement
in an article in a Bulgarian journal. His underlings
have shown open disdain for Bulgarian failings. Ac-
cording to Embassy reporting, rumors were rampant
in the early fall of 1985 about the likelihood of high-
level personnel changes prior to the Bulgarian con-
gress. F_ 4 num-
ber of senior government officials came to believe that
party leader Zhivkov would be removed from office at
a Central Committee plenum in January, primarily
because he had lost Soviet confidence. Although
Zhivkov has conducted some personnel shifts at all
levels, it is not likely, barring strong Soviet interven-
tion, that personnel changes will significantly affect
the senior party government leadership in the near
term.
Czechoslovakia. Prague also has been inundated with
rumors about personnel changes. A foreign ministry
official commented recently to an Embassy officer
that Czechoslovaks at all levels are now talking about
how important it is that changes take place in the
political and economic system. Much speculation has
focused on whether Husak might be forced out
Despite their sharp differences, current
Czechoslovak leaders are comfortable in their stale-
mate, and any sharp break-barring determined Sovi-
et intervention-would have to be considered a long
shot.
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On domestic economic issues, both Prague and Sofia
seem to be engaged in a massive campaign of scape-
goating in responding to Soviet pressure for greater
efficiency in their respective economies. Both have
sought to lay the blame on middle management.
Initial indications of a broader debate on reform in
Czechoslovakia during the summer of 1985 seem to
have fizzled, in part because of the failure of Moscow
to present clear alternatives.
Poland. Polish leader Jaruzelski has apparently suc-
ceeded in allaying some of Gorbachev's most pressing
concerns about domestic political stability, although
little has been accomplished in the economic sphere.
Since his brief meeting with Gorbachev in April 1985,
the Polish leader has endorsed a markedly tougher
policy toward the obstreperous academic community,
pursued a more thorough effort to weaken the under-
ground, and continued to thwart the church's efforts
to implement a program to aid private agriculture. In
resigning as Premier in November as part of a larger
restructuring of the government, Jaruzelski appears to
have responded to Soviet demands that he devote
more time and effort to restoring the party to its
former preeminence.
These moves seem to have met with Moscow's approv-
al. The deputy editor of the Polish party's theoretical
monthly recently referred to "friendly winds from the
Jaruzelski's response to Gorbachev's concerns is in
marked contrast to his tepid response to similar
demands from Chernenko a year earlier. Perhaps
Gorbachev made a stronger impression on Jaruzelski,
but it also seems that Jaruzelski became persuaded by
domestic considerations that a tougher course of
action was required. Thus, Gorbachev's concerns fell
on more fertile soil.
The Congresses
With several months to go, there is little evidence that
any of the four East European congresses will be a
watershed event. Although aging, the four party
leaders are in sufficiently good health to continue for
the next several years. More important, none of the
current party leaders is faced with an internal opposi-
tion that is sufficiently coherent to pose a real threat.
Honecker is riding high, and Jaruzelski has shored up
his position. Husak's longevity continues to rest on the
unwillingness of the leadership as a whole to break the
current stalemate. Zhivkov probably is the weakest,
but we judge his chances at staying on to be signifi-
cantly better than even.
If there are to be dramatic personnel changes, we
judge that a Soviet leadership determined to leave its
imprint will have to set the ball rolling. Until he
perceives that he is firmly in control himself, Gorba-
chev probably will exercise caution in taking on the
potential troubles that a forced shift in leadership in
one of these countries might entail.
Prospects
There clearly is a perception in Eastern Europe-
probably based more on wishful thinking than on
accurate knowledge of Gorbachev's intentions-that
the Soviet leader is not ready yet for a big push.
This line of reasoning is reinforced by the perception
that Gorbachev may not yet be firmly in the saddle.
tions about Gorbachev's policy directions exist among
leaders of the KGB and the, Soviet military.
Gorbachev is young and apparently determined, how-
ever, and he may indeed strike out more competently
than did his immediate predecessors to force changes
in Eastern Europe. Stability in Eastern Europe will
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depend on how hard and on what issues Gorbachev
decides to press, as well as the level of sanctions he
opts to use in the face of noncompliance. Under the
rubric of increased unity and cohesion, the East
Europeans will have little difficulty in supporting the
general Soviet foreign policy line and will be willing to
let the Soviets take the lead on East-West contacts as
long as this does not require a sharp curtailment of
relations. It is in the areas of Soviet-East European
trade relations and Soviet efforts to engineer person-
nel or structural changes that Gorbachev will have to
be particularly careful not to upset the carefully
balanced yet fragile East European political systems.
In fact, the harder he pushes the more forcefully the
East Europeans will counter with arguments that such
policies threaten domestic stability and are not in
Soviet interests. Thus far, the Poles have had fair
success with this line. Gorbachev will learn that he
has fewer levers to pull than he has at home to
accomplish his goals and that the East Europeans do
not lack experience in resisting what they consider to
be unreasonable demands.
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Soviet-East European
Trade Plans for 1986-90
Plans call for trade between the Soviet Union and
Eastern Europe to grow more slowly in the next five
years than at any time since the 1960s. Rapid in-
creases in East European exports in recent years have
resulted in roughly balanced trade with the USSR,
and we expect both the value and volume of those
exports to grow much more slowly. Soviet pressure is
likely to focus on improving the quality of East
European exports and forcing the East European
regimes to make tough choices about exporting to the
West and supplying domestic needs. Moscow's ability
to export to Eastern Europe will be limited by declin-
ing oil production and a hard currency squeeze. A key
unknown is whether Moscow will meet its commit-
ment to maintain oil deliveries during the next five
years. Major cuts in oil exports could well disrupt
East European economies and dramatically alter
Moscow's economic relations with Eastern Europe.
Review of Recent Trade Trends
Beginning in the mid-1970s, the USSR permitted its
East European partners to run large trade deficits in
recognition of their inability to generate enough ex-
ports to cover the rising cost of Soviet oil deliveries.
The imbalance grew even larger in the early 1980s as
the Soviets extended trade assistance to Poland during
its economic crisis. In recent years, Moscow has
become less willing to support Eastern Europe. In
part, Moscow may have become impatient with the
East Europeans' inability to close the trade gap.
Moreover, the Soviets found themselves having to
accept poor-quality East European goods in exchange
for Soviet oil and raw materials that were becoming
increasingly costly to produce. Moscow's push for
more balance narrowed the annual trade deficits from
a high of 3.1 billion rubles in 1981 to 1.9 billion rubles
in 1984, and may have nearly eliminated them in
1985 for all countries except Poland. Soviet trade data
show the region running a 900 million ruble deficit
with the USSR through three-quarters of last year.
The deficit resulted in large part from Poland's trade
gap; Soviet trade with the rest of the region was
nearly balanced.
Over the past decade the Soviets enjoyed a sharp
improvement in their terms of trade with the East
Europeans because energy prices were rising faster
than other prices in intra-CEMA trade. In value
terms, Soviet exports to and imports from Eastern
Europe more than doubled from 1978 to 1985. But
according to our estimates, the volume of Soviet
deliveries to Eastern Europe rose by less than 10
percent over the entire period, while real import
volumes from the region increased by nearly 50
percent.' Thus, even though Moscow's tolerance of
East European trade deficits softened the blow from
the higher energy prices, the Soviet gains in terms of
trade resulted in sharply increased East European
exports in exchange for the same quantity of Soviet
goods (see figures 1 and 2).
1986-90 Trade Plans: Slower Growth
Protocols concluded in the final months of 1985
between the USSR and its East European allies on
the coordination of national economic plans provide
the framework for bilateral trade through 1990.1 Over
the past decade protocols, while underestimating the
value of actual trade because of unexpectedly rapid
price increases, have been relatively good indicators of
the types and quantities of traded goods.
The 1986-90 protocols call for trade to total 380
billion rubles over the period. This target implies an
average annual growth rate in the value of Soviet-
East European trade of only 5 percent-the slowest
' Estimates are based on the use of Hungarian ruble price indexes
as price deflators of official Soviet foreign trade statistics. Soviet
and Polish indexes for prices and trade volumes show similar trends
but are not as comprehensive as the Hungarian data.
' Protocols on plan coordination are forerunners of Trade and
Payment Agreements, which appear to be more precise and bind-
ing. Press reports on the Trade and Payment Agreements signed by
the Soviets and the East Europeans provide few additional details,
but they appear to be consistent with the plan coordination
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Figure 1
Index of Soviet Exports to Eastern Europe, 1977-85
Nominal
o Real
100
75 1977 80 85 75 1977 80 85 75 1977 80 85
100 100
I i i I i I
75 1977 80
85 75 1977 80
J I I I I
85 75 1977 80
125
J I I I
85 75 1977 80
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Figure 2
Index of Soviet Imports From Eastern Europe, 1977-85a
- Nominal-
Real
75 1977
80
100
75 1977 80
85 75 1977 80
100
I I I I I I 1 1
85 75 1977 80
100
I I I I.. I
V1
85 75 1977 80
100
I II I I I I I 11 I
85 75 1977 80 85
I I I I 11 1
85 75 1977 80
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Five-Year Trade Turnover a
(billion rubles)
Increase b
(percent)
Average Annual
Increase c (percent)
Date Protocol
Signed
1981-85
1986-90
1986-90/
1981-85
1986-90
Czechoslovakia
55
73
33
4
29 October 1985
East Germany
66
82
24
3
31 October 1985
Hungary
40
51
28
5
28 November 1985
Poland
50
74
48
8
7 October 1985
Romania
17
30
76
12 to 15
14 December 1985
a Trade in 1985 estimated on the basis of six-month Soviet trade
statistics and annual protocols.
b These rates, based on CIA estimates, differ somewhat from
several East European announcements for turnover growth with the
USSR: 28 percent for East Germany; "approximately 40 percent"
for Bulgaria; and "more than 30 percent" for Hungary.
Calculated using estimates of trade in 1985 as base year.
growth in planned trade in the past 15 years.3 Because
a portion of this growth apparently is attributable to
price increases, we believe that the rise in the volume
of goods traded will be slight. The modest targets in
the protocols belie the oft-discussed need to increase
trade and cooperation within CEMA, as well as
statements by officials in some East European coun-
tries who say that trade will be diverted away from
the West toward the USSR (see table).
The plans contrast sharply with the 11-percent annual
growth in the value of trade in the 1978-85 period,
which resulted from the spiraling costs of Soviet oil
and increases in the volume of East European exports
to close the trade gap with Moscow. The slowdown in
trade projected through 1990 reflects, in part, plan-
ners' expectations of slower price increases than in the
early 1980s. It also reflects the difficulty Moscow-
which benefited from windfall gains on its oil exports
in the past-faces in generating the additional exports
required for continued growth in Soviet-East Europe-
an trade.
Inflation in intra-CEMA trade should be reduced
substantially as the stability of Western prices in the
past few years becomes incorporated into CEMA
prices. According to the CEMA pricing mechanism,
which is based on the average of world market prices
during the previous five years, Soviet oil prices to
Eastern Europe will decrease slightly in 1986 and will
fall slowly in following years.' The prices of East
European exports-composed primarily of machinery
and manufactured goods-are more difficult to pre-
dict, but should rise slightly because they are tied to
prices of Western machinery. They may also rise as a
, The CEMA Executive Committee announced in January 1985
that the price formula in use since 1976 would be continued for
' The percentages announced compare the value of trade planned
for 1986-90 with the value over the entire 1981-85 period. As a
result, the announced growth is greater than if it were taken from a
base of 1985 trade. We believe 1985 is the proper base from which
to project trade.
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result of the increased costs of producing the quality
machinery Moscow demands. With energy prices
falling and at least some price increases likely for East
European exports, Moscow faces a deterioration in its
terms of trade for the next several years. Any effort
by the Soviets to overcome this deterioration-by
changing the pricing formula in their favor or through
item-by-item negotiation-would meet with strong
East European resistance.
Emerging Trade Patterns
The protocols generally omit figures on the key
question of how total trade will be divided between
Soviet exports to and imports from Eastern Europe,
but several factors suggest that East European sur-
pluses are likely, reversing the trade imbalances of the
past decade:
? Eastern Europe's base of trade in 1985 was roughly
in balance (except for that of Poland), according to
our projections based on preliminary trade data.
? Price trends probably will favor East European
exports and move against Soviet fuel exports.
? Moscow's oil deliveries will be at best constant and
could well decline.
? The Soviet leadership clearly feels that its allies
should repay the debt accumulated during the 1970s
and early 1980s.
? The protocol for Poland-the country in the weak-
est position to meet Moscow's demands-calls for
trade to be balanced over the next five years, and,
the Soviets may feel that the other countries could
do even better.
Soviet demands for more East European exports
reinforce the indications in the protocols that much of
the growth in trade for the rest of the decade will
come from Eastern Europe. Eastern Europe conceiv-
ably could run surpluses large enough to repay the
entire 15 billion rubles owed by increasing exports, in
nominal terms, by 7 percent annually and holding
import growth to 4 percent.
Although the protocols imply relatively modest in-
creases in the quantity of exports, nearly all of the
protocols, as well as other bilateral and CEMA
agreements on long-term science and technology co-
operation, emphasize that the East Europeans must
improve the quality of their exports. Meeting Soviet
demands, in turn, may cut into their ability to earn
foreign exchange-their best goods are normally sold
in hard currency markets-and satisfy domestic
needs. Implied Soviet threats to cut energy and raw
material deliveries if the requisite quantity and quali-
ty of goods are not forthcoming from Eastern Europe
.are a potent lever in ensuring compliance. Moscow's
demands for better machinery, food, and other con-
sumer goods, however, will be tempered by Eastern
Europe's ability to maintain domestic economic
growth and remain financially solvent in dealings with
the West. Moreover, Moscow may still be willing to
grant concessions if an East European country's eco-
nomic problems become serious enough to warrant
them.
We expect the major constraint on trade in 1986-90 to
be Moscow's inability to boost exports to Eastern
Europe. Little growth can be expected in deliveries of
oil and other fuels-the mainstay of the USSR's
exports. Moscow will maintain oil deliveries at 1985
levels of about 70 million tons, according to state-
ments by Soviet and East European officials. While
the Soviets stand ready to increase oil deliveries to
Romania, and possibly other countries, in exchange
for dollars or for goods that could be sold for dollars,
the East Europeans probably cannot afford major
purchases on these terms.
Gas deliveries will not grow substantially until 1989
when the Yamburg pipeline comes on line. All coun-
tries will invest machinery, equipment, or manpower
in this project in exchange for a share of 20-22 billion
cubic meters of gas annually over 20 years. East
European participation in other joint projects, such as
the Krivoy Rog iron ore complex, probably will lead to
only moderate increases in some raw material
deliveries.
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Agreements by Country
While the protocols have in common generally level
Soviet supplies of raw materials and continuing pres-
sure on Eastern Europe to deliver more and better
goods to the USSR, there are important differences
among the agreements signed with each country (see
inset). The highest rates of growth in trade are
projected for those countries with economies in the
most trouble-Romania and Poland. East Germany
and Czechoslovakia are in much stronger economic
positions, but their protocols call for much more
modest trade growth. Yet these countries will proba-
bly face the strongest demands to improve the quality
of their exports.
The agreement to increase Romania's trade with the
USSR by over 70 percent-the highest rate in East-
ern Europe-reflects Bucharest's desperate efforts to
secure aid for its ailing economy. Bilateral trade,
however, will be limited by Romania's ability to meet
export commitments. Imports of Soviet crude oil
increased in 1985 to about 2 million tons, but for the
second year in a row Romania received little more
than half of the oil it had contracted for because of its
inability to provide the meat, other foodstuffs, and
industrial machinery demanded by Moscow.
Poland seeks to regain the place of second-largest
Soviet trading partner among CEMA countries,
which it lost after Warsaw's inability to meet export
commitments in 1980-81 led to a decline in trade.'
the
1986-90 period will focus on the development of both
economies-in contrast to 1983-85, when the Soviets
extended substantial economic assistance to help
Warsaw recover from its economic crisis. While Mos-
cow will allow Warsaw to run trade deficits through
1987, the protocol calls for Poland to run surpluses in
1989 and 1990 large enough to balance trade for the
five-year period as a whole. Repayment of 5 billion
rubles owed to the Soviets will be deferred until after
1990.
Moscow's negotiations
on 1986-90 trade with East Germany-its largest
trading partner-were difficult and long delayed
' Poland's economic situation was so unsettled in 1980-81 that
Warsaw and Moscow did not even conclude a trade agreement for
because of Soviet threats to reduce deliveries of some
raw materials and Soviet demands for large East
German investment in Soviet resource projects. Per-
haps to gain leverage in holding Moscow to its
commitments, the East German announcement of the
protocol prominently specified planned amounts of
several fuel and raw material imports from the
USSR.
Czechoslovakia will contribute equipment and 12,000
workers for the construction of the Yamburg gas
pipeline and a gas treatment plant in the USSR in
exchange for 5 billion cubic meters of gas annually
over 20 years. Czechoslovak officials have said public-
ly that Soviet oil and raw material deliveries will
continue at 1985 levels through the next five years,
but, Czechoslovak
officials expect annual crude oil deliveries to be cut by
at least 1.4 million tons by 1990 even if Prague invests
in Soviet projects.
Hungary has con-
vinced Moscow to continue purchasing its meat sur-
plus for hard currency by arguing that the planned
elimination of such transactions by the Soviets would
threaten Hungary's fragile hard currency position.
Bulgaria's relationship with Moscow over the past
year has been strained. Soviet displeasure over Bul-
garia's economic policies and the Slavicization cam-
paign against the Turkish minority in the country
probably is the major reason Moscow cut back on
crude oil deliveries to Bulgaria last year.
Oil: The Key Unknown
Although we believe that the trade plans announced
in the protocols-often the products of tough negotia-
tions-genuinely reflect intentions, future events and
developments could force the plans to be modified or,
more likely, could cause results to diverge from goals.
The largest uncertainties are in Soviet oil exports.
Although Moscow for the most part has so far
insulated Eastern Europe from cuts in oil exports, it
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Soviet Exports
Bulgaria Machinery and equipment for recon-
struction of metallurgical, chemical,
machine-building industries. Continua-
tion of energy deliveries at 1985 levels.
Czechoslovakia 50 percent increase in machinery.
Equipment for power, metallurgical,
chemical industries and for Prague
subway.
Maintenance of oil and raw materials
at 1985 levels.
East Germany Annual deliveries of 17.1 million tons
of oil, 6.9 billion cubic meters of gas,
4.5 million tons of coal, 1.7 million
tons of iron ore, 3.2 million tons of
rolled steel.
15-percent increase in gas this year,
probably in exchange for food and agri-
cultural products.
Additional 2 billion cubic meters of gas
from Yamburg beginning in 1989.
Poland Maintenance of oil deliveries at 15
million tons annually.
Additional I billion cubic meters of gas
this year through Kobrin-Brest pipe-
line, plus another 5 billion cubic meters
from Yamburg beginning in 1989.
Romania 2-3 million tons of oil annually.
Increases in gas and iron ore.
East European Exports
Increases in machine-building, elec-
tronic, electrical-engineering products.
More consumer goods, fruits,
vegetables.
"Substantial" increase in consumer
goods.
Equipment and 12,000 workers for con-
struction of Yamburg pipeline and gas
treatment plant at Karachaganak.
40 percent increase in consumer goods
and 50 percent in chemicals.
Doubling of electrical engineering and
computer-related products.
Increase in oil and gas equipment.
Equipment for reconstruction of Soviet
chemical, agricultural machinery, light
industries.
"Large" deliveries of ships, heavy ma-
chinery, lathes, electric motors, textile
and chemical industry equipment,
roadbuilding and agricultural machin-
ery. Increases in food and agricultural
products.
Doubling of machinery deliveries to 6.5
billion rubles.
1-1.5 billion rubles in ships, equipment
for oil drilling and exploration.
500 million rubles in agricultural
machinery.
Metallurgical equipment worth I bil-
lion rubles.
Increase in consumer goods and
chemicals.
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may find it increasingly difficult to do so if oil
production and prices continue to fall. With hard
currency shortages of its own, Eastern Europe would
be hard pressed to replace any Soviet deliveries
diverted to the West. The region already faces tight
energy supplies as evidenced by severe shortages in
several countries during the past year. Even modest
cuts in oil deliveries could seriously undermine the
economic performance of several countries.
Moreover, if Moscow chose to make the cuts large
and abrupt, it would risk the entire structure of its
economic relationship with Eastern Europe. The
USSR has little to offer besides oil, especially in the
short run, and the East Europeans would be forced to
divert their trade to the West or to the Middle East to
obtain oil.
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Slower Growth in Non-Soviet
Warsaw Pact Defense Costs
Between 1973 and 1983 there was little growth in the
defense costs of the non-Soviet Warsaw Pact (NSWP)
nations when measured in dollars. In particular, the
dollar costs of military procurement were almost
unchanged over the period-a significant change
from the growth of the early 1970s. While we cannot
account for all the reasons for the procurement
plateau, the available evidence suggests that policy
decisions in response to domestic economic conditions
held down procurement in two East European coun-
tries and that economic factors may well have played
an important role in the region as a whole.
The lower priority accorded defense spending by the
East Europeans than by the Soviets and the leveling
off of NSWP procurement are serious matters for
Moscow, Most
disturbing to the Soviets is the fact that NSWP
capabilities are falling behind those of the Soviets in
precisely those categories of equipment most critical
to Soviet conventional strategy in Europe-self-
propelled artillery, modern tanks, tactical aircraft,
and surface-to-air missiles. Unless Moscow is willing
to assume a much larger responsibility for NSWP
modernization, the Soviets may have to take on a
greater share of the Pact's wartime missions.
Background
In 1949, with the postwar Communist regimes firmly
entrenched in Eastern Europe, Stalin moved to reha-
bilitate and expand their military forces to add their
military potential to that of the Soviet forces opposing
NATO and to tie the satellite armies to the Soviet
system of control in Eastern Europe. Beginning in
1960, Khrushchev began to stress closer military
integration with Eastern Europe. Joint exercises, or-
ganizational changes, and a major arms moderniza-
tion program lasting through the early 1970s substan-
tially upgraded NSWP capabilities for theater
operations with the delivery of T-55 tanks, MIG-21
aircraft, and surface-to-air missiles-provided at least
initially on concessionary terms
In this article we track NSWP military spending since
1970 in constant 1983 dollars. Although dollar costs
To determine the impact of defense spending on a
country's economy, we need a measure in that coun-
try's own currency. An indigenous currency measure
also indicates the domestic perception of the cost of
defense activities and of the cost trade-offs made by
national leaders. Unfortunately, reliable NSWP de-
fense spending data in domestic currencies do not
exist. Even if they did, they could not answer other
questions: the comparative resource levels and trends
across Warsaw Pact countries or the relative impor-
tance of each member to the alliance total. Moreover,
there are no reliable measures of defense inflation in
NSWP countries, so we could not adjust for the
effects of inflation.
To make defense cost comparisons, we use dollar
costs to provide a common resource index, even
though dollars do not reflect actual spending. Dollar
costs permit comparative sizing across countries,
show cost trends over time, and can be adjusted for
inflation. Since dollar costs are based on US prices,
growth rates measured in dollars will be different
from growth rates measured in domestic currencies.
However, since all defense activities carry some cost
regardless of currency, dollar costs do indicate the
presence (or absence) of growth in domestic spending.
Otherwise, dollar costs do not indicate the domestic
perception of defense activities or their economic
impact.
do not measure actual defense spending, they reflect
general trends over time in the flow of resources
devoted to defense. Because they reflect annual inputs
of manpower, equipment, construction activity, and
the like, costs should not be used as a measure of the
overall military potential of Warsaw Pact forces (see
inset).
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Figure 1
Dollar Costs of Warsaw Pact
Defense Activities, 1970 and 1984
a NSWP costs exclude RDT&E because of a lack of information.
Such costs may be significant in Poland, Romania, and
Czechoslovakia,. which have well-developed defense industries, but
are unlikely to reach the 12-percent share of Soviet defense costs
represented by RDT&E from 1970-84. Soviet RDT&E was $18 billion
in 1970 and $33 billion in 1984.
Costs of Pact Defense Programs
Total. We estimate the total cost of Warsaw Pact
defense activities in 1984 at $278 billion, of which $42
billion, or one-seventh, represented the NSWP contri-
bution (see figure 1).' In the 1971-84 period, total Pact
costs rose at an average annual rate of 1.9 percent.
Soviet costs, however, grew more than two and a half
times faster than NSWP costs (2.1 percent versus 0.8
percent a year), reflecting both much greater force
expansion and more rapid modernization (see table).
Consequently, the share of NSWP costs in the Pact
total fell from 18 percent in 1970 to 15 percent in
1984.
Figure 2
Dollar Costs of Warsaw Pact
Defense Procurement, 1970-84
NSWP. The relative size of each NSWP nation's
defense activities is shown in the table. Polish defense
costs are the highest, reflecting the larger Polish force
levels. East Germany's and Czechoslovakia's costs are
next in size and almost equal. Together, the three
northern tier countries account for two-thirds of
NSWP costs.
total NSWP costs has changed little since 1970.
Beginning in the early 1970s, the already modest
rates of increase in NSWP defense costs fell off
dramatically. Excluding the 1984 procurement surge
in Czechoslovakia and Romania, only East Germany
averaged more than 1-percent annual growth during
the entire period, and no country showed any accel-
eration. Growth in the costs of defense in Poland,
Hungary, and Bulgaria-which account for almost
half of the NSWP total-was negligible. Because of
the slow growth in these costs, each country's share of
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Growth in Total Defense Costs by Country
and Share of NSWP Total
Billion 1983 US $ Share of NSWP Total
(percent)
a NSWP costs exclude RDT&E.
b A major surge in Romanian and Czechoslovak procurement in
1984, almost certainly a one-time event, affects average growth.
Average annual growth in 1976-83 is 0.7 percent for Czechoslova-
kia, 0.6 percent for Romania, and 0.5 percent for the NSWP
countries as a whole.
? The continuing expansion of ground forces equip-
ment without manpower increases suggests that
average usage rates are probably declining. During
the period 1970-84, NSWP manpower stayed about
the same despite growing inventories of troop carri-
ers, tube artillery, and multiple rocket launchers.
Soviet equipment deployment also greatly outpaced
manpower growth.
The main reason for the slower growth in NSWP
defense costs after the early 1970s was the virtual halt
in the growth of procurement. In the 1971-75 period,
NSWP procurement grew at an average annual rate
of 2.5 percent-a rate comparable to that of the
middle and late 1960s. By 1975, annual procurement
had leveled off at about $7 billion, where it has
remained (see figure 2). Even so, a considerable
degree of modernization took place (see inset).
A second reason for the slower growth in NSWP
defense costs has been slower growth in operations
and maintenance (O&M) costs. Through 1975, War-
saw Pact O&M costs rose at an average annual rate of
3 percent; after 1975, at less than 2 percent. This
deceleration primarily reflects the trend in Soviet
procurement; with the weapons inventory increasing
less rapidly, the cost of maintaining it also grows more
slowly. But an accumulation of evidence indicates
that the other Warsaw Pact countries have also cut
equipment operating rates as a cost-saving measure,
although this is not reflected in our current estimates:
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Hungary, Czechoslovakia, and Romania began
adopting stringent fuel conservation measures.
in 1983
the Defense Ministry reduced participation in annu-
al divisional field exercises to one-sixth the previous
level to conserve fuel and ammunition.
Economic Influences on NSWP Defense Activities
Defense and the Economy. The lack of growth in
NSWP procurement represents a significant change
from the growth of the 1960s and early 1970s. We
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Even with little or no growth in procurement costs,
the NSWP countries have made notable progress in
modernization since 1970. They have:
? Increased the number of armored troop carriers by
nearly 80 percent, to include a large number of
BMPs.
? Increased tube artillery by 40 percent and multiple
rocket launchers by 70 percent.
? Replaced much of their towed antitank artillery
with vehicle-mounted and man-portable antitank
guided missiles and have begun to replace towed
antiaircraft guns with mobile SAMs.
? Begun deployment of the SA-5.
? Upgraded tactical aircraft by replacing early-model
MIG-21 Fishbeds with more advanced versions and
have begun to acquire MIG-23 Floggers.
cannot account for all the reasons for the procurement
plateau, but the evidence indicates that in two East
European countries policy decisions in response to
domestic economic conditions held down procurement
and that economic factors may well have played an
important role in the region as a whole:
? The procurement plateau in Eastern Europe, like
the slower rise in procurement in the USSR, oc-
curred in a period of lower economic growth. Since
the mid-1970s, the rate of increase of GNP
throughout the Warsaw Pact has been the lowest in
the post-World War II era. The economic slide in
Eastern Europe has been even more severe than in
the USSR because of the added problem of the
foreign debt crisis.
? In all East European countries, arms imports are in
competition with imports of investment and con-
sumer goods. Paying off foreign debt has claimed an
increasing share of East European export earnings,
which would otherwise go to purchase much-needed
imports, including weapons from the USSR. This
has been true particularly in East Germany, Poland,
Romania, and Hungary.
? In Poland in the early 1970s and in Romania in
1979, statements by government officials indicated
that policy decisions to allocate a larger share of
resources to the civilian economy were responsible
in part for the procurement slowdown in both
countries.
NSWP Defense Priorities. Both direct and indirect
evidence suggest that in Eastern Europe defense
traditionally has had a lower priority and consump-
tion a higher priority than in the USSR. Because the
procurement slowdown predates Eastern Europe's
economic troubles, it may-at least initially-have
been the result of decisions to lower the relative
priority of defense in favor of consumption.
challenges to Soviet wishes appear to have come most
often from Romania, Poland, and Hungary-
countries for which our estimates show the least
procurement growth after 1975.
The High Cost of Military Modernization. Another
obstacle to upgrading NSWP arms is the high cost of
new generations of weapons, particularly those with
advanced technology. Using dollar costs, we can
illustrate the impact of different rates of moderniza-
tion on NSWP procurement costs. For instance, the
cost of replacing the NSWP's T-54/55s with T-72s
today would be equivalent to its procurement for all
land arms in the last decade. Similarly, the cost of
upgrading NSWP MIG-15/17s to MIG-21s and cur-
rent holdings of MIG-21s to MIG-23s would equal
NSWP procurement of all types of aircraft during the
last 10 years. Achieving the above goals would take
34 years at the current rate of procurement growth.
Even so, by the time this hypothetical program could
be completed, NSWP forces would be equipped with
weapons first deployed in the early 1970s. Eastern
Europe is understandably reluctant to undertake am-
bitious modernization programs.
Other Factors. Although there is strong evidence that
policy decisions related to general economic difficul-
ties and the high cost of modernization slowed East
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European military procurement, other economic fac-
tors played a contributing role. For example, weapons
manufacturing problems clearly pushed land arms
procurement below intended levels. Contrary to Soviet
intentions in providing the designs and production
technology for the T-72 tank to Czechoslovakia and
Poland, NSWP tank modernization was slowed for
several years by T-72 production problems. The tank
is still only in limited series production there. Manu-
facturing problems with the Czechoslovak 152-mm
self-propelled howitzer delayed its serial production
also. Procurement of support equipment, much of
which is produced domestically, accounts for about
half of NSWP procurement and is affected by the
same materials and energy shortages and transporta-
tion bottlenecks that have afflicted Eastern Europe
generally.
The reluctance to support higher defense spending on
economic grounds is reinforced by Eastern Europe's
appraisal of the NATO threat. Warsaw Pact military
plans are based on a conflict with NATO, but knowl-
edgeable sources within the Pact report that most
NSWP officers do not believe NATO has either the
intention or the capability to initiate an attack. We
have little information on the views of key NSWP
leaders, other than in Romania, on the strategic
"threats" to their countries. We believe, however,
they also do not seriously entertain the possibility of a
NATO attack.
Prospects for Future NSWP Military Programs
The relatively low shares of GNP accounted for by
East European defense activities (less than half that of
the Soviet Union), and their much lower annual
growth rates, suggest not only that the East Europe-
ans have given a lower priority to defense than has the
USSR, but also that they have successfully resisted
longstanding Soviet pressure to do more. In effect, the
East European governments have arrived at a rela-
tively stable balance between Soviet pressure for more
defense spending and their own economic priorities,
although the balance varies from country to country.
Economic problems have reinforced this resistance in
most of the NSWP countries, but the experiences of
Bulgaria and East Germany, whose procurement costs
have continued to grow despite slower economic
growth, show that political decisions can sometimes
run counter to economic pressures. However, even in
East Germany, apparently the most "pro-defense
spending" of the NSWP countries, defense costs are
growing only half as fast as in the USSR.
If the slow growth of NSWP defense costs after 1973
is an accommodation to slower economic growth and
changing priorities, we would not expect a return to
faster growth in defense activities soon. The East
European economies suffer from serious structural
problems-rigid central planning, poor management,
rising energy and raw material costs, obsolescent
industrial plants, and an unmotivated labor force-
which make sustaining annual GNP growth rates
much above 2 percent unlikely. The economic pros-
pects for East Germany, Czechoslovakia, and Bulgar-
ia are better than for Poland, Hungary, and Romania.
Improved performance for the first three would make
a modest upturn in defense procurement more likely,
but only East Germany's and Bulgaria's priorities
have consistently favored defense procurement in the
past.
Future growth in NSWP military procurement will
probably hinge on acquisition plans for aircraft, which
historically have accounted for one-fifth of all pro-
curement costs. If the NSWP continues to emphasize
savings by buying upgraded models of 20-year-old
aircraft rather than modern aircraft, cost growth
probably will remain restrained. Land arms costs,
which have accounted for 12 percent of NSWP
procurement, will be heavily influenced by the pace of
tank modernization programs.
Implications for Relative Capabilities of
Soviet and NSWP Forces
Eastern Europe's economic performance and the low-
er priority given to defense have increased the quality
gap between NSWP and Soviet forces. Despite Soviet
success in extending control over NSWP arms pro-
duction and procurement, NSWP forces in the mid-
1970s were well behind the standards for Soviet units
in Eastern Europe, and the differences have continued
to widen. The northern-tier ground forces lagged
forward-deployed Soviet units by five to 10 years or
more in many categories, while southern-tier nations
were equipped with even fewer modern weapons. The
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gap will almost certainly grow given the nature of
Eastern Europe's economic problems and the political
difficulty of squeezing consumers to pay for major
defense increases.
Most disturbing to the Soviets is the fact that NSWP
forces are falling behind in precisely those categories
of equipment most critical to the Soviet conventional
strategy, which is based on integrated firepower and
combined-arms maneuver. For example:
? The East Europeans do not have the latest Soviet
tank (the T-80), and only Czechoslovakia has a
division's worth of T-72 tanks. Only a few countries
have improved T-55s or T-62s, and several still have
World War II-vintage T-34s in active units.
? Most forces still rely on towed antiaircraft guns
rather than surface-to-air missiles.
? Most NSWP divisions do not have attack
helicopters.
? As of 1984, only 40 percent of NSWP aircraft
represented models introduced since 1970, com-
pared with 80 percent for Soviet aircraft opposite
NATO.
The current Soviet emphasis on improving conven-
tional forces threatens to leave the NSWP forces
further behind. Although we anticipate that the
NSWP forces will make important gains in the future
in selected areas, they will have great difficulty
adopting some of the most promising Soviet com-
bined-arms tactics, such as the operational maneuver
group or the reconnaissance strike complex, and in
developing the integrated fire support viewed by the
Soviets as the key to defeating NATO's air and armor
defenses of the future.
Soviet Options
Soviet options for improving their allies' capabilities
are few and unappealing:
? They could subsidize East European arms imports
by allowing them to run trade deficits with the
USSR, but this would be backtracking on current
moves to cut support of the Eastern Bloc.
? They could demand that NSWP regimes raise
defense spending, at the cost of investment and
consumption, but this would run the risk of stifling
economic growth, sparking political unrest, or both.
? They may pay more of the East Europeans' defense
bill, but, because they are in the midst of their own
costly force improvement program, they are unlikely
to offer the expensive, long-term support necessary
to close the gap in force capabilities.
? They could give the East Europeans a bigger stake
in the production of Soviet weapons. This, however,
goes against longstanding efforts to specialize, rath-
er than diversify, NSWP defense industry and
would also require an expensive and lengthy upgrad-
ing of the East European defense industry.
The Soviets will probably offer some older equipment
on concessionary terms, but this also would not close
the gap. Even with these measures, they might have to
take on a greater share of the Pact's wartime mis-
sions. The Soviets have apparently experimented with
the precombat deployment of some of their own forces
from the western USSR to Eastern Europe. This
would compensate for the NSWP's failings in war-
time, but in effect would concede defeat in Moscow's
efforts to narrow the increasing discrepancy between
Soviet and NSWP capabilities. Ultimately, the USSR
may have to consider a return to its former strategy of
more limited use of NSWP forces in an independent
offensive role
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The Warsaw Pact is the most important institutional
embodiment of the USSR's relationship with Eastern
Europe and has several key functions in Soviet policy.
It is first and foremost a military alliance that serves
as the instrument of Soviet command and control over
East European armed forces in time of war and
provides justification for the stationing of Soviet
military forces in the region during peacetime. Sec-
ond, it is a political alliance that furnishes a frame-
work for Soviet efforts to coordinate the Pact's for-
eign, defense, and economic policies. Third, it serves
as an instrument for enforcing Soviet domination of
the region, providing a mechanism to pressure deviant
allies, and, if need be, a coercive means to guarantee
the survival of pro-Soviet regimes.
The Warsaw Pact has undergone considerable evolu-
tion since its creation in 1955. For the first six years,
it provided only a multilateral veneer for the funda-
mentally bilateral network of relationships between
the Soviets and the East Europeans. An extensive
joint exercise program during the 1960s laid the
foundation for a significant expansion of the Pact's
military institutions in 1969, and an additional mech-
anism for coordinating foreign policy was created in
1976. The obligatory formal extension of the Warsaw
Treaty in 1985, however, was not used to revise its
text to reflect these-and possibly further-organiza-
tional changes.
Background: The Early Years
The treaty signed by the prime ministers of the USSR
and seven East European states' in May 1955 provid-
ed only the bare bones of the alliance's institutions. A
single deliberative body was created-the Political
Consultative Committee (PCC)-composed of a
member from each signatory government "or another
specially appointed representative" and tasked with
conferring on "important international questions
' The founding members were Albania, Bulgaria, Czechoslovakia,
East Germany, Hungary, Poland, Romania, and the Soviet Union.
Albania ceased participating in Pact activities in 1961 and an-
touching upon their common interests." A combined
command was also established, headquartered in
Moscow. A Soviet marshal was appointed its com-
mander in chief (CinC), and the defense ministers of
the Pact's members were designated as his deputies.
While military units from each state were to be
"assigned" to the Pact's Combined Armed Forces
(CAF), they would remain, at least in peacetime,
under national control.
The Warsaw Pact was largely a hollow shell in its
early years. The PCC met only twice prior to 1960,
with senior government figures rather than top party
leaders attending. No official joint military maneu-
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announced of the defense ministers with the com-
mander in chief of the CAF. The Warsaw Pact played
no identifiable role in the suppression of the 1956
Hungarian uprising, which was put down by the
unilateral action of the Soviet army.
Soviet initiatives in the early 1960s-and the confron-
tations that ensued over Germany and Berlin-led to
the activation of the Warsaw Pact as an instrument of
Soviet foreign and defense policies. PCC meetings
were convoked more frequently to provide Soviet-
orchestrated endorsements of proposals for a Europe-
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curb the flow of refugees to the West. Chiefs of
delegations to these meetings were upgraded to the
level of Communist party first secretaries, and the
delegations themselves were expanded to include pre-
miers as well as foreign and defense ministers. F_
Heightened tensions in Europe in turn led to more
serious efforts to mold the Pact into an effective
military alliance. The Pact defense ministers met
separately in September 1961 for the first of what
became almost annual sessions. The commander in
chief of the Combined Armed Forces conducted the
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Figure 1. Soviet Premier Bul-
ganin signs original Warsaw
Treaty. Foreign Minister Molo-
tov, newly appointed Pact CinC
Konev, and Defense Minister
Pact's first large-scale multilateral exercise-involv-
ing Soviet, East German, Polish, and Czechoslovak
troops-in October of that year. Joint maneuvers-
especially those involving members of the Bloc's
northern tier-became a regular feature of Pact
military activity through the mid-1960s.
The Warsaw Pact played no formal role in the
invasion of Czechoslovakia in 1968. The Soviets did,
however, involve most Bloc members in political and
military efforts to put an end to the "Prague spring."
Statements issued by the regular PCC session in
March 1968 took no notice of the Czechoslovak
developments. This meeting was, nevertheless, fol-
lowed by a series of special Bloc summits-all boy-
cotted by Romania and some excluding the Czecho-
slovak leadership-that were convened to bring
pressure on the Dubcek regime. Pact exercises were
also used to set the stage for the invasion, and, while
the CAF command staff did not itself direct the
operation, armed forces from all Pact countries except
Romania participated in the occupation of Czechoslo-
vakia under Soviet direction.
Military Structure
Meanwhile, the Pact for several years had been
discussing plans for expanding and reorganizing its
military institutions. We believe these reforms were
undertaken to satisfy rather different-and indeed
somewhat contradictory-Soviet and East European
desires. Authoritative writings show that the Soviets
wanted to improve their ability to direct and coordi-
nate Bloc military policy-a capability they intended
to use to bring the East European military establish-
ments into line with expanded requirements that
evolving Soviet military doctrine foresaw for the
tional arrangements as enhancing the consultative
aspect of Pact policy formulation, thereby offering
improved opportunities to voice their own views.
The reorganization adopted at the March 1969 PCC
meeting in Budapest recast command and staff ar-
rangements for the Pact's Combined Armed Forces
and created several additional organs to handle vari-
ous aspects of Bloc defense policy. The reforms put an
end to the anomalous situation whereby all Bloc
defense ministers-including even the Soviet-were
nominally deputies to a Pact CinC who traditionally
was a Soviet first deputy defense minister. The na-
tional ministers would now meet annually as the
Pact's Defense Ministers Committee, nominally
equals under a rotating chairmanship, to consider
measures to strengthen Bloc defense capabilities, im-
prove organizational arrangements, and increase com-
bat readiness.
The CinC of the Combined Armed Forces meanwhile
was given a new set of deputies drawn from the ranks
of deputy defense ministers in each Pact member
state. Together with the CAF Chief of Staff, the
CinC and these "national" deputies constitute the
Warsaw Pact's Military Council, which is convened
twice a year to consider the state of combat readiness
and training. Additional deputy CinC slots have also
been established for Pact naval, air, and air defense
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Figure 2. CPSU General Sec-
retary Gorbachev signs Pact re-
newal. Seated left to right: De-
fense Minister Sokolov,
Premier Tikhonov, Gorbachev,
Foreign Minister Gromyko,
and Central Committee Secre-
tary Rusakov
forces and rear services-posts that are reserved for
Soviet appointees.
New institutions were also established to promote
standardization of military equipment within the Bloc
and to coordinate weapons R&D and production. A
Military Scientific-Technical Council, composed of a
deputy defense minister from each Pact member, was
created to provide policy guidance. Staff support and
day-to-day management are performed by a Techni-
cal Committee at Pact command headquarters in
Moscow. A Soviet general was named deputy com-
mander in chief of the CAF for armaments. His
duties include chairing the meetings of the Military
Scientific-Technical Council and directing the work
of the Technical Committee.
The Warsaw Pact's "Peacetime Statute," implement-
ing the 1969 military reorganization, officially ac-
knowledged the equality and sovereign rights of all
the Pact's members. In particular, it stipulated that,
as before, the military units "assigned" by the individ-
ual states to the Pact's Combined Armed Forces
would remain under the control of their respective
national authorities in peacetime.
The contradictory interests motivating the Soviets and
the East Europeans to enact these reforms predictably
resulted in neither side fully achieving its wishes.
Considerable Soviet pressure has brought the more
advanced East European armed forces-the East
German, Czechoslovak, and Polish-closer to the
standard of their Soviet counterparts, and thereby has
made them better prepared for their anticipated
wartime roles. But the other Bloc armed forces lag
decades behind in modernization and are generally ill
trained, ill equipped, and unmotivated. The Roma-
nians, in addition, have publicly aired disagreements
over defense policy-most notably following the No-
vember 1978 PCC session, when they refused to go
along with plans to increase defense spending
throughout the Pact. They have also forced the
Soviets to go around them-both figuratively and
literally-in conducting exercises.
Policymaking Structure
The Pact's policymaking machinery has also been
expanded on the civilian side with the creation of an
additional body to coordinate foreign policy. Pact
foreign ministers had begun meeting nearly annually
in the late 1960s, leading to the formal establishment
of a Foreign Ministers Committee in November 1976.
A Soviet proposal to increase the frequency of this
body's meetings to twice a year reportedly was adopt-
ed at its April 1983 session. The proposal may have
stemmed from Soviet interest in stepping up the
Bloc's political offensive against US INF deployments
in Europe. The Pact foreign ministers held no formal
meetings of their own in 1985, but this hiatus may
reflect the plethora of official and unofficial Bloc
summits, which brought the group together on three
occasions that year. In contrast to the extensive
command and staff system developed to support the
Combined Armed Forces, an extensive foreign policy
bureaucracy apparently has not been established.
The Political Consultative Committee also apparently
lacks a permanent political secretariat of its own, and
the Soviets for many years have provided administra-
tive support and direction out of their own foreign
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ministry. A Soviet deputy foreign minister with a
background in East European affairs, Nikolay Firyu-
bin, was publicly identified as "general secretary" of
the PCC in connection with its July 1966 meeting in
Bucharest, Romania. He continued to perform this
role until illness precluded his participation in the
January 1983 PCC session in Prague. A Czechoslovak
deputy foreign minister acted as general secretary of
the PCC at that meeting, and a senior Bulgarian
diplomat was identified in this post at the PCC's
October 1985 session in Sofia, indicating that the job
probably now rotates to the Pact member hosting the
meeting.
In all likelihood, the general secretary is the senior
administrative officer charged with preparations for
the PCC session. His most important function would
be to oversee the drafting of the communique and the
political declaration issued in the name of the PCC.
Important though this task is, the post obviously lacks
the independence, stature, and responsibility attached
to the position of NATO's secretary general.
We believe the establishment of a permanent political
infrastructure was a point at issue in the deliberations
over renewal of the Warsaw Treaty, which was
scheduled to expire in May 1985.
the Romanians, in the fall
of 1984, proposed the creation of a permanent com-
mittee-perhaps a counterpart to the NATO Coun-
cil-to coordinate Bloc positions on all important
international questions. Such a proposal is consistent
with President Ceausescu's public advocacy of greater
participation by the rank-and-file members of both
the Warsaw Pact and NATO in the formulation of
alliance positions, especially for arms control negotia-
tions, that are normally considered a "superpower"
preserve. The Soviets no doubt would veto anything so
ambitious. Other Pact members who have sought to
pursue more independent foreign policies in recent
years, such as Hungary and East Germany, may have
been torn between the temptation of enhanced consul-
tative opportunities and concern that institutional
modifications could be used to enforce greater Bloc
cohesion-that is, Soviet domination-on the East
Europeans.
efforts to revise the
treaty-in this or any other way in connection with its
renewal-ran afoul of Romanian insistence that only
the top party leaders, operating by unanimous con-
sent, could consider such changes. While Ceausescu
in an October 1984 speech announced acceptance in
principle of prolongation of the Pact, Romania contin-
ued to haggle privately over the length of the exten-
sion. This amounted to no more than a bargaining
tactic, ultimately unsuccessful, to extract Soviet eco-
nomic concessions, particularly in oil and gas deliver-
ies. Ceausescu finally gave in to Soviet insistence that
the treaty extension match its original duration-20
years with automatic renewal of 10 more-at the 13
March 1985 meeting of Bloc leaders following
Chernenko's funeral
As a result, the Warsaw Pact was extended through a
protocol to the original treaty, signed by the Bloc
party leaders in Warsaw on 26 April 1985, that
changed none of its language but merely extended its
life for another 30 years. The Pact has, nonetheless,
changed in significant ways.
Effects of Evolution
While it has not become an alliance of genuine equals,
it has evolved into a forum where at least some policy
consultations take place. At times these may be
simply for show-as when Gorbachev imitated Presi-
dent Reagan's post-Geneva briefing of NATO Allies
with a snap convocation of Bloc leaders in Prague.
More substantively, however, the East Europeans
have been able to influence the tone of statements
issued in the Pact's name. Pact declarations in the
1980s have not matched the stridency of Soviet
rhetoric on NATO INF deployments and have not
fully endorsed Soviet arms control positions. The tone
of these statements probably reflects East European
desires to maintain openings to the West that Moscow
was inclined to close.
The Pact has also become a much more cohesive
military alliance than the original collection of Soviet-
dominated East European armies despite considerable
foot-dragging within the Bloc on increases in defense
spending (see the article "Slower Growth in Non-
Soviet Warsaw Pact Defense Costs"). The Soviets
forced through changes in the Pact's wartime com-
mand system at the end of the 1970s that, while not
publicized, have been alluded to by the Romanians,
who refused to concur. These regulations for the first
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time provided for the subordination of non-Soviet
military forces to the Soviet Supreme High Command
in advance of hostilities. These measures could serve
to undercut the principle of peacetime control over the
members' armed forces by their respective national
authorities and could be used by Moscow to commit
the Pact's East European members to an active role in
a conflict without consultation with appropriate party
or government leaderships
The Soviets also increasingly see the Warsaw Pact as
an appropriate instrument for assuring the survival of
pro-Soviet regimes in Eastern Europe. Marshal Viktor
Kulikov, CinC of the Pact's Combined Armed Forces,
played the most active role in bringing pressure
directly to bear on Polish authorities during 1981 to
institute martial law and suppress the Solidarity
movement. Kulikov's threatening words were backed
by menacing Soviet military maneuvers under the
guise of Pact exercises, and the Poles were convinced
that at least token units from most other Bloc mem-
bers would participate in any direct Soviet military
invasion.' As in the 1968 Czechoslovak case, the PCC
did not itself consider the developments in Poland, but
an extraordinary summit of Bloc party leaders was
convened in Moscow in December 1980 to discuss the
situation. Should the Soviets deem it necessary to use
force in the region at some future date, the strength-
ened and refurbished Pact command structure could
play a more active role than in past similar crises.
Prospects
Gorbachev probably will seek tighter control over
Eastern Europe-and the Warsaw Pact-after sever-
al years of neglect from elderly and infirm leaders in
Moscow. He is faced, however, with alliance partners
who, having sampled some modicum of independence
and influence in collective policymaking, are likely to
resist efforts to turn the Pact back into a totally
compliant instrument of the USSR.
As in the past, the Soviets are likely to be more
insistent on having their way on military arrange-
ments than on foreign policy questions. In particular,
they may attempt to integrate Soviet theater com-
mands created in the fall of 1984 into the Pact's
peacetime command structure.' Such a move could
further subordinate East European armed forces to
the Soviet command system and compromise still
more the ability of East European political authorities
to retain control over their national armed forces.
Romanian demurral on such arrangements is certain
so long as Ceausescu remains in power. Eventual
compliance with Soviet wishes, albeit with consider-
able reluctance, is the more likely course elsewhere in
the Pact.
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Problems and Prospects
Romania's Problems
The situation in Romania, chronically troubled since
the early 1980s, continues to deteriorate. The princi-
pal causes of this decline include the faltering econo-
my and President Ceausescu's deteriorating health,
which for the first time has raised speculation in
Romania of an earlier-than-expected succession. In
addition, Soviet General Secretary Gorbachev is more
vigorously asserting Moscow's influence over Eastern
Europe, including Romania, and putting more pres-
sure on the East Europeans to follow Moscow's lead,
especially in foreign affairs and defense policy.
The economic outlook is bleak. The economy has not
recovered from last winter, when unusually harsh
weather left the country without energy reserves.
Most signs, however, indicate Ceausescu will try to
maintain his vigorous pursuit of debt reduction (that
is, rapid payoffs of the debt through large trade
surpluses), even though the resulting austerity will
continue to undermine the economy.
Such policies will depress already low living standards
even further. At best, the allocation of heat and
electricity to households will only match last year's
painfully inadequate supplies. The overall food supply
will be lower, in part because of heavily increased net
exports of wheat in the 1984-85 marketing year and
increased meat exports to pay for Soviet energy. The
1985 grain crop was only about 16.6 million metric
tons, some 2.4 million tons less than that of 1984 and
perhaps the smallest since 1975. Bread rationing has
been reimposed in some localities.
Ceausescu's security forces have maintained tight
control, and so far there have been no signs of unrest.
Absenteeism appears to be on the rise, however, and
the domestic situation could deteriorate in the event
of a succession crisis, especially if the population were
Although reports vary concerning the nature and
gravity of Ceausescu's illness, it is clear he is ailing.
still presides over lengthy leadership meetings, hosts a
steady stream of visitors, and in recent months has
traveled to China, North Korea, Bulgaria, and
Czechoslovakia. Visitors have not detected any loss of
mental acumen.
The View From Moscow
Under Gorbachev the Soviets seem to want to stem
the drift of recent years that allowed the East Europe-
ans to assert some measure of greater independence.
The new limits of Soviet tolerance are not yet clear,
but early indications suggest that Gorbachev will
more actively manage the Soviet-East European rela-
tionship. He is pressing for greater integration of East
European economies with that of the USSR and for
the allies to be more responsive to Soviet economic,
political, and military initiatives. Specific policies that
have caused friction with the Romanians include:
? Pressure on the East Europeans to follow the Soviet
foreign policy lead and to clear bilateral initiatives
outside the Bloc with Moscow.
? Criticism of Ceausescu's industrial policy and Sovi-
et insistence that Romania supply CEMA with
more agricultural commodities.
? Soviet insistence on a "CEMA first" trading policy
to force greater integration of the Soviet and East
European economies along bilateral lines within a
Soviet-dominated CEMA framework.
The Soviets recognize that they have fewer levers of
control over Romania than over any of their other
Warsaw Pact allies. Party and military contacts are
not close and Romania's trade is highly diversified.
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Moscow views Romania as a special case in Eastern
Europe, providing both a challenge and an opportuni-
ty. The Romanians have often opposed Soviet propos-
als in Warsaw Pact forums, embarrassing Moscow
and creating a potential stalking-horse for other East
European grievances.
We believe that the Soviets have tolerated Romania's
aberrant foreign policy because Ceausescu's authori-
tarian and ideologically orthodox regime has served
other Soviet national security interests well. Addition-
ally, the Soviets may have felt that the political,
military, and economic costs of altering Romanian
behavior would be too high and that they lacked
instruments of control in Romania to assure them that
pro-Soviet policy options would be regularly pursued.
In any case, Romania has been a stable border state
with a firmly entrenched Communist ruling party. Its
narrowly nationalistic foreign policy, its weak econo-
my, and Ceausescu's personality cult have had little
appeal in Eastern Europe, calming Soviet fears some-
what that Romania might serve as an example to
other allies.
Soviet Concerns and Assets
A stable Romania-with or without Ceausescu-
appears to be Moscow's chief concern. While Gorba-
chev is consolidating his power and pursuing an
ambitious internal agenda, he would find domestic
turmoil in Romania to be most unwelcome. We judge
that he would also find the Soviets currently have few
reliable means of influencing Romania under
Ceausescu. Recent official visits of high-level Roma-
nians to Moscow have been described by the Roma-
nians as difficult, suggesting no improvement in rela-
tions has occurred under Gorbachev. In fact, our
evidence in several areas indicates the same.
Trade Levels. Despite recent agreements in principle
to nearly double Soviet-Romanian trade, trade levels
in the 1982-84 period fell below that of 1981, though
they improved somewhat last year. Moscow has insist-
ed on payment for its energy and raw materials in
hard currency or "hard goods," which Romania needs
for its international trade, and Gorbachev recently
informed the Romanian Prime Minister that there
would be no special economic assistance from Mos-
cow. Furthermore, Moscow has consistently linked its
economic cooperation to political demands for greater
subordination to Soviet wishes, which Ceausescu will
not accept. Despite Romanian probing for Soviet
trade on favorable terms, Moscow has continued to
drive a hard bargain, and Moscow's economic lever-
age to date remains limited.
Party Contacts. Although there have been recent
agreements to pursue closer party-to-party ties,=
party ex-
changes are frosty and that the Soviets have made no
inroads in his area of the country in attracting
support. At the national level, Ceausescu has reporte-
ly isolated or purged officials who have even studied
in the Soviet Union, which makes Moscow's attempts
to identify and court potential anti-Ceausescu factions
difficult.
Military Contacts. The Romanian military continues
to have few contacts with its Soviet counterpart.
the Romanians are
isolated in the Warsaw Pact staff and do not partici-
pate in Warsaw Pact field exercises or allow their
officers to study at Soviet academies. Romanian
military attaches serving abroad-a likely target of
Soviet interest-are instead reportedly treated as
pariahs by the Soviets.
Infiltrations. The Soviets do not appear to have
penetrated the Romanian security forces, the bulwark
of Ceausescu's personal support.
Outlook
If Ceausescu maintains roughly his present level of
health-on balance a better-than-even chance in the
near future-we believe he will stay in charge
through 1986. But, in the event an operation causes
complications and Ceausescu requires extended rest
and recovery, the leadership situation could drift for
some time and his would-be successors probably
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would accelerate their maneuvering and make dis-
creet approaches to East and West. If it became clear
that he could no longer exercise the responsibilities of
office, the currently remote chances of a palace coup
could rise sharply.
Ceausescu's wife, Elena, his closest adviser in person-
nel matters over the past decade, is best positioned to
lead a post-Ceausescu collective but lacks sufficient
personal power to rule alone. Hence, the chances are
good that the other members of her succession team
would eventually push her out of the leadership and
one or more leaders from Ceausescu's inner circle
would take over. The most likely kingmaker in such
struggles would be Tudor Postelnicu, chief of the
security apparatus.
we believe the Soviets are looking for assets
in Romania and are probing for opportunities to gain
influence with key individuals and groups. If
Ceausescu began to seriously lose control or was
ousted, we would anticipate a more active Soviet role
and bolder machinations. In such a changed political
climate, the regime's current bulwarks against Soviet
influence might be considerably weakened.
Moscow does not want Romania's troubles to end in
chaos and the necessity for military intervention, but
probably does want Ceausescu and his regime to feel
increased pressures that might make them more
amenable to accommodating Soviet goals. In this vein,
the Soviets probably see limited domestic turmoil in
Romania to be to their advantage and do not plan to
assist Bucharest out of its difficulties without exacting
major concessions. The Soviets no doubt hope to
influence Ceausescu and, in case of his death or
ouster, his successors through a combination of eco-
nomic and political carrots and sticks as well as
whatever active measures they can mount.F___1 25X1
The Soviets probably see several possibilities for the
future of Soviet-Romanian relations. The Romanians
could muddle through their present difficulties with-
out a breakdown of Communist rule that might force
affairs.
present troubles are an object lesson to Eastern
Europe and will narrow Ceausescu's ability to conduct
an independent foreign policy. If Ceausescu felt the
need to turn to the East for help, the Soviets probably
calculate he could be made to temper his annoying
foreign policy and become more cooperative in Pact
Communist rule in Romania.
Alternatively, but much more unlikely, severe domes-
tic unrest could force Ceausescu to abandon his policy
of autonomy in return for major Soviet economic aid.
The Soviets would probably provide such aid and
capitalize on Ceausescu's vulnerability, rather than be
confronted with a serious challenge to continuous
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In any event, any successor to Ceausescu will face
difficult domestic conditions while lacking Ceauses-
cu's skill, experience, and knowledge. Hence, any 25X1
post-Ceausescu leadership will probably be more vul-
nerable to Soviet pressures and more willing to mute
Romanian foreign policy independence in return for
Soviet economic support.
Moscow will probably use any influence it develops
with Ceausescu, or especially with a post-Ceausescu
leadership, to pressure the Romanians to pursue some
or all of the following policies:
? Publicly endorse the Warsaw Pact and Soviet for-
eign and military policy lines while privately desist-
ing from disruptive objections to Soviet initiatives at
Pact and CEMA meetings.
? Funnel more resources into the agricultural sector.
? Place more emphasis on promoting pragmatic tech-
nocrats-men with proven experience managing
major economic sectors.
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Without a major breakdown of authority in Romania
or a regime change with powerfully clear anti-Soviet
implications, the Soviets probably would not want to
pay the price of military intervention. Romania is not
as strategically significant as northern-tier countries.
Moreover, the Romanians stress a decentralized "de-
fense of the homeland" military doctrine that would
make a quick clinical intervention difficult. The Yu-
goslavs also would see Soviet intervention in Romania
as a direct threat. Not only would they condemn it,
but it could also result in Yugoslav military mobiliza-
tion and a clearer orientation of Yugoslavia toward
the West, heightening tension throughout Eastern
Europe. Although the Soviets would probably judge
that their military intervention in Romania would not
provoke direct US military actions in support of
Romania, they would fear that their intervention
would freeze US-Soviet relations. Perhaps even more
important, it could be a disaster for Moscow's Pan-
European policy, and, as in the Polish crisis, set off a
fresh round of pro-NATO sentiment in Western
Europe.
Implications for Moscow
Romania's economic difficulties and the Ceausescu
regime's harsh police state are in Moscow's interest;
hence, time is on the Soviets' side as long as the
Kremlin can avoid a stark choice between direct
military intervention and watching a new regime even
more hostile to the USSR gain power. If Romania's
plight worsens, the Soviets could offer modest
amounts of vital supplies in return for incremental
compromises by Bucharest. If the Romanian regime
publicly acceded to Soviet desires on unfavorable
terms, this might inflame nationalistic sentiment and
further undermine the government's already low pop-
ularity more than Soviet aid would bolster the Roma-
nian economy. Concurrently, however, such aid could
help Moscow to build a constituency that in a succes-
sion crisis might serve it well. In the near future,
though, as long as Ceausescu remains in command,
the Soviets probably would expect few if any signifi-
cant compromises and are unlikely to deal with the
Romanians on concessionary terms.
The situation could rapidly become far more fluid
should Ceausescu become incapacitated or die. We
would expect a far more aggressive Soviet policy,
including active probing for clients with offers of aid
and insinuations and threats if the Romanians persist-
ed in their independent ways. If Gorbachev chose to
demand Romania's full compliance with Soviet for-
eign policies as a condition for any assistance to a new
regime, he could force a major crisis on Bucharest at
a time when it would be weakest. Such a crisis could
force the stark choice between direct forms of Soviet
intervention and a laissez faire policy that Gorbachev
wants to avoid. How well Moscow manages these
concerns could prove a litmus test of the new Kremlin
leadership's diplomatic skills and the challenge Mos-
cow poses to Western interests in Eastern Europe.
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Other Topics
Patterns in Availability of
Soviet Urban Food Supplies
The Soviet consumer judges his well-being largely on
the basis of the quality of the daily diet. About a half
of all household expenditures are on food. To gauge
changes in consumer welfare and popular morale, it is
therefore necessary to monitor changes in availability
of foodstuffs in the Soviet Union.
Although the USSR's food distribution and market-
ing system has improved in recent years, it remains
far behind those in Western countries. About 95
percent of food is marketed through the retail trade
network, which includes "state" and "cooperative"
stores. Generally speaking, state stores are located in
urban areas and cooperative stores in rural areas.
Nearly all retail food prices are centrally determined
and are fixed at relatively low levels. Despite food
shortages, Soviet leaders have maintained the long-
standing official policy against raising food prices.
demand.
The remaining 5 percent of food is marketed through
collective farm markets. State and collective farms as
well as individuals have the option of marketing
surplus products through these markets, which exist
in all cities and in nearly every town and village.
Steadily rising money incomes have combined with
the fixed retail food prices to channel demand for
quality foods into collective farm markets where
prices are relatively free to respond to supply and
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Commodity Sample in Emigre Survey
The survey data include responses to a query on the
availability and prices of 22 food commodities in
state stores and collective farm markets. By major
group these include:
Meat, chicken, and fish
Beef Mutton
Chicken Pork
Fish Sausage
Dairy products, eggs, and margarine
Butter Margarine
Cheese Milk
Eggs
Vegetables and fruit
Apples Oranges
Beets Potatoes
Cabbage Tomatoes
Staples
Bread Rice
Flour Sugar
Vodka
The commodity groups used in the comparisons of
availability in this article exclude fish, mutton, to-
matoes, and rice.
Trends in Food Availability Over Time
Agricultural shortfalls checked the progress that had
been made in the 1960s and early 1970s in improving
the Soviet diet. Increased queuing and shortages of
quality foods led to consumer disappointment. A
rising incidence of strikes related to food shortages in
1980-82 was a cause of concern to the leadership.
General Secretaries Brezhnev, Andropov, and Cher-
nenko adopted several measures to cope with the food
problem, including rationing, special distribution of
food at the workplace, and large purchases of food-
stuffs and grain from abroad.
these policies, with the help of
boosting food availability in 1983 and 1984.
Figure 1
USSR: Trends in Availability of Selected
Products in State Stores, 1981-85
Vodka
Staples a
80 Vegetab
les
and Fruits
Dairy a
20 Mesta
'O ? C C ro L C L as
LOO O W LN "OONO LM 9 W Lcc 9 W LOO
y~ C a. yC C O. ya. C O~ mC Ccc ~n a`
a Weighted average of the reports of regular availability of the
included products (see inset for product list).
b Data for 1st quarter 1985.
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The category of vegetables and fruit showed the most
improvement over the four-year period. The share of
respondents who found fresh produce regularly avail-
able in the first three months of 1985 was 30 percent-
age points higher than that in the first half of 1981.
Reflecting a general slippage in availability of food
products from 1981 to early 1983, the share of
respondents reporting regular availability of dairy
products fell to a low of 17 percent in the first half of
1983. By early 1985, 47 percent of the respondents
indicated that there was regular availability of dairy
products. Some improvement in meat supplies over
previous levels was noted in early 1985.
Despite improvements over time in the availability of
food products, some items are still more difficult to
obtain than others in the state retail trade network.
Meat and dairy products in particular are problem
categories. For example, fewer than one-third of the
respondents in our sample in 1985 reported that beef,
cheese, chicken, pork, or sausage could be purchased
regularly in state stores. 2 In contrast, three-fourths
reported regular availability of fish.
As expected, staples are among the most easily ob-
tainable items. Some 93 percent of our 1985 sample
reported regular availability of bread and 78 percent
regularly found sugar stocked in state stores.
Only vodka rivaled bread as the most regularly
supplied item. In 1985, 85 percent of those surveyed
said that vodka could be found easily in the state
trade network. We expect that this large supply of
alcohol fell off later in 1985 as a result of Gorbachev's
antialcohol campaign. The Soviet statistical authori-
ties announced a 25-percent drop in alcohol sales in
the second half of 1985 as compared with the same
period in 1984.
The upward trend toward increased availability of the
major categories of food groups did not continue
through 1985, however. Official Soviet data on eco-
nomic performance in 1985, as well as our estimates
of net farm product imports, indicate that total
availability of farm products declined somewhat in
2 The shares of respondents reporting regular availability of these
goods in state stores in the first quarter of 1985 were 17, 31, 22, 21,
1985. This suggests that per capita food supplies
declined slightly. Meat production, for example, ap-
pears to have increased only marginally over the 1984
output level. A smaller vegetable crop in 1985 as
compared with 1984, including a large drop in the size
of the potato harvest, probably led to a decline in the
availability of vegetables. Reporting from the agricul-
tural counselor at the Embassy in Moscow also
suggests a general tightening up of food supplies in
the second half of 1985. Emigrant sources in 1985
also indicated an increasing incidence of little or no
supply of meat and dairy products, particularly
butter.
City Size as a Predictor of Food Availability
Our data base indicates that city size is a good
predictor of relative availability of food supplies.
Cities with populations of over 1 million have the best
supplied state stores for all categories of food products
(see figure 2). Availability is most limited in small
cities with populations of less than 100,000. The
availability of food products in medium-size cities fell
between that of large and small cities for each group 25X1
examined. This accords with reports from Soviet open
sources that large, industrialized areas receive prefer-
ential treatment regarding distribution of food. The
intent is to provide for and maintain the support of the
key element of the work force-industrial labor.'
The difference between food availability in small and
large cities is most acute in the case of meat. Whereas
more than 20 percent of all respondents from our
sample of large cities in 1984 reported regular avail-
ability of meat in the state network, fewer than 5
percent of the respondents from the small cities could
consistently obtain meat from that source. Beef and
sausage, for example, were never regularly available
at the state stores in small cities, whereas the shares
of respondents indicating regular availability of these
products in large cities were 15 and 42 percent,
respectively.
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Figure 2
USSR: Share of Respondents Reporting Regular Availability of
Selected Food Products in State Stores, by City Size, 1984
Less than 100,000
100,000-1,000,000
Vegetables and Staples
Fruit
City Size as a Predictor of Price Differentials
The data base also suggests that prices in the collec-
tive farm markets relative to state prices are higher in
small cities. This reflects a relatively tighter food
supply situation in small cities than in large urban
areas. Although the free markets provide some foods
not available in the state stores, the greater price
differences in small cities indicate that there is more
unsatisfied demand for food in small cities than in
large cities. The price differentials between collective
farm market prices and state store prices also reflect
substantial differences in shopping convenience and in
the assortment and quality of the food products (see
figure 3).
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Figure 3
Relation of Collective Farm Market
Prices to State Store Prices, 19848
Small cities Medium-size Large cities
cities
O Total
? Meat
? Dairy
0 Vegetables
and fruit
For example, our sample showed that average market
prices for a sample selection of foods were 3.25 times
higher than average state prices in small cities in
1984, but only 2.93 times higher in medium-size cities
and 3.10 times higher in large cities.' The differential
between collective farm market prices and state store
prices for meat is noticeably lower for the medium-
size cities than for either the small or large cities.4 The
market-state price differentials for dairy products are
relatively even over the range of city sizes, but for
vegetables and fruit the differential is noticeably
greater in the small cities.
' Although there is little difference in the differential between small
and large cities for beef and pork combined, the market prices for
beef in small cities are higher than state prices by a proportionally
greater amount than in large cities; for pork this relation is
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The Soviet Construction
Materials Industry: Its Role
in Economic Expansion
The efficiency of the national economy and the rates
of our growth depend to a great extent on the
structure and quality of materials. At present we are
lagging in this task.
Mikhail S. Gorbachev
at the June 1985
Science and Technology Conference
Mikhail Gorbachev's aggressive industrial moderniza-
tion program will challenge the construction materials
industry to supply more and better quality building
products for renovating and expanding production
facilities.' In addition, his program to improve con-
sumer welfare depends, in part, on more and better
housing. Whether the industry can meet these chal-
lenges depends on its ability to overcome a number of
problems that have contributed to its deteriorating
performance over the past decade.
A Troubled Industry
Rapid increases-averaging nearly 10 percent per
year-in the output of construction materials in the
1961-75 period were followed by an abrupt slowdown
in growth to only 2 percent annually in the last half of
the 1970s. Since 1980, performance in the industry
has been mixed: production virtually stagnated in
1981-82 but made a moderate recovery in 1983-84.
The severe winter hampered output in the first quar-
ter of 1985, limiting industry growth to less than 2
percent for the year as a whole (see table 1).1 The rate
of growth of cement production was less than half
that originally targeted for 1981-85. Production in-
creases for other products remain well below those
necessary to assure an adequate supply of materials to
meet the newly promulgated industrial investment
plans for the balance of the decade.
' Performance in the precast ferroconcrete sector was so abysmal
that the Soviets withheld monthly production statistics for three
Factors contributing to slow production growth in-
clude the deteriorating quality and shortage of raw
materials, aging plant and equipment, inadequate
investment, shortages of labor, irregular supplies of
energy, and transportation bottlenecks. These defi-
ciencies are exacerbated by the fragmentation of
administrative responsibility for the planning, produc-
tion, and distribution of construction materials.
Impact of Poor Performance
The poor performance of the construction materials
industry, along with excessive waste in Soviet use of
construction materials, has had a substantial negative
impact throughout the economy. Many different in-
dustries as well as specific geographical areas have
been affected. Although 1979 and 1982 were particu-
larly bad years, shortages of construction materials
have occurred consistently since the mid-1970s and 25X1
continued to affect Soviet enterprises in 1985 (see
table 2). Appeals to the State Committee for Material
and Technical Supply (Gossnab) and the Central
Committee of the CPSU have resulted only in the
issuance of decrees calling for additional production
from enterprises of the Ministry of the Construction
Materials Industry and increased availability of rail
transport.
The major sectors of the Soviet economy affected by
construction materials shortfalls in recent years
include:
? Nuclear power. Although overall deliveries in-
creased substantially in 1984, continuing shortages
of cement and prefabricated concrete forced Goss-
nab to issue a resolution to all territorial organiza-
tions requesting full cooperation in the delivery of
construction materials for nuclear power stations in
support of the Long-Term Energy Program.
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Table 1
USSR: Average Annual Growth of
Construction Materials Output
Preliminary.
b Includes construction lime, gypsum, rock products, and mineral
wool insulation.
? Rural housing. According to Izvestiya, rural hous-
ing continues to face severe shortages of construc-
tion materials, especially wall and roofing materials.
This has led the Committee of People's Control to
reprimand the Main Administration for Trade in
Economic Goods for causing the shortages.
? Oil and gas development. Siberian oil-drilling sites
and pipeline construction projects are experiencing
shortages of cement. Shortages of construction ma-
terials needed for well repairs and infrastructure
development in the oil and gas fields have been a
chronic complaint of the oil and gas ministries for
several years.
? Military construction. Facilities subordinate to the
Defense Ministry's Main Directorate for Special
Construction-a prime contractor for the initial and
ongoing construction support of facilities for strate-
gic offensive and defensive forces-continue to be
short of reinforced concrete, cement, and brick.
Past Attempts To Address the Problem
The Central Committee supports the ideas expressed
at the June Science and Technology Conference on
the need for ... the production of efficient construc-
tion materials.
Mikhail S. Gorbachev
at Tyumen' in September 1985
Soviet officials have long been aware of the problems
confronting the industry. Official resolutions and nu-
merous articles in the Soviet press have recommended
an expansion of capacity, increased automation, and
conservation of energy and raw materials. Investment,
however, has been inadequate; there has been little
addition to the industry's capacity since 1980. More-
over, the limited success in automation has hampered
Soviet efforts to improve substantially the quality of
materials produced and to reduce the labor intensive-
ness of the industry. There has been no effort to
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Table 2
USSR: Selected Production Shutdowns and
Work Stoppages Due to Construction Materials
Shortages, 1982-85
April 1982
Artemovskiy Reinforced Concrete
Plant (military)
Cement shortage
Production halted periodically through
August 1982.
May 1982
Kola Atomic Power Station
Lack of wall and roofing materials
Construction slowdown delayed
production.
October 1982
Urengoy-to-Uzhgorod Pipeline
Needed cement
Pipeline completion delayed.
November 1983
Tyumen' Oblast Gas Stabilization
Plant
Lack of cement
Production halted for several days.
April 1984
Balakovo Atomic Power Station
Needed reinforced concrete blocks
Construction halted for indeterminate
period.
May 1984
Kyshtym Reinforced Concrete
Products Plant
Cement shortage
Production halted for at least seven
days.
August 1984
Novosibirsk Military Construction
Organization
Needed reinforced concrete
Half of shop shut down temporarily.
November 1984
Sukhoy Log Secondary Nonferrous
Metals Plant
Needed clinker and slag
Three mills shut down for several days.
Production halted for indeterminate
period.
February 1985
Millerovo Metallurgical Equip-
ment Plant
Construction material shortage
Construction delayed for indetermi-
nate period.
March 1985
Talasskiy Brick Plant
Construction material shortage
Plant reconstruction delayed; quarter
plan 20 percent fulfilled.
June 1985
Chardzhou Chemical Plant
Construction material shortage
Half-year construction plan
unfulfilled.
September 1985
Tula Oblast'
Construction material shortage
Nine-month housing plan 73 percent
fulfilled.
consolidate administrative control over construction highly effective scientific and technological research
materials production and distribution. The impact of developments, such as ... highly effective types of
these constraints has been magnified by Moscow's polymer materials.
inability to move ahead on the economywide conser-
vation of construction materials. As a result, Moscow Mikhail S. Gorbachev
has had to rely increasingly on imports of these at the June 1985
materials, especially insulation and refractory materi- Science and Technology Conference
als. By 1984, imports had reached $675 million-
nearly 40 percent of which was paid in hard currency With the release of preliminary goals for the 1986-90
(see chart).0 Five-Year Plan, we have some understanding of what
the industry will be tasked with over the next five
Looking Ahead years, but little knowledge yet of the flow of invest-
The proportion of plastic materials, ceramics, and ment to underwrite these tasks. Although Gorbachev
other advanced nonmetallic materials is still small in
the overall volume of materials. We must exploit
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Materials, 1975-84
the production of new, better quality construction
materials that will be demanded by the construction
sector, such as basalt plastics, glass ceramics, and
polymeric materials.
Exports
= Imports
Source: Vneslurva.va torrgovlva v SSSR, various years.
recognizes the need to reduce shortages of construc-
tion materials, he probably hopes that his emphasis on
renovation as opposed to new plant construction,
along with an intensive, economywide campaign to
conserve on construction materials use, will allow him
to hold down the share of investment to the industry.
Moreover, commissioning of new capacity during the
12th Five-Year Plan (1986-90) probably will remain
relatively low given Gorbachev's emphasis on the
machine-building sector and the substantial savings in
construction materials envisioned from the renovation
of existing facilities.
In his 11 June 1985 address to the Conference on
Science and Technology, Gorbachev emphasized the
need to focus future work on plant modernization, a
theme that has since been echoed in Pravda editorials.
Whether this emphasis will be able to reduce demand
for construction materials is problematic. In any
event, some new construction will be necessary to
bring down the high level of unfinished construction
in the industry and to add new facilities dedicated to
Over the next year or so, indications that Moscow is
moving aggressively to improve the performance of
the construction materials industry would include:
? An increase in the investment allocated to the
industry in the 1986-90 Five-Year Plan.
? Moves by Sergey F. Voyenushkin-the newly ap-
pointed Minister of the Construction Materials In-
dustry-to replace ineffective managers throughout
the industry as he did in the RSFSR.
? The widespread application of a system to ensure
delivery of materials to construction sites in com-
plete sets. This would alleviate excessive amounts of
material supplies at construction sites, reduce losses
of materials, and avoid work disruptions caused by
inadequate supplies of specific materials.
? The formation of a "superministry" of construction
materials, encompassing the material-related re-
sponsibilities of the 16 organizations currently hav-
ing such responsibilities, or the absorption of the
construction materials ministry into the State Com-
mittee for Construction Affairs.
? The signing of a major contract with a Western-
possibly US-firm for the renovation of the Novo-
rossiysk cement plant, which could lead to a con-
tract for the modernization of a large portion of the
cement industry.
? The signing of a contract with a West German or
US firm to purchase a turnkey magnesite plant and
two other plants to be located in the Magnitogorsk
region for the manufacture of refractory brick for
the steel industry. This would double Soviet refrac-
tory output and improve substantially the quality of
brick produced.
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Areas that will require long-term attention include
completion of unfinished construction within the con-
struction materials industry and improvement of the
system of reports and monitoring controls over the
expenditure of material resources. Increased materials
conservation and expanded automation will also be
necessary.
Conservation in the general economy would make a
long-term contribution by releasing scarce types of
primary raw materials and supplies and reducing
pollution of the environment by waste products. Spe-
cific measures probably will include the assignment of
specific tasks for saving material resources both for
the five-year plan and each individual year, the
expansion of production of lightweight structural ele-
ments, the introduction of materials with high tensile
strength, and the increased utilization of industrial
waste products.
Accelerated automation is a key to continuing growth
of the construction materials industry and could lead
to a substantial increase in the efficiency of produc-
tion: higher productivity of labor, greater and more
uniform output, and reduced consumption of energy
and raw materials. However, this will require a
number of expensive measures over the long term,
especially the mechanization and automation of basic
and auxiliary production processes through the wide-
spread introduction of computers.
Perspective
Gorbachev will be hard pressed to reconcile his needs
to boost investment in machine building, meet the
investment needs of energy and agriculture, and
increase investment in the construction materials in-
dustry. He will also find it difficult to deemphasize
new construction as much as he would like and get the
economywide conservation he is counting on.
If investment in construction materials is not in-
creased in the 12th Five-Year Plan period, additional
new capacities will be slow to materialize, and the
inefficiencies associated with an aged capital stock
will continue. Rising raw material and equipment
costs could exacerbate this problem. The construction
materials industry will have few resources to use for
mechanizing the numerous labor-intensive production
processes that currently prevail. For example, accord-
ing to press reports, about half of the workers in the
cement sector are still employed in manual and
auxiliary tasks. Planners, who hope to raise labor
productivity through the introduction of new high-
efficiency machinery, increased mechanization and 25X1
automation, and better social and cultural facilities at
production enterprises, will find it increasingly diffi-
cult to modernize because all these improvements
depend on higher rates of growth of capital
investment.
The industry's efforts to improve its raw material
supply position appreciably will also be affected by
the performance of other industrial sectors. The plan
to use more metal wastes and fly ash instead of rock
products, for example, may be hampered by continued
slow growth in the metals and coal industries and by 25X1
transportation constraints. If fuel and power supplies
cannot be made more reliable, production of construc-
tion materials will continue to falter.
In sum, unless investment in the industry is increased
substantially to develop new sources of raw materials,
commission new production capacity, renovate old
plants, and increase output of processing equipment,
continuing construction materials shortfalls will seri-
ously hamper Gorbachev's modernization and con-
sumer welfare efforts. Specifically, new housing starts
will slow and capital renovation will suffer due to
delays in the production of advanced and higher
quality construction materials.
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Soviet Oil Production
and Exports:
Prospects for 1986
Soviet oil production in 1985 fell-for the second
consecutive year-to about 11.9 million b/d, more
than 300,000 b/d below the 1984 level. Hard curren-
cy receipts from oil exports dropped about $3.5
billion-down roughly 25 percent. The Soviet plan for
1986 calls for raising oil production to more than 12.3
million b/d, but the production outlook is precarious,
particularly for the key Tyumen' region, which ac-
counts for 60 percent of oil output. On the basis of the
oil industry's recent record of rising investment and
falling output, together with extensive discussion in
the Soviet press of a widespread lack of equipment,
skilled manpower, and effective management in the
industry, we conclude that:
? Even with the planned boost in investment for the
USSR: Oil Production, 1975-86
oil industry, production is unlikely to rise above the 6
1985 level.
? Depending on the degree of slippage in the supply of
resources to the oil industry, national output could
fall another 300,000 b/d.
? Despite conservation and substitution efforts, do-
mestic oil consumption is likely to remain at 1985
levels.
? Oil exports to hard currency countries will probably
again bear the brunt of any production shortfalls.
At the extreme, export reductions, compounded by
anticipated oil price declines, could cost Moscow as
much as $4-6 billion in hard currency earnings.
Trouble in the Tyumen' Region
Development of Tyumen's largest and best oilfields
began more than 20 years ago, and the era of "easy
oil" has certainly come to an end. Further attempts to
increase-or even sustain-production will be ob-
structed by several factors:
? Production is overly dependent on output from eight
to 10 large but overworked oilfields that were 25X1
developed during 1964-73. Production from most of
them has peaked, and output will probably continue
to fall in 1986.
? There is little likelihood for the imminent discovery
of a new supergiant oilfield. New capacity will have
to come from developing a much larger number of
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remote fields that are smaller, structurally more
complicated, and far less productive than the oil-
fields developed during the 1970s. According to
Pravda, however, the Soviets planned to commission
26 oilfields during 1981-85, but only 13 are produc-
ing. We judge that the plan to bring 18 new oilfields
on line in 1986 is no more likely to be met.
? Average flow from new wells has been steadily
declining-from 1,250 b/d in 1975 and 490 b/d in
1980 to about 220 b/d in 1985.
? Because of excessive water injection, the share of
water produced with oil in Tyumen' has risen from
14 percent in 1975 to more than 50 percent in 1985,
sharply escalating the demand for reliable pumping
equipment and also increasing the production costs.
Currently, pumps are used on more than 70 percent
of the producing wells in the region, compared with
about 20 percent in 1980.
? The Soviet press reports that production and sup-
port infrastructure in the Tyumen' oil region is four
to five years behind the level needed to support
planned production. Moreover, much of this equip-
ment has been ravaged by corrosion.
In 1985 Moscow stimulated Tyumen' production by
transferring substantial equipment and labor re-
sources to this region from the older producing re-
gions. Sustaining output in 1986 would require an
additional increase in allocation of similar resources
to Tyumen'. Further transfers, however, could result
in accelerated loss of output in the older regions that
could-because flow rates from new Tyumen' wells
can no longer be assumed to be greater than those in
some of the older regions-cause national output to
decline.
Prospects for Production
We judge that General Secretary Gorbachev is not
altering the thrust of oil policy and continues to favor
production growth despite the high cost and the
negative consequences for needed exploration. In re-
action to the two-year decline in production, Moscow
plans to raise oil output by more than 3 percent and
increase oil investment by 31 percent in 1986. We do
not believe that the measures outlined in Gorbachev's
Tyumen' speech in September-increased application
of science and technology, better equipment, a sharp
increase in housing construction, and the availability
of amenities-are capable of increasing production in
1986. Although pressure from Gorbachev-most no-
tably the firings of high-level oil industry personnel
for poor performance-may lead to stepped-up pro-
duction from older fields in the short run, such gains
will be insufficient to push national output above the
1985 level and will be extremely difficult and costly to
sustain for more than a year at best.'
Moscow plans to allocate over 14 billion rubles to oil
industry investment in 1986, most of which will be
used in Tyumen'. Much of this investment, however,
will be absorbed by sharply rising costs associated
with providing sufficient capacity just to offset deple-
tion. Several factors have contributed to this situation:
? In the past, the Soviets were able to compensate for
the downward trend in average well flows by more
intensive drilling of established fields. According to
the Soviet press, this option may no longer be
available, and an increasing number of new fields
must be tapped in areas remote from infrastructure.
? Local oil officials complain that the costs for devel-
oping the smaller and more remote fields are esca-
lating but that investment funds are allocated on the
basis of the lower costs previously experienced in
developing fields in more favorable locations-es-
sentially dooming new output plans.
? On the average, 20 percent of the production wells
in Tyumen' stand idle.
? The leadtime for new equipment orders means that
delivery and timely installation in Tyumen' will not
be possible much before next winter, when the
ground is frozen hard and winter roads can be built.
' The new regime, in addition to replacing the Soviet oil minister,
removed key personnel in Tyumen'. Moreover, two production
associations that run oil operations in the European USSR were
given control over three West Siberian production directorates in an
unprecedented move to improve efficiency.
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The new fields are located generally to the north of
existing oil operations in areas entirely lacking
infrastructure.
Other Producing Regions
In aggregate, the oil and gas condensate output from
the other producing regions has been declining since
1975 and is likely to fall again in 1986, although the
drop may not be as large as in previous years. Newly
developed oilfields on the Buzachi Peninsula in Ka-
zakhstan and in the Caspian Basin (onshore and
offshore), together with new condensate output from
Karachaganak, Astrakhan', Shurtan, and Dauleta-
bad, will help to offset declining output from the old
regions west of the Urals. Production from the Volga-
Urals area-the USSR's second-largest producing
region-has experienced annual declines averaging
on the use of fuels and lubricants, during the first nine
months of 1985, automobile transport exceeded its
planned allocation by more than 46,700 b/d of gaso-
line and 8,500 b/d of diesel fuel.
We believe that oil consumption will remain essential-
ly flat in 1986 because:
? The demand for oil products-such as gasoline and
diesel fuel-in the transportation and agriculture
sectors will probably grow.
? There is little opportunity to reduce oil consumption
in the residential sector.
? The requirements for nonfuel oil products-such as
lubricants and plastics-will probably remain
constant.
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about 200,000 b/d since 1978.
Can Oil Consumption Be Reduced?
We believe that domestic oil consumption-which
grew rapidly during the 1970s-has essentially stabi-
lized. Of the major oil products-gasoline, kerosene/
jet fuel, diesel fuel, lubricants, and fuel oil-we judge
that the only oil product for which there exists a
substantial opportunity for reduced consumption (be-
cause of either improvements in efficiency or substitu-
tion) is fuel oil.' Nonetheless, during 1981-85 Moscow
did not decrease the volume of fuel oil consumed by
thermal power plants-a main goal of the oil conser-
vation effort. Our analysis indicates that the volume
of fuel oil consumed by power plants remained at
nearly the same level in 1985 as in 1980-about 2.5
million b/d, 28 percent of total apparent oil consump-
tion. Despite successes in substituting natural gas for
fuel oil at many power plants, fuel oil consumption by
coal-fired power plants increased during 1981-85
because of low-quality coal and coal shortages, thus
offsetting the potential savings in the oil-to-gas con-
version program.
The Chairman of the State Committee for Oil Prod-
ucts has indicated that, despite efforts to economize
2 In 1986, the USSR plans to save about 25,000 b/d of gasoline-
about 2 percent of current gasoline production-by using liquefied
compressed gas to power about 100,000 automobiles. Increased
demand for gasoline as a result of new automobile production-
about 1.3 million vehicles annually-will easily offset this saving.
? Fuel oil consumption in the electric power industry
-which accounts for about 70 percent of total fuel
oil consumption-will probably decline only mar-
ginally in 1986 because of continuing problems with
low-quality coal and coal shortages.
Implications for Exports
If Moscow can stem the decline in production, the
Soviets will at best be able to maintain total oil
exports this year at the 1985 level-an amount we
estimated to be 10 percent below the 1984 level. In
the event output falls by as much as 300,000 b/d in
1986, Moscow could be forced to reduce exports an
additional 10 percent.
Moscow opted to absorb most of the 1985 production
decline through reductions in oil exports to the
West-at a cost in earnings of $3.5 billion-while
sustaining deliveries to its Communist partners.
.Maintaining 1986 oil exports to the developed West at
last year's level-depressed by about 25 percent from
1984 levels-will continue to cost the Soviets much-
needed hard currency-the more so if world oil prices
drop further. Earnings from gas exports are scheduled
to increase substantially by 1990 but will fall short of
compensating Moscow for the expected decline in oil
export revenues.
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Tough Options
Nonetheless, we believe that exports to the developed
West would probably, at least initially, bear the brunt
of further reductions in oil production, costing the
Soviets almost $700 million for every 100,000-b/d
decrease (at $20 per barrel). But the Soviets may still
need to make some tough additional choices on how to
allocate available exports in 1986. The East European
countries, heavily dependent on Soviet oil, are already
suffering from shortages. A cut in oil deliveries would
cause them major economic difficulties at a time
when they are under pressure to export more finished
products to the USSR. Moreover, Moscow would
have to weigh carefully the attendant risks of econom-
ic instability and increased political tensions that
could result from a reduction in oil deliveries to these
nations.
Political considerations will also make it difficult to
cut deliveries to Cuba, Nicaragua, and Moscow's
other Third World client states, which account for
about 10 percent of Soviet oil exports. Even in the
case of Nicaragua, where,
the Soviets have pledged to supply oil in 1986
at only 60 percent of last year's level, the Soviets will
probably supply additional supplies-especially if oil
shortages threaten Sandinista military operations.
approval of the 1986 purchasing program has been
delayed, in part, because of hard currency shortages.
Recent personnel changes in the Foreign Trade Min-
istry and Gosplan could also be delaying the required
approval.
While Moscow could partially compensate for re-
duced earnings through further borrowing and larger
gold sales, major additional import cuts may also be
in the cards, especially if Moscow cannot arrest the
decline in oil production and if the fall in export
earnings becomes particularly sharp:
? Additional gold sales of $2-3 billion are possible, but
any further sales would seriously affect gold
prices-a reaction that the Soviets generally try to
avoid.
? Traditional financial conservatism would probably
put a brake on continued Soviet borrowings.
Anticipated drops in Soviet grain imports in 1986
may give Soviet planners some flexibility to avoid
serious cuts in machinery and equipment imports. In
fact, large equipment orders last year could mean
some increase in imports for major development pro-
jects. However, major adjustments to imports in 1987
would almost certainly be necessary to prevent a
sharp increase in Soviet debt service ratio in light of
declines in oil export earnings and recent borrowing
activity.
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Oil deliveries to other Third World countries repre-
sent 6 percent of Soviet oil exports, providing the
Soviets with another area where deliveries could be
reduced. India receives the majority of this amount.
Moscow, however, has shown concern for the political
and strategic aspects of its relationship with India and
would probably be reluctant to make a reduction
there.
Impact on Hard Currency Earnings
At the extreme, export reductions, compounded by
anticipated oil price declines, could cost Moscow as
much as $4-6 billion in earnings, presenting Moscow
with onerous choices between rapidly expanding its
debt and reducing hard currency imports. Last year's
fall in revenues was the major contributor to Mos-
cow's deteriorating financial position. To offset earn-
ings reductions, the Soviets stepped up borrowing
dramatically and postponed some planned purchases.
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