INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00770R000100300001-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 41
• Document Creation Date: December 22, 2016
• Document Release Date: June 28, 2011
• Sequence Number: 1
• Publication Date: May 23, 1986
• Content Type: REPORT

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Directorate of
Intelligence
d1l
Weekly
International
Economic & Energy
23 May 1986
DI IEEW 86-021
23 May 1986
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International
Economic & Energy Weekly
23 May 1986
iii Synopsis
1 Perspective-USSR: Facing Hard Currency Shortages
3 USSR: Economic Impact of the Chernobyl' Accident
15 French and Japanese Industrial Policy: Diverging Impacts on the Electronics
Industry
19 Briefs Energy
International Finance
Global and Regional Developments
National Developments
Comments and queries regarding this publication are welcome.
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International
Economic & Energy Weekl{
Synopsis
1 Perspective-USSR: Facing Hard Currency Shortages
Low energy prices, domestic oil production problems, and a depreciating dollar
will substantially reduce the Soviets' ability to import Western equipment,
agricultural goods, and industrial materials for the rest of the decade. This
comes at a time when General Secretary Gorbachev may have been counting
on increased inputs from the West to assist his program of economic
3 USSR: Economic Impact of the Chernobyl' Accident
Preliminary analysis of the Chernobyl' nuclear accident indicates that direct
damage to the Soviet economy will be relatively minor. Nonetheless, the
potential loss of electric power this year could put a crimp in General
Secretary Gorbachev's hopes to get the new five-year plan off to a fast start in
The external debts of the Central American Core Four countries-Costa Rica,
El Salvador, Guatemala, and Honduras-are small, but the burden of
repayment weighs heavily on their equally small economies.
Prime Minister Gandhi, prompted by a growing trade deficit, a tight budget,
and domestic political problems, has moved to slow the pace of economic
liberalization. Gandhi is modifying his approach to protect the country's hard
currency reserves and deny his opposition a rallying point and will look
increasingly to Western governments for financial support.
? 15 French and Japanese Industrial Policy: Diverging Impacts on the Electronics
Industry
Although both the Japanese and French electronics industries have been
nurtured by a wide range of government policies, the Japanese industry has
emerged as a world leader while the French industry has failed to make a
major impact on the global electronics market. Japan, in our judgment, will
build upon its current strengths, while continuing French lags in electronics
may lead Paris to tighten protection for the sector, including calls for higher
EC tariffs on electronics products.
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Secret
International
Economic & Energy Weekly
23 May 1986
Perspective USSR: Facing Hard Currency Shortages
Low energy prices, domestic oil production problems, and a depreciating dollar
will substantially reduce the Soviets' ability to import Western equipment,
agricultural goods, and industrial materials for the rest of the decade. The
decline in Moscow's hard currency import capacity-most likely on the order
of one-third-comes at a time when General Secretary Gorbachev may have
been counting on increased inputs from the West to assist his program of
economic revitalization. Assuming some increase in debt to the West, substan-
tial annual gold sales, and an $18 average price per barrel for Soviet crude oil
and oil products during 1986-90, we estimate that Moscow faces the prospect
of real imports falling to levels comparable to those of the mid-1970s.
The Chernobyl' nuclear accident, although troublesome, may not have a large
impact on the Soviets' hard currency position. Immediate costs focus on a few
selected Western imports-such as robots-needed to deal with the accident
and the neglible export losses resulting from the EC ban on food. Over the
longer term, hard currency losses could rise if Moscow needs to cut hard
currency oil sales to divert fuel to thermal power stations.
Since late last year purchasing activity has slowed, and planned purchases are
now being scaled back. The cutbacks appear to be across the board and are
even affecting imports of equipment for oil and gas fields. In addition to
dealing with the immediate scarcity of hard currency, this strategy allows the
leadership time to implement a more coherent import program-one that
reflects the long-term nature of the problem. Gorbachev faces a difficult time
in choosing among competing demands for foreign exchange:
? The Modernization Program. While the success of the program hinges on
internal factors, the lofty goals imply that some highly specialized imports
from the West for such sectors as energy, machine tools, microelectronics,
and telecommunications must be continued, if not increased. Import cuts in
key intermediate goods, in turn, could strain already taut production
schedules.
? Consumer Welfare. A cutback in hard currency agricultural imports would
reduce availability of such commodities as meat, vegetable oil, coffee, cocoa,
and some fruits and-depending on the size of the grain crop-could slow
domestic production of meat, milk, and eggs.
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There are several areas where Moscow could take action to counter the adverse
impact of the import cuts:
? Economic Initiatives. Soviet planners will need to revise the five-year plan to
account for reduced imports. Moreover, they might consider bolder economic
reforms to carry out Gorbachev's ambitious capital renewal policy without
drawing heavily on resources slated for defense.
? Western Involvement in the Soviet Economy. Even before the fall in oil
prices, Soviet planners, including Gorbachev, were reportedly considering
altering the nature of the relationship between Soviet entities and Western
firms to enhance the effectiveness of the technology and equipment imports.
They recently have shown an interest in joint ventures entailing Western
profit sharing and managerial presence, closer engineering and production
consultations with Western firms, and the creation of more training facilities
with Western participation.
? Political Relations With the Developed West. We believe the Soviets will
consider ways-short of real concessions on significant political or security
issues-to foster a climate conducive to attracting Western involvement in
the Soviet economy. Possible actions include toning down anti-US rhetoric,
relaxing restraints on Jewish emigration, and allowing expanded intra-
German ties. Flexibility would be strongly constrained, however, by an
expressed Soviet policy aim of reducing long-term vulnerability to Western
economic leverage.
? Relations With Eastern Europe. Moscow is likely to increase pressure on its
East European allies to fill some of the gap in hard currency imports; it may
also divert some of its oil exports away from the region. But Eastern Europe
is not in a position to provide the scale of support the Soviets require.
? Relations With the Third World. Moscow's policies toward the Third World,
including its clients, are not likely to be significantly affected. Except for
Cuba, the hard currency component of military and economic aid tradition-
ally has been minimal. We expect the Soviets to be more agressive on the in-
ternational arms market, including an increased willingness to offer state-of-
the-art arms and provide military technicians.
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USSR: Economic Impact of
the Chernobyl' Accident
Preliminary analysis of the Chernobyl' nuclear
accident indicates that direct damage to the Soviet
economy will be relatively minor. Although the cost
of the evacuation, decontamination, cleanup, im-
ports of technical equipment and medical supplies,
and some permanent resettlement will be large-
perhaps as much as 25 billion rubles
direct damage to
agriculture, industrial facilities, and the environ-
ment will be limited to a fairly small area. None-
theless, the potential loss of electric power this year
could put a crimp in General Secretary Gorba-
chev's hopes to get the new five-year plan off to a
fast start in 1986.
Preliminary calculations suggest workers and fire-
men at the reactor site and local residents who were
drawn to the area by the fire-perhaps as many as
200 to 300 persons-received potentially lethal
doses of radiation. As of 21 May, the death toll was
15-13 from radiation and two from the explosion.
Additional deaths among the heavily irradiated
victims are expected in the next several weeks.
Onlookers near the site would have inhaled consid-
erable airborne radioactivity and may be among
the hospitalized victims, who, according to Gorba-
chev, numbered 299 on 14 May. People within 5
kilometers (km) of the site who were exposed to the
initial radioactive plume could have received sub-
stantial doses of radiation. An additional 25,000 to
30,000 persons who were exposed may have re-
ceived enough radiation to show mild symptoms
such as nausea, and these people will be at risk for
future cancers.
The accident also forced a large-scale relocation of
many in the area. As of 13 May, Moscow acknowl-
edged that 92,000 persons had been evacuated from
a 30-km zone around the plant. We estimate the
population of this area to be 150,000 to 180,000,
including the two towns of Pripyat' and Chernobyl'
and the surrounding rural population. It is likely
that many fled on foot-some with their live-
stock-before vehicles arrived. In addition to the
official evacuees, thousands of persons, mostly 25X1
women and children, have left Kiev and other cities 25X1
outside the 30-km area. 25 X 1
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It is difficult to estimate the cost of the evacuation,
but assuming military units were involved, little
incremental cost would accrue to the Soviets. Vol-
unteers are housing many of the evacuees; and, if
existing housing is properly decontaminated, resi-
dents could begin returning within months. The 25X1
Soviets reportedly are applying a polymer to the
immediate area that can later be removed, taking
contamination with it. The roofs of buildings are
also being coated to prevent rain from washing
radioactive debris into drainage systems. It is likely
that permanent relocation will be required for some
of the population. Indeed, in some areas, the evacu-
ees are already being put to work.
Impact on Agriculture
The initial plume of radioactivity appears to have
passed over an area covered largely by forests and
swamps. Not more than 15 to 25 percent of the
crop and pasture land in the Chernobyl' region
would have been seriously affected. Soviet data
show that the region accounts for a minuscule share
of total Ukrainian farm output. Damage to farming
regions beyond the immediate area of the accident
is likely to be minimal. Because harmful levels of
contamination are localized, we do not anticipate
substantial, long-term effects on international com- 25X1
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What Happened in Chernobyl'?
Our best estimate of the cause of the accident is
that the reactor power suddenly surged, producing
superheated steam. A reaction between superheat-
ed steam and zirconium-alloy fuel cladding pro-
duced hydrogen gas. The gas built up until it
exploded, damaging the reactor and leading to fuel
melting and afire in the graphite. The destruction
of the reactor hall allowed large quantities of
radioactivity to escape. The explosion reportedly
knocked out the radiation alarm system, and
officials at the site did not learn of the high levels
of radioactivity until hours later. Two and possibly
three persons were killed by the explosion, and at
least 35 people at the site, including some of the
firemen who responded, were exposed to lethal
doses of radiation. Helicopters were used to drop
sand, lead beads, clay, dolomite, and boron into
the burning reactor. The fire was finally extin-
guished on 11-12 May.
The livestock sector may be more seriously disrupt-
ed in the area. Indeed, we have already seen reports
of livestock being slaughtered because of high
radiation levels. Soviet press reports
however, indicate many livestock were evacuated
along with the population. Livestock that ingested
contaminated feed before being evacuated should
survive if quickly switched to clean feed. Except for
milking cows, radioactive isotopes not excreted by
these animals would be localized in organs general-
ly not consumed by humans, such as the thyroid,
and in bones. Some pastureland beyond the evacu-
ated area may have to be taken out of use until
radiation drops to acceptable levels, putting pres-
sure on local supplies of stored feed.
The local dairy industry will be most seriously
affected because cows consuming radioactive feed
concentrate radioiodine-the main contaminant-
in their milk. Cows fed contaminated feed will
produce hazardous milk for several weeks after
switching to clean feed. Soviet dairy authorities will
have to not only monitor the milk but also assure
that condemned milk does not reach black-market
channels.
Local Effects of Radiation on Agriculture
The effects on farming activities near the site are
likely to be varied. Although the affected area
contains very small quantities of grain and sugar-
beets, winter grains planted last fall and sugar-
beets that are just emerging have been exposed to
radioactive particles settling on leaves. Some of
this radiation will be incorporated into the plants.
Lightly contaminated grain may be mixed with
clean grain during milling to dilute any harmful
effects, but any heavily contaminated grain will
have to be collected and disposed of. Sugarbeets
exposed to radiation would tend to concentrate
radioactivity in their roots and will likely have to
be destroyed.
According to US experts, spring grains and vegeta-
bles can be planted in areas of light contamination
because most of these crops-with the exception of
sunflowers-do not absorb radiation through their
roots. Danger to humans, however, could result
from contaminated dust raised by machinery in
fields during planting, subsequent field operations,
and harvesting. Thorough monitoring and decon-
tamination of workers, equipment, and crops in the
areas adjacent to the evacuated zone will be
necessary, slowing field work. Even in those areas
where contamination is light, crops could suffer
some losses if normal spring field operations are
delayed. Workers may be kept from the fields as a
safety precaution or diverted to cleanup opera-
tions. Growing seasons in the USSR are short, and
harvests are frequently disrupted by the early
onset of winter.
The Chernobyl' power plant is located just north of
the Kiev Reservoir, which supplies the bulk of the
drinking water for the Ukraine's capital. Some
radiation was undoubtedly carried to the reservoir
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by winds and by the two major rivers feeding it-
the Pripyat' and the Dnepr. Fish, particularly
freshwater shellfish, taken from these waters will
also require monitoring for some time. The Soviets
are building a 30-meter concrete wall into the
ground around the complex to contain any contam-
inated runoff or groundwater seepage. Soviet envi-
ronmental authorities, however, maintain that reg-
ular water samples are being taken from the Kiev
Reservoir and that they show levels of radioactivity
below established norms.
Local Industry
An inventory of industrial facilities within the 30-
km zone around the reactor reveals only a small
number of civilian plants, including two concrete
products plants, a machine-tool plant, perhaps 10
food-processing sites, three textile mills, and a
railroad repair yard several
of these facilities have been shut down-probably
as a result of the evacuation order. How long they
will be affected remains an open question, depend-
ing on the degree of contamination and how quickly
the Soviets want to resume their operation. Moscow
has already discussed bringing reactor units 1 and
2 at Chernobyl' back on line as quickly as possible,
but local industry may not have such a high
priority.
In all likelihood, the accident disrupted-at least
temporarily-electricity supplies beyond the 30-km
area. All industries suffer problems in the event of
brownouts or blackouts, but the largest users of
energy-metals processing, cement, food process-
ing, and chemicals-would be hardest hit from
resulting damage to machinery and products in
process. We have no information to date regarding
specific disruptions in electric power supplies to
local industry. In addition to electricity, industrial
facilities depend on water for cooling and process-
ing. If irradiated water is used in processing, some
end products could be affected, particularly in the
chemical and food sectors.
Electricity Supplies
The shutdown of the four 1,000-megawatt (MW)
reactors at Chernobyl' will probably have a wide
range of effects. During the summer lull in electric-
ity demand, the Soviets will be able to compensate
for most of the power losses associated with Cher-
nobyl' by using other generating capacity more
intensively. Beginning in September, however, the
upsurge in demand for electricity probably will
eliminate most of the painless adjustment mecha- 25X1
nisms. Moreover, two 25X1
reactors at Kursk identical to the damaged one at
Chernobyl' may not now be operational. We cannot
be certain whether these other reactors are com-
pletely shut down or are operating at reduced
power levels for safety reasons. Moreover, if they
are in fact shut down, it is unclear that the
Chernobyl' accident was the reason. Moscow, how-
ever, probably would not disrupt the economy
further by shutting down the remaining nine 25X1
graphite-moderated, boiling-water reactors
(RBMK) similar to those at Chernobyl' unless the
cause of accident is judged to have stemmed from
basic design faults.
The confirmed shutdowns at Chernobyl' and the
likely shutdowns at Kursk-assuming the latter
reactors remain out of service for the remainder of
the year and the power is not made up from other 25X1
plants-would reduce Soviet electricity output in
1986 by about 25 billion kilowatt-hours (kWh),
roughly 1.5 percent of the annual total. The im-
pact, however, is concentrated on two power grids
that would experience losses of about 10 percent.
Power cuts of this magnitude, although unlikely,
could seriously affect key economic activity in the
Ukraine and Moscow regions. We believe the Sovi-
ets will attempt to ease the impact by drawing
electricity from adjoining grids, and possibly from
more distant grids in the Urals and Kazakhstan.
Moscow may also request that Czechoslovakia,
Bulgaria, Romania, and Poland reduce imports of
electricity from the Ukraine-roughly 20 billion
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kWh was sent to these countries in 1985. Cutting
exports to Eastern Europe, however, may not be a
politically attractive way to ease the crunch.
The Soviets could compensate for the loss of elec-
tricity over the next several months if they forgo
maintenance-normally scheduled for the sum-
mer-at power plants using fossil fuels and operate
them at full winter capacities. Moscow has already
reported that one generating unit at a thermal
power plant in Kiev, normally held in reserve at this
time of the year, is now operating at full capacity to
partially compensate for the loss of Chernobyl'.
Seven other power plants in the Ukraine-four
hydroelectric and three thermal-are also reported
to be working at full capacity.
Increasing output at conventional plants, however,
is only a stopgap measure. Maintenance must still
be performed, and if it is not finished by winter the
Soviets will be hard pressed to meet the surge in
electricity demand that will take place then. In any
event, domestic supplies of fossil fuels will have to
be supplemented with increases in domestic fuel
production and possibly with imports, such as
additional coal from Poland. The additional fuel
required to offset the loss of the Chernobyl' reac-
tors would amount to perhaps 150,000 barrels per
day oil equivalent and half again as much if the
other two reactors remain shut down. If domestic
fuel oil supplies are used to generate replacement
electricity for these six reactors, at the expense of
exports of oil to the West, hard currency losses
would amount to $100 million per month at current
prices.
The Chernobyl' disaster is likely to result in some
setback to the USSR's nuclear power program. The
Soviets currently have 28,300 MW of nuclear
generating capacity, supplying some 11 percent of
their electricity. Moscow's plans call for expansion
of nuclear capacity to 70,000 MW by 1990, boost-
ing the nuclear share of total electricity output to
more than 20 percent. The accident may prompt
the Soviets to at least put construction of new
RBMK reactors on hold temporarily. The Soviet
decision to allow placement of nuclear plants closer
to populated areas to supply centralized district
heating systems-including one in Kiev-could be
reexamined.
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Central American Core Four:
Troubled Small Debtors
The external debts of the Central American Core
Four countries-Costa Rica, El Salvador, Guate-
mala, and Honduras-are small, but the burden of
repayment weighs heavily on their equally small
economies. For each of the four nations, relations
with creditors are strained, and political leaders
perceive their problems as receiving short shrift
from the international financial community and
creditor governments. Solutions to the region's debt
troubles-including calls for a possible joint posi-
tion to increase leverage with foreign creditors-
will be a major topic of discussion at the Central
American presidential summit in Guatemala on 24-
25 May.
Small Debts, But Bigger Burden
The Core Four's foreign debts are small relative to
most other LDCs, especially those in Latin Ameri-
ca. Only Costa Rica owes more than $3 billion, and
the four nations together owe only about $11
billion, placing their collective debt roughly on a
par with Peru or Colombia. Brazil and Mexico, by
comparison, each owe over $100 billion. Nonethe-
less, the debts are a strain on the region's cash-
starved economies. While Core Four real GDP
declined 5 percent between 1980 and 1.985, and the
region's persistent current account deficit wors-
ened, debt service obligations nearly doubled. As a
result, the Four's debt service ratio has more than
doubled since 1980 to 41 percent last year-equal
to the Latin American average. In addition, as
Core Four political leaders are quick to point out,
their debt is higher as a share of GDP than Latin
America as a whole-53 percent compared with 48
percent for Latin America.
Individual Country Situations Grim
Despite both Paris Club and commercial bank
reschedulings in 1983 and again last year, Costa
Rica remains mired in debt troubles. San Jose had
Core Four: Aggregate Debt
Service Ratios, 1980-85 a
I Debt service as a percent of exports of goods and services.
b CIA estimate.
won both an IMF standby arrangement and a
World Bank structural adjustment loan last year,
but failure to comply with agreed economic perfor-
mance targets and policy reforms stalled both Fund
and Bank disbursements. Without the IMF and
World Bank money, Costa Rica was unable to
make an interest payment to banks last month and
fell into default on its 1985 rescheduling agree-
ment, according to US Em- 25X1
bassy reports. Just days afterward, San Jose de-
clared a temporary moratorium on foreign debt 25X1
payments and publicly advised domestic banks to
withdraw funds held overseas to avoid a possible
freeze of assets by lenders. President Arias, who
took office the day after the moratorium was
announced, is committed to working with the IMF
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and World Bank, according to US Embassy re-
ports, but it probably will be months before agree-
ments with the Fund, Bank, and commercial credi-
tors are back on track. Meanwhile, San Jose faces
the risk of cuts in its trade credit lines as debt
arrearages, which now exceed $110 million, grow
by $50 million each month the moratorium lasts.
Almost all of El Salvador's external debt is owed to
foreign governments and multilateral financial in-
stitutions, largely on concessional terms. Neverthe-
less, falling exports and rising repayment obliga-
tions combined to increase the nation's debt service
ratio fivefold since 1980 to 43 percent last year.
Debt relief will be difficult to achieve. Roughly half
of San Salvador's $325 million debt service due this
year is owed to the multilateral institutions, which
do not reschedule. The largest payment is to the
IMF, followed by the Interamerican Development
Bank (IDB). Relief from much of the other half of
1986 obligations-those owed to foreign govern-
ments-would be possible through a Paris Club
rescheduling, but President Duarte almost certain-
ly lacks the domestic political support needed to
reach the prerequisite formal agreement with the
IMF. El Salvador is some $120 million in arrears to
foreign creditors, including the United States.
Before 1980, Guatemala pursued a cautious debt
policy, with most of its debts on concessional terms
from multilateral and bilateral creditors. More
recently, however, the country has increasingly
turned to market-rate foreign commercial borrow-
ing to cover foreign payments gaps, driving debt
service obligations up to 37 percent of export
revenue last year, compared to just 8 percent in
1980. As a result, foreign banks now are Guatema-
la's second-biggest creditor after the IDB. Pay-
ments problems also have resulted in roughly $490
million in external arrearages, mainly on payments
for imports, according to IMF data.
gan discussing debt relief with foreign bankers.
Cerezo's recent economic moves, however, which
include public-sector wage hikes and plans for huge
increases in government employment, run counter
to conciliation with the IMF and relief from credi-
tors.
Honduras' debt service ratio is the lowest among
the Core Four, but its relations with creditors
nevertheless are strained. IMF data and US Em-
bassy reports indicate Tegucigalpa often falls in
arrears to the multilateral development banks, to
which it owes about one-third of its debt. Although
the country has avoided a comprehensive resched-
uling of bilateral official debts, some bilateral debts
have been rescheduled on a case-by-case basis each
year since 1980. Relations with foreign commercial
banks remain especially difficult. The government-
guaranteed debt to foreign banks amounts to only
$226 million, 8.5 percent of the total debt, but
much of this sum is in arrears, and rescheduling
talks have dragged on since 1982. The departing
Suazo administration broke off negotiations late
last year-aborting a draft accord-to avoid com-
mitting the new Azcona government to an agree-
ment it did not participate in. Talks resumed
recently, but both sides have redrawn their bar-
gaining positions, and interest payments have be-
come as much as 190 days past due, portending still
lengthier negotiations.
Core Four leaders are well aware of their lack of
financial leverage with foreign creditors and per-
ceive themselves as being ignored in negotiations
with an international financial community that
pays greater attention to the larger debtors. They
point to the stiffer terms-particularly higher in-
terest rates-of their debt rescheduling deals and
are concerned the Cartagena Group and the US
initiative on debt are not taking their interests into
account. The Core Four leaders reason that credi-
tor concessions are more important for their new
and fragile democracies than for the rest of Latin
America because the risk of political instability is
greater, according to US Embassy reporting.
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Total Debt
(million US $)
a As a share of exports of goods and services.
b CIA estimate.
Total Debt Service Debt Service Ratio a
(million US $) (percent)
Like the Cartagena Group, Core Four representa-
tives agreed at a conference last year to exchange
information about their experiences in debt negoti-
ations and to explore joint bargaining positions as a
way of boosting their leverage with creditors. The
Core Four vice presidents reaffirmed these goals at
a San Jose meeting last month, and the next
opportunity for discussion will be the Central
American presidential summit this weekend in
Guatemala. The debt issue is one of four agenda
items for the meeting. The diversity of the nations'
respective financial situations and Nicaragua's at-
tendance at the summit may make effective com-
mon positions difficult to find, but, even if no
concrete plan for joint action emerges, increased
calls for burden-sharing by creditors are likely.
Implications for the United States
Default by any single Core Four country, and even
the region as a whole, is far from capable of
triggering an international financial crisis. US
commercial bank exposure to the Core Four is only
about $830 million, according to US Federal Re-
serve data, compared to over $20 billion for either
Mexico or Brazil alone. Global commercial bank
exposure to the region is only about $2 billion,
according to Bank for International Settlements
statistics.
From the Core Four's point of view, however, the
burden of debt repayment obligations will remain
serious. IMF and World Bank data indicate debt
service for the Core Four will continue at current
levels at least through 1987. In turn, the region's
leaders can be expected to increase pressures for
debt relief, possibly focusing on the US Govern-
ment-creditor for about 14 percent of the four
nations' debts. US financial relations with the
region might be aggravated by cutoffs of new US
assistance to El Salvador, which remains as much
as 11 months in arrears on some US debt. Under
the provisions of the Brooke Amendment, US
military and development assistance would be sus-
pended if El Salvador fell more than one year
behind on repayments to the United States. Finally,
the United States also should expect commercial 25X1
banks to continue to pressure the Core Four,
especially Costa Rica, to use US cash disburse-
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India: Pace of Economic
Liberalization Slows
Prime Minister Gandhi, prompted by a growing
trade deficit, a tight budget, and domestic political
problems, has moved to slow the pace of economic
liberalization. The change is signaled in part by
this year's government budget, which focuses on
traditional support for welfare programs and in-
cludes measures to slow the growth in imports.
Gandhi has not abandoned his efforts to promote
economic growth by liberalizing the economy, but
is modifying his approach to protect the country's
hard currency reserves and deny his opposition a
rallying point. Gandhi will look increasingly to
Western governments for financial support to
maintain imports he feels are necessary to upgrade
India's technology and productivity.
When Rajiv Gandhi took over as Prime Minister he
sought to transform the Indian economy into a
more dynamic and competitive force through liber-
alization measures. His strong belief that less bu-
reaucratic meddling and more competition in the
private sector would spur modernization, limit cor-
ruption, and ease strains on the government budget
prompted him to accelerate liberalization moves
begun several years ago under his mother. Manu-
facturers in several industries may now set up new
operations, expand capacity, and vary their product
mix without seeking government permission. He
also relaxed antimonopoly legislation and lowered
corporate and personal tax rates.
In return, Gandhi, through the 1985-89 plan, called
for the private sector to assume 52 percent of total
investment, compared with 47 percent under the
previous plan. More major projects were to be
funded as joint ventures and in areas long closed to
private-sector participation. Private companies, for
example, have been invited to invest in telecom-
munications equipment, power generation projects,
six proposed gas-based fertilizer plants, and road
construction projects.
Import policy changes combined safeguards for
domestic manufacturers with efforts to promote
modernization and exports. Import licensing was
eased on some industrial machinery, and a new
duty-free import scheme was offered for exporters.
New Delhi promised easy access to imported tech-
nology and simplified procedures for employing
foreign technicians. The government even empha-
sized that foreign equity investment-previously
tolerated but not encouraged-would be welcomed
in electronics and oil exploration.
Gandhi's policy reforms have fueled an atmosphere
of optimism in the business community and led to
expectations of even more liberalization measures. 25X1
Businessmen have been looking for additional de-
regulation and tax reforms to make long-term
investments more attractive.
Increasing Constraints on Gandhi
Several economic and political factors are now
beginning to affect Gandhi's ability to maintain the
pace of liberalization he undertook in his first year
in office. The trade deficit for the fiscal year that
ended on 31 March (FY 1985) exceeded $6 billion,
at least $1.8 billion greater than FY 1984. Prelimi-
nary trade data indicate nonpetroleum imports
increased by about 20 percent while nonpetroleum
exports increased by only about 8 percent. Stag-
nant domestic crude oil production and a 7-percent
growth in oil consumption led to the first increase 25X1
in net oil imports in five years. 25X1
A record current account deficit has raised outcries
among Gandhi's critics and fear among his sup-
porters that India's foreign reserves will once again
deteriorate. The government has been able to pre-
serve foreign reserves near last year's level of $6
billion through aid inflows and increasing its for-
eign debt burden. Aid disbursements were about
Secret
DI 1EEW 86-021
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India: Estimated Balance of Payments,
Million US $
1981-85 a
Current account b
-3,025
-2,795
-2,770
-2,160
-3,700
Trade balance b
-6,855
-6,000
-5,690
-4,470
-6,300
Exports f.o.b.
8,660
9,605
9,600
10,560
10,100
Imports c.i.f.b
15,515
15,605
15,290
15,030
16,400
Net invisibles
3,830
3,205
2,920
2,310
2,600
Capital account
628
3,299
3,652
2,423
3,700
Of which:
Aid disbursements
1,833
2,211
1,989
1,763
2,000
Grants
595
560
514
463
450
Nonconcessional
loans c
858
887
1,378
1,450
1,700
Nonresident deposits
179
592
558
610
1,200
Change in reserves
-2,397
504
882
263
0
a Fiscal year beginning 1 April of the year stated.
b Excluding military.
Medium and long term only, including IBRD.
the same as the last five years, but the grant
component has continued to decline while conces-
sionary loans have increased. New Delhi has also
tempered somewhat its historic reluctance to bor-
row from international money markets, increasing
nonconcessionary borrowing to $1.7 billion. Non-
resident Indians, attracted by high interest rates,
deposited an estimated $1.2 billion in Indian banks,
almost double the FY 1984 amount.
The rising budget deficit also is severely curtailing
the government's ability to follow through on do-
mestic liberalization measures. The budget deficit
in each of the last two years reached record levels
that exceeded $3 billion annually, about 6 percent
of the government expenditures. Growing defense
spending, rapid increases in the cost of subsidies,
particularly for fertilizer, and rising debt service
allow the government little latitude to experiment
with tax reform or grant additional incentives to
the industrial sector. Moreover, the financial con-
straints are forcing inefficient government-owned
industries to compete with the private sector for
capital. Price increases for food, petroleum, and
fertilizer announced in February were an important
step toward reducing subsidies, but this year's
budget deficit is still likely to be near the levels of
the last two years.
over economic liberalization.
Political problems also are constraining Gandhi in
his pursuit of additional liberalization measures.
Criticism that tax cuts and industrial policies im-
plemented last year have favored the upper and
middle classes has led opposition leaders as well as
some Congress Party members to contend that
Gandhi has abandoned the socialist direction of the
country. Some politically influential industrialists,
long accustomed to operating in a protected envi-
ronment, have begun to complain about losing sales
to foreign suppliers. Internal dissension in the
Congress Party, and the fear of more electoral
losses, the unresolved problem with the Sikhs in
Punjab, and the domestic concerns with the insur-
gency in Sri Lanka have forced Gandhi to devote
more time to political issues and become more
cautious about stirring up additional controversy
Changing the Tone and Pace
Gandhi's response to the problems he faces was
reflected in the government's budget for the cur-
rent fiscal year. Total government expenditures are
projected to grow by only 5 percent to $43 billion,
but focus on programs with immediate popular
appeal. The government has provided for a 65-
percent increase in funding for social welfare pro-
grams such as employment, education, housing,
and rural development.
The budget was a disappointment to the business
community and prompted a sharp drop in the stock
market. The government plans to cover much of the
increase in expenditures by raising import duties
and other indirect taxes. The increase in import
duties, while aimed primarily at luxury items,
represents a backpedaling on import liberalization
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Secret
measures enacted last year. In addition to the
revenue raising aspects of import duties, the gov-
ernment hopes to discourage some imports to slow
the deterioration in the trade balance and respond
to the complaints from influential industrialists of
foreign competition.
The imposition of other indirect taxes also is likely
to cut into the liberalization process. Small indus-
try, automobiles, and electronics-the fastest grow-
ing sectors and those benefiting most from the
liberalization process-are all likely to be hurt.
Some taxes on the textile industry, cut last year as
part of a textile policy aimed at increasing produc-
tivity, efficiency, and competition, were moved up
again. The government also reversed its earlier tax
policy on a wide variety of consumer durables,
making everything from cars to television sets and
refrigerators more expensive.
Some government liberalization policies that
sought to facilitate increased production through
easier and quicker access to foreign inputs and
technology also are being revised. Liberal imports
of technology and expansion of capacity have led to
some redundant imports and excess production for
the domestic market. The automobile policy, hailed
as the model for other areas of industry, already
has been modified. Other consumer durable indus-
tries, particularly those that do not contribute to
exports, also are being reviewed.
Basic Philosophy Unchanged
Slowing the pace of liberalization, however, does
not appear to reflect a fundamental change in
Gandhi's economic philosophy. We believe he is
trying to consolidate his gains while at the same
time denying the opposition a political issue and
avoiding a drawdown in foreign exchange reserves.
The Finance Minister has reiterated the govern-
ment's commitment to liberalization measures, in-
cluding domestic price adjustments, reduced subsi-
dization of uncompetitive industries, and imports of
capital goods necessary to continue the moderniza-
tion process. Gandhi has indicated India will con-
tinue to welcome foreign investment in specific
technological areas.
Automobile Industry Left Hanging
The automobile industry represents one area where
liberalization moved too fast for New Delhi. In
January 1985 the government announced that it 25X1
intended to allow the automobile industry more
flexibility to adjust capacity and product manufac-
turing. All of the domestic manufacturers hoped to
sign foreign collaboration agreements to modernize
their product lines. In February of this year,
however, after keeping manufacturers guessing for
six months, the government quietly put all these
projects on hold.
The foreign exchange cost of expanded foreign
collaboration was the primary reason for the
government's action.
the arrangement between the government-
owned automobile company, Maruti Udyog, and
Suzuki of Japan could cost the country more than
$400 million of foreign exchange in the next few
years. The collaboration program called for 45-
percent local content at the start, progressing rap-
idly to 95 percent; but Maruti has managed just
over 30 percent.
most indigenous components are themselves as-
sembled imported materials. The Finance Minister
also has cited growing petroleum consumption as a
reason for halting more car ventures. Some critics,
however, are charging that liberalization and mod-
ernization in the private-sector automobile indus-
try is being held back because it would threaten
the government carmaker.
The latest blow to the automobile industry was the
tax hike imposed by the new budget. While the
Finance Minister stated the day after the budget
was released that car prices would come down as
the result of tax changes, the opposite was true.
The cost of India's poor man's car, the Maruti, is
expected to increase from $5,000 to $6,000 as a
result of tax changes in the budget.
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We believe Gandhi also remains committed to
liberalization out of necessity. Much of the Indian
industrial sector has become stagnant and ineffi-
cient because of government control and lack of
competition. The public sector in particular has
shown little return on capital investment. The last
five-year plan fell 18 percent short of planned
expenditures primarily because state enterprises
could not provide the necessary resources. India
will need more efficient management and greater
productivity, especially from the private sector, to
achieve its five-year goal of 5-percent average
annual economic growth
Implications for Western Countries
Opportunities for developed countries to sell high-
technology items as well as other capital goods will
be reduced, if the slowdown in liberalization contin-
ues. Import purchasing decisions by Indian Govern-
ment agencies are likely to be even more time
consuming and will give greater weight to price and
financial terms, even in high-technology areas.
Exporters who have long-established ties to Indian
firms will suffer less than newcomers, because New
Delhi usually considers import history when allot-
ting licenses to Indian businessmen.
We expect New Delhi to push for more Western
aid and concessional financing to continue the
liberalization process without incurring a heavier
debt burden. New Delhi has already begun a heavy
lobbying effort to at least maintain its current level
of funding from multilateral financial institutions.
The level of US aid is likely to face additional
criticism if New Delhi's repayment of principal and
interest on past loans continues to exceed new loans
and grants. New Delhi will also look to Western
governments and businessmen to come up with
creative financing to alleviate the short-term for-
eign exchange burden of importing foreign technol-
ogy and capital goods. India might also look to
greater equity participation by foreign businessmen
to cover some of the costs of capital imports.
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French and Japanese Industrial
Policy: Diverging Impacts on
the Electronics Industry
Although both the Japanese and French electronics
industries have been nurtured over the past three
decades by a wide range of government policies, the
Japanese industry has emerged as a world leader,
while the French industry has failed to make a
Japan, in our judgment, will build upon
its current market strengths and expand its re-
search capabilities in the years ahead. In contrast,
continuing French lags in electronics may lead
Paris to tighten protection for the sector, including
calls for higher EC tariffs on electronics products.
Moreover, French firms facing increasing competi-
tion from the US and Japanese industries may be
forced to seek joint ventures, licensing, or outright
technology purchases as they attempt to become
competitive.
Although Japan and France have employed a simi-
lar mix of targeting measures to support their
electronics industries, the programs have varied
both in the way policies were applied and in the
goals they were designed to achieve. Both the
French and Japanese Governments have sheltered
the industry from foreign competition, supported
R&D activities, granted preferential access to capi-
tal, and provided preferential procurement. Tokyo,
however, has consistently focused its support on
enhancing the competitiveness of Japanese firms in
the global marketplace, while French policy has
been designed to support technological indepen-
dence for defense as well as civilian electronics.
French policy also differs in that the government,
rather than the private sector, has largely deter-
mined industry structure and the range of product
development
Under MITI leadership, Japanese policy changed
as the industry grew. Our review of Japan's indus-
trial policy indicates that early attention was fo-
cused on protection of the infant industry from
foreign competitors. As the industry strengthened,
MITI began to fund a broad range of R&D 25X6
activities and instituted programs to spur purchases 25X6
of Japanese electronics equipment. Tokyo's actions
to create demand for domestic electronics prod-
ucts-particularly the buy-Japanese procurement
policies of Nippon Telegraph and Telephone
(NTT)-were, we believe, crucial to the early suc-
cess of the industry.
= more than 90 percent of NTT's purchases over
the last two decades have come from four major
Japanese electronics firms. In addition, Tokyo has
used tax policy and targeted loans to promote
demand for domestically produced electronics
goods and to encourage expansion of the production
In contrast to Japan, France has continually tin-
kered with the structure of the industry-almost all
the leading French electronics firms have under-
gone a continuing series of government-directed
restructurings, realignments, mergers, or national-
izations. For example:
? In the 1960s, Paris created a "national cham-
pion" in computers by merging two firms to
create Compagnie Internationale pour l'Informa-
tique (CII).
? In the 1970s, CII was merged with Unidata-a
Siemens/Philips joint venture-but pulled out
two years later and merged with Honeywell-Bull.
? In the 1980s, Honeywell was bought out, CII-
Honeywell-Bull was nationalized, and the newly
named Groupe Bull was ordered to focus solely
on computers.
We believe that the continuing upheaval caused by
French intervention in the structure of its electron-
ics industry has been a major reason its firms have
Secret
DI IEEW 86-021
23 May 1986
25X1
25X1
:25X1
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France: Government Support for the Electronics Industry,
1962-85
Heavy emphasis
Medium emphasis
Light emphasis
Trade measures
Foreign direct investment controls
Antitrust exemptions and
industry rationalization
Stimulating production and demand
Export promotion assistance
R&D support
Targets self-sufficiency
in electronics
Targets
telecommunications
Nationalizes the
failing
electronics
industry
failed to become competitive. Moreover, because
these moves frequently eliminated domestic sources
of competition, the French firms operated in a
protected domestic market and became too reliant
on government subsidies. As a consequence, French
firms have not been forced to develop the technical
strength or product offerings necessary to compete
in international markets.
Where Japan had a full range of support policies,
French support of the electronics industry has been
concentrated largely in a series of R&D plans.
Paris often budgeted massive funding for these
plans but then failed to meet promised allocations.
For example, the "Electronics Network" project
was a five-year, $20 billion project begun in 1982;
by 1985, the project had spent only $6 billion and
was not renewed. Moreover, industry observers
note that the French programs lacked consistency
and did not establish close ties within the French
research sector. In addition, France failed to estab-
lish a central agency-similar to MITI-that could
effectively coordinate research findings and financ-
ing to the electronics sector.
Future French Support in Doubt
Despite several new tax and loan incentives-
similar to early Japanese policies-to spur the
electronics sector, we believe that Paris is backing
away from its close support of the industry. The
newly elected Conservative government has prom-
ised to denationalize the electronics industry, a
move that will once again upset the established
structure. Moreover, recent policy maneuvers by
Prime Minister Chirac-including the abolition of
the Ministry of Research and Technology-indi-
cate that aid to industrial research and EUREKA
may fare poorly under his leadership. Chirac has
promised to cut back sharply state support for
research and aid to industry as a measure to reduce
budget outlays and the government's role in direct-
ing business activity. Moreover, his budget adjust-
ments for 1986 have severely reduced financing to
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France: Major Government-Funded Computer
Development Programs, 1965-90
Billion US S
7
Le Plan Composants I
Le Plan Calcul I
Le Plan Calcul II
Le Plan Calcul III
L Informatique
Le Plan Software
I I I I I
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the National Center for Scientific Research
(CNRS), which under President Mitterrand's plan
was spearheading electronics research and was to
be the center of France's EUREKA effort. Without
Paris's leadership and seed funding, EUREKA's
primary function of coordinating advanced Europe-
an research may be seriously threatened.
As Japanese firms have gained in competitiveness,
the need for direct government support has de-
clined. In recent years, MITI has shifted its focus
from applied research with near-term commercial
applications to fundamental research in technology
basic to the electronics sector. Indeed, Tokyo is
already initiating programs to support R&D in the
next generation of electronics technology. The gov-
ernment also has increased its export promotion
measures, including export financing, loan guaran-
tees, and export insurance.
The coming denationalizations of the French elec-
tronics sector will have both positive and negative
impacts on the industry. On one hand, we expect
that the leading French firms will concentrate their
efforts on product offerings in areas where they
have a strong technical base. At the same time,
however, these firms have come to depend on
government support, and we believe that the transi-
tion to a more competitive environment will not be
easy. French firms, facing more technically sophis-
ticated competition from US and Japanese firms,
may be forced to seek joint ventures, licensing, or
outright technology purchases as they attempt to
become competitive. In the defense-related sector,
we believe that Paris will continue to seek technical
independence in electronics and may be willing to
continue to support the sector in the future through
subsidies and preferential procurement.
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Secret
Iran Increasing
Oil Exports
Energy
facilities become more effective.
Recent Iranian cuts in oil prices indicate Tehran is capitulating to market
pressures and making good on threats to increase exports in the absence of an
OPEC agreement to lower production. Tehran's unwillingness to lower prices
had caused many customers to cancel purchases and had reduced exports to
about 1.4 million b/d. Iran wants to increase oil exports by some 600,000 b/d,
and since the end of April has given price concessions to major customers. Teh-
ran's bid to increase exports is an admission that it has failed for the present to
persuade OPEC, and particularly Saudi Arabia, to reduce production and
shore up oil prices. Higher output will give Iran an edge over Iraq, which has
little capacity to increase exports, and may help arrest the recent slow rise in
world oil prices. Iran may have difficulty sustaining higher exports, however, if
technical and personnel problems persist or if Iraqi attacks on oil export
Saudi Reaction Recent Iranian attacks on Saudi ships in the Persian Gulf have a arentl led
to Shipping Attacks owners to try to make their ships less vulnerable to attack. 25X1
ays owners are altering routes, using partially loaded 25X1
customers if ships cannot be protected has 25X1
deflected a request from one oil companyny twin avian-sty Iranian-style tanker
shuttle service, may begin 25X1
escorting vessels to and from its ports. Riyadh will do w atever is necessary-
including military action-to reassure oil and shipping companies and to
defend Saudi interests. They probably hope that making this clear to the
Iranians will end the attacks and will continue to avoid such partial solutions
as the establishment of a shuttle. The surplus of shipping capacity worldwide
cuts Iran's chances for success. If oil companies reduce liftings, however, the
Saudis probably would lower prices to compensate buyers for the additional
risk. 25X1
effect on Saudi oil liftings, but Saudi officials are worried they will lose
ships that can pass through shallower waters, and ordering some ships to delay 25X1
entering the Gulf. According to the US Embassy, the attacks have had little
19 Secret
DI IEEW 86-021
23 May 1986
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Secret
China Buys
Indonesian Oil
China has purchased 1.5 million barrels of oil from its rival oil supplier
Indonesia, according to the Hong Kong press. The $20 million deal comes 10
months after Beijing and Jakarta agreed to resume direct trade links, which
were severed in 1967. Indonesia
quietly lifted its ban on oil exports to China in early January to allow for a pos-
sible swap in which Indonesian oil would be exported to southern China in ex-
change for northern Chinese oil that Jakarta would sell to Japan, cutting
transport costs for both sides. Both sides may also see oil trade as a way to re-
duce counterproductive competition for markets and to encourage their
deadlocked talks on opening trade offices. China imported only $45 million in
petroleum and petroleum products in 1985, while exporting over $6 billion.
Indonesia was the biggest loser from Beijing's price cutting to increase oil sales
Bolivia's
Natural Gas Sales
to Argentina
New Brazilian
Debt Concessions
to Japan last year.
La Paz and Buenos Aires have agreed on new contract terms for Argentina's
purchase of Bolivian natural gas. The agreement, according to the US
Embassy, provides for the purchase of 2.3 billion cubic meters of gas at $3.65
per million Btu's- 15 percent less than the previous price. The terms represent
a compromise: in exchange for accepting a price equivalent to $20.51 per
barrel of crude oil, Buenos Aires will pay only 24 percent of the total $296 mil-
lion in cash, with food aid and an open trade credit making up the difference.
Brazil plans to make major concessions to foreign creditors to complete stalled
debt rescheduling negotiations. The US Embassy indicates that the govern-
ment will honor most of the $450 million debt of three failed banks, ending a
contentious dispute that has caused half of Brazil's private creditors to block
the tentative rescheduling accord reached in March.
The planned
Secret
23 May 1986
retreat from tough, nationalistic negotiating positions probably reflects Brasi-
lia's fear of economic reprisals. Most private foreign banks probably will ratify
this year's debt agreement, but they-and official creditors-are likely to
continue insisting on some role for the IMF in future reschedulings.
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Secret
Algeria
Coping With the
Oil Price Slump
Iraq's
Credit Problems
Grow Worse
greater financial crunch next year.
According to Embassy reporting, Algiers is responding to an anticipated 39-
percent drop in hydrocarbons earnings by cutting government operating
expenses by 11 percent and development spending by 26 percent. These
reductions are projected to cut imports by at least $2 billion. After failing to
raise a $500 million syndicated loan earlier this year, Algiers is now trying to
float a $300 million loan. Despite more realistic terms, at least one major US
bank believes Algeria will again have difficulty subscribing the loan because of
bankers' continued reluctance to increase their exposure in oil-driven econo-
mies. Embassy reporting indicates bankers believe Algeria will have to borrow
about $2 billion this year. Even with additional funds and a cut in imports, we
believe the country could still face a current account deficit of as much as
$2 billion. Algeria would have little choice but to draw down its roughly
$3 billion in foreign reserves, which leaves almost no cushion for an even
Iraq's continued failure to make large debt payments to official and commer-
cial lenders is rapidly reducing Baghdad's access to further financing and
increases the likelihood that major creditors will adopt a unified approach to
the problem. France-Baghdad's major 9FX1
creditor-has suspended short- and medium-term export credits because of 25X1
Baghdad's failure to make a $120 million debt payment last month. Iraq also
has missed several payments on letters of credit used to finance French
military purchases, according to the US Embassy in Baghdad. The Embassy
also reports that Japan's export credit agency has restricted loans to Iraq while
Tokyo evaluates Baghdad's financial position. 25X1
the Arab-owned Gulf International Bank-a major lender 25X1
Debt Relieffor
Mozambique
and one-seventh owned by Iraq-will not increase its debt exposure to
Baghdad. Several of Iraq's creditors, including the French, discussed coordi-
nated action last week during a general Paris Club discussion. Even if some
agreement is worked out, Iraq still will have difficulty financing imports and
obtaining the large commercial loans it needs 25X1
Romania, one of Mozambique's major creditors, recently announced that it
will reschedule $40 million of Mozambique's bilateral debt. The debt to be
rescheduled was part of a $70 million credit granted in 1981. The Romanian
action comes just one month after Sweden canceled much of its commercial
debt with Mozambique. Maputo has a total debt of $2.4 billion and, despite
this relief, payments problems will persist as long as vital transportation and
farming sectors continue to be disrupted by Mozambican insurgent attacks.
21 Secret
23 May 1986
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Secret
Manila To Meet
With Bilateral
Aid Donors
Manila's major aid donors-including the IMF, World Bank, the United
States, and Japan-will meet next week in Tokyo with senior Philippine
officials to discuss the strategy and financing of an economic recovery
program. The discussions will help shape Manila's negotiations with the IMF
for a new balance-of-payments loan that Manila considers the key to a rapid
economic recovery, according to State Department reporting. Press reports
indicate that Manila's recovery program will include proposals to dismantle
agricultural marketing monopolies and restructure the ailing financial system,
both longstanding demands of the IMF and World Bank. Firm commitments
of new aid are likely to fall far short of the $2 billion Manila reportedly
anticipates. In addition, according to US Embassy reporting, Manila and its
donors will disagree over measures to deal with this year's projected $1.9
billion budget deficit and to liberalize foreign trade. Moreover, Finance
Minister Ongpin will have a difficult time selling a program of budget
austerity and trade liberalization to most of Aquino's closest advisors. They
are leery of the short-term costs such policies impose on consumers and small
Secret
23 May 1986
businessmen and ultimately on Aquino's popularity.
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Grain Market
Reaction to
Chernobyl'
GCC Reaction
to Chernobyl'
Global and Regional Developments
commodity prices barring major crop disasters.
Although world grain and livestock prices soared following the Chernobyl'
accident in anticipation of larger Soviet grain imports, they are moving back to
preaccident levels. The Soviets reentered world grain markets recently to
complete purchases of 1.4 million metric tons of coarse grains, but no new or-
ders have resulted from the accident. This brings 1985/86 marketing year
purchases to 29 million tons. We believe that for 1986 the accident will have
only a minor impact on Soviet agricultural production and no measurable
impact on grain output. The longer term agricultural impact cannot be
assessed until the extent and composition of actual contamination is known.
Soviet grain imports for the 1986/87 year will, as always, be largely
determined by the size of the domestic grain crop. To cover grain import
needs, Moscow will probably continue to buy first from the EC, Canada, or
Argentina. US grain export prices remain high, and Moscow is still angry over
exclusion from Export Enhancement Program subsidies. Soviet buying will
probably not be sufficient to draw down world grain stocks or bolster
Australian suppliers.
Gulf Cooperation Council (GCC) countries are making efforts to stop imports
of produce from Eastern and Western Europe. According to the UAE and
Bahraini press, government authorities are monitoring all imported European
foodstuffs. The Kuwaiti and Saudi press report that both countries began an
indefinite ban on certain food imports from Europe. Saudi Arabia specifically
has prohibited meats, fruits, vegetables, and dairy products. Although West
European suppliers have been pressuring Saudi authorities to modify their ban,
Riyadh will import only those products certified as radiation free by the
exporter's government. West European countries account for 25 percent of
GCC produce imports. GCC countries could easily switch to US and
Secret
23 May 1986
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Airbus A320
Commercial Bank
Funding
Nicaragua Receiving
Economic Support
From Peru
Secret
23 May 1986
it moves toward privatization.
A consortium of French banks headed by state-owned Paribas has recently
agreed to lend Aerospatiale some $51 million to finance a small part of the de-
velopment costs of the new Airbus A320 aircraft. For past A300 and A310
programs, the French Government provided all the necessary development
funds, but budget constraints are forcing Paris to turn to commercial sources
for some of the funds. Under the agreement, the interest and principal will be
repaid by a levy of 2 percent on the A320 sales price to be paid in full with the
delivery of approximately 120 aircraft. We believe the move represents the
beginning of increased efforts by Airbus to acquire funds from the private
sector for the development of future programs, including the $2.5 billion
needed for the A330/A340 programs. Likewise, British Aerospace, which is
pressing London for up to $675 million in launch aid for the A330/A340 wing,
may begin to explore new ways to tap the commercial market, particularly as
Following Peruvian President Garcia's recent call for Latin American coun-
tries to help Nicaragua rebuild its war-torn economy, Lima announced a $27
million financial support package for Managua in mid-May. Peru will provide
$20 million in trade credits, and reschedule some $6.5 million in Nicaraguan
debt obligations. The deal was made possible by a Soviet-Peruvian agreement
allowing one-half the trade credits to be applied against Lima's debt to
Moscow.
25X1
2bA1
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Secret
Increased Food
Donations for
Afghan Refugees
Tighter Control
of Tokyo Offshore
Banking Facility
the Pakistani economy.
Donations to the World Food Program's (WFP) 1986 relief program for
Afghan refugees in Pakistan have increased over 1985 levels-reversing
declining international support for the program. In 1985, total wheat pledges
declined about 5 percent from the previous year, and Islamabad was forced to
release 90,000 metric tons from its own stocks to meet refugee needs. Wheat
donations for 1986 should increase by 10 percent, according to Embassy
reporting, and donations of other commodities are expected to rise as well.
Although pledges of 361,000 tons of wheat meet WFP goals for 1986, they fall
well short of the 500,000 tons that Islamabad estimates is needed this year to
support the 2.6 million registered and over 300,000 unregistered Afghan
refugees. On the basis of these figures, Pakistan will probably again be forced
to supplement WFP donations, making the refugees a continuing burden on
National Developments
Developed Countries
prohibited, further limiting the appeal of the proposed facility.
A recent press report indicates that Finance Ministry guidelines for the
proposed Tokyo international banking facility will be stricter than potential
investors had hoped. The facility-expected to open in late 1986-is one of the
liberalization measures agreed to in the 1983 Yen/Dollar Accord. The
proposed guidelines apparently will limit the level of interaction between the
domestic Japanese and offshore markets, enabling the Finance Ministry to
retain most of its present control over the domestic money supply. Foreign
securities transactions and certificates of deposit issues would also initially be
25 Secret
23 May 1986
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Secret
Libya Trying
To Recover
Frozen Assets
From London Bank
UK Report Urges
Better Relations
With Moscow
Secret
23 May 1986
Libya has taken steps to recover blocked assets in the London branch of a ma-
jor US bank, raising concerns in Britain about the extraterritorial reach of US
sanctions. The Libyan Arab Foreign Bank-wholly owned by the Libyan
Central Bank-is suing the London branch for nearly $300 million, money
that the Libyans claim they had instructed the US bank to transfer from New
York to London. The case is apparently the first of its kind since Washington
froze Libyan assets in January and could strain US-UK relations because of
the hazy nature of the laws governing US bank assets outside US territory. Al-
though several similar cases arose during the Iranian crisis in 1980, none came
to trial to establish any legal precedent. Bank of England officials told US Em-
bassy officers that the matter should be left to the courts, and the officials
probably hope the case can be resolved without undercutting US sanctions.
year.
A report released this month by the Foreign Affairs Committee of the House
of Commons recommends that Britain broaden official contacts with the
Soviet Union. The committee outlined several specific proposals in the
diplomatic and economic spheres to help relieve tensions and increase commer-
cial opportunities. The recommendations include a reciprocal relaxation of
controls on the movement of diplomats in London and Moscow, reappointment
of a science counselor to Moscow to upgrade research contacts, use of British
influence to keep the COCOM list to a minimum, and making Russian
language a major educational priority. Prime Minister Thatcher is eager to
continue the gradual improvement in bilateral relations witnessed since
Gorbachev came to power and may take action on some of these proposals dur-
ing the expected visit of Foreign Minister Shevardnadze to London later this
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Italy Considers
Controls on
Foreign Investment
Italy Considering
Adopting New Lira
tion, Confindustria, has already voiced its objections
Prime Minister Craxi's Socialist Party is drafting legislation that would
require the government to be notified of the foreign purchase of Italian firms
with capital above $20 million or net sales of $67 million at least five days pri-
or to completion of the deal. The draft bill does not clearly describe the
government's power to prohibit such sales, but firms failing to comply on
notification could forfeit their right to government assistance for five years.
Legislation aimed at controlling foreign investment is proposed periodically in
Italy, and Craxi's concern over Libyan ownership of Italian firms apparently
has prompted this latest attempt. Craxi claims only to have learned of Tripoli's
recent purchase of the Tamoil refinery and its 900 service stations through the
news media. Under the proposed law, the government could block direct
investment only from non-OECD countries. A similar bill introduced in 1984
to control all foreign investment received little support, and there is likely to be
much opposition to the present draft legislation. The main business organiza-
feet before passing the legislation.
The Italian cabinet agreed in principle last week to adopt a new lira worth
1,000 old lira-a symbolic measure economically, but a political boost for
Socialist Prime Minister Craxi. Although several efforts at currency reform
have failed, Treasury Minister Goria believes Parliament will pass his
legislation this summer because of the improved inflation outlook in Italy, and
he hopes to have the new lira in circulation by early 1987. Since prices are like-
ly to be rounded upward during the currency changeover, it is important to in-
troduce the new lira while inflation is falling. Inflation in April dipped to its
lowest level in 13 years. The currency change will not correct any of Italy's
continuing economic ills-such as the huge budget deficit-but probably will
create the impression that Craxi is addressing the problems. The other parties
in the cabinet, reluctant to let Craxi reap this credit, probably will drag their
27 Secret
23 May 1986
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Secret
Less Developed Countries
Brazil's Emerging Brazil's two-month-old anti-inflation plan is fraying around the edges, provid-
Economic Problems ing an opportunity for President Sarney's opponents to renew protests.
Sarney's plan met initial success: March interest rates dropped, the stock
market boomed, and the official price index declined for the first time in
memory. The US Embassy reports that consumers, earlier treated to a wage
hike, went on a spending spree. rasilia is
having trouble managing the program. Spot shortages appeared in April and
growing numbers of firms are dodging the price freeze by repackaging
products, according to the US Embassy. A recent survey shows planned
business expansion remains low. In addition, the recently announced $900
million public-sector deficit in March is dampening expectations that inflation
will be controlled, according to the US Embassy. The cruzado is now trading
unofficially at 40 percent below its official value against the US dollar-an in-
dicator of waning public confidence. Consumers, expecting prices to rise soon,
are withdrawing savings and increasing credit use to fuel their buying. Labor
leaders are criticizing the plan in the press, and wildcat strikes have resumed.
Sarney probably will try backstage political maneuverings to prevent protests
while his economic advisers adjust the stabilization program. Nevertheless,
Brasilia is reluctant to make the extensive budget cuts needed to cool demand
before the November elections. Price controls are also extremely popular and
difficult to remove. Brasilia will probably reduce demand by tightening credit
terms and improve supply by increasing imports or cutting business taxes.
Secret 28
23 May 1986
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Secret
Rising Mexican Recently released first-quarter government figures indicate that Mexican
Inflation Rate inflation could top 100 percent this year if the government continues using
expansionary monetary policy to finance its growing budget deficit. 25X1
25X1
US Embassy officials report that
costs.
the Central Bank is circulating new currency more rapidly than banks can
unpack it. The recent inflation trend is likely to spur additional capital flight,
increase pressure on the government for new wage hikes, and increase
resistance to planned price rises on government subsidized goods and services.
In addition, the high inflation rate will push domestic interest rates up, adding
to the already elevated costs of financing the burgeoning budget deficit, and
also force a more rapid devaluation of the peso, which would boost import
Sudan faces a further reduction in exports despite the easing of the drought
Problems for Sudan this year. Exports of cotton and sesame will be hampered by low world prices
and continued pest infestation of the crops. Livestock sales, a potentially strong
export, will be limited as farmers rebuild herds devastated by the drought last 25X1
year. Moreover, the government's resistance to correcting an overvalued
exchange rate is making trade unprofitable. This growing export crunch will
exacerbate the government's already serious foreign exchange shortage and
further limit Khartoum's ability to meet skyrocketing debt payments and
maintain critical imports.
Zimbabwean
Farm Prices
Provoke Discontent
29 Secret
23 May 1986
statement expressing concern over the government's new pricing policy.
A new price structure for agricultural commodities announced recently by
Harare is meeting with widespread dissatisfaction from the country's farmers.
The new prices for most commodities fall short of the substantial rise in costs
farmers have experienced in the last year-farm wages alone have gone up by
over 30 percent. Harare hopes that minimal price increases for some crops will 25X1
depress production incentives and cut surpluses that have led to significant
storage problems. Highlighting the displeasure of the agricultural community,
Zimbabwe's three farmers' unions have, for the first time ever, issued a joint
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Secret
New Issue of
Pakistani Bonds
More Deregulation
in Pakistan
Sri Lankan
Defense Spending
Increases
Secret
23 May 1986
budgets.
Pakistan reopened sales of National Fund Bonds (NFBs) on 15 May, but the
new issue probably will not raise sufficient revenues to cover the growing
budget deficit. According to the US Embassy, NFBs-one of the three bond
schemes introduced last year-are designed to reduce the deficit, which
totaled more than $2 billion in FY 1986. To attract funds, the bonds provide
anonymity to buyers, exempt interest from taxation, and can be used as loan
collateral. Although sales of NFBs have done well-more than $1 billion has
been raised so far-shortfalls in tax revenues may still force Pakistan to look
to the domestic banking system for budget financing, thereby increasing the
risk of higher inflation and crowding out credit for the private sector.
Moreover, the new NFBs will add to the debt servicing burden in future
opposition
Islamabad last month removed price and distribution controls on the fertilizer
industry as part of its gradual policy of privatization and deregulation.
According to the US Embassy, these moves will reduce fertilizer subsidies-
about $90 million in FY 1985-encourage private-sector production, and
attract domestic and foreign private investment. The removal of price controls
is not expected to increase fertilizer prices in the short term because of excess
domestic capacity in the industry, but prices will continue to be monitored to
ensure stability. If prices for fertilizer and edible oils begin to rise, however,
the government might curtail its deregulatory efforts to appease the political
social welfare programs will experience additional cuts.
Colombo recently announced a $140 million increase in military spending.
This is the second increase in two months-the first totaled $100 million-and
would double the original defense budget figure for the current fiscal year. The
additional funds will be diverted from rural development projects and will be
used to buy military equipment, according to press reports. The increase has
pushed defense to 19 percent of government spending, compared to 3 percent
in 1982. Meanwhile, low prices for tea-which accounts for over 30 percent of
the country's export earnings-and growing military imports will continue to
aggravate Sri Lanka's trade deficit, which reached $520 million in 1985. Until
the Tamil insurgency is settled it is likely that spending on development
programs, public-sector industries, the Mahaweli irrigation project, and some
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Secret
Burma's Rising With no significant increase in exports likely, Burma's debt service payments
Debt Service Ratio will absorb almost two-thirds of its foreign exchange earnings this year, up
from 50 percent last year, according to US Embassy estimates. Foreign
exchange reserves are equal to only about one month of imports. Burma has
had to turn increasingly to short-term commercial borrowing to finance
imports, but banks are starting to resist further expansion of such borrowing.
If Burma cannot meet its repayment obligations, it will probably seek the help
of such key donors as Japan, West Germany, the United States, and Australia
rather than submit to conditionality which would probably accompany a
general rescheduling.
Thailand Cutting
Rice Export Target
Hong Kong
Consolidates Its
Stock Exchanges
Indonesia's
First Car
World Bank estimates
Thailand has reduced its target for rice exports this year by about 7 percent to
4 million metric tons. Thailand, which earns roughly 15 percent of its foreign
exchange from rice exports, expects to lose sales as a result of increased price
competition arising from the US Food Security Act as well as the continuing
decline in the world rice market. To counter this loss, Thailand will attempt to
sell lower grades of rice at prices with which the United States cannot
compete. Bangkok also plans to lobby Washington to reduce the impact of the
US legislation on its exports. Nonetheless, Thailand is likely to face weakening
world rice demand at falling prices for the rest of the decade, according to
In an attempt to increase supervision of the often unruly securities market, the
Hong Kong Government merged the colony's four stock exchanges in April.
To protect investors, regulations now require brokers to show substantial liquid
assets and listed companies to submit fuller financial disclosure statements.
Banks are now banned only from trading stocks with each other, and this
restriction will be lifted in October 1987. In addition, the government in May
established a stock index futures market that caters to institutional investors.
The government hopes these measures will help attract more investment from
abroad as well as from small local investors. Many local investors have been
sending an increasing share of their savings overseas because of of the market's
volatility and worries over the reversion of Hong Kong to Chinese sovereignty.
Indonesia's first domestically designed and engineered automobile reflects a
successful effort to emphasize the labor-intensive strengths of the economy.
Unlike most Indonesian manufactures, the two-wheel-drive van probably will
be price competitive despite the requirement to use high-cost domestic steel. 25X1
The car has a sticker price of about $9,500 compared with $15,000 for a
similar Japanese vehicle, according to US Embassy reporting. The manufac-
turer believes it has the capacity to produce 5,000 cars annually for the
domestic market. If the company can hold the line on prices, we believe the
new car could serve as a prototype for the kind of labor-intensive industrial de-
velopment Indonesia needs to diversify the oil-based economy. FI 25X1
31 Secret
23 May 1986
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Secret
South Korean
Auto Exports
Soviet Resolution
on Light Industry
Eastern Europe's
Hard Currency
Trade Balance
Secret
23 May 1986
scheduled to increase to about 1 million units in 1987
Hyundai Motor Company has sharply increased the number of cars it plans to
sell in the United States this year. Hyundai
plans to ship 140,000 to 170,000 units to the United States in 1986, up from
the earlier target of 100,000. Strong sales in March and April-almost 23,000
units-were close to the rates needed to reach the new goal. In the future,
South Korea's other automobile companies, Daewoo and KIA, each plan to
ship 80,000 small cars to the US market in 1987, all to be sold under US man-
ufacturers' nameplates. These three automakers will have the capacity to
produce a total of 600,000 units by the end of 1986, and the capacity is
on satisfying the consumer.
The USSR Council of Ministers on 24 April adopted a resolution on improving
the production of consumer goods. The resolution elaborates on enacting the
new system of industrial management throughout light industry. This manage-
ment mechanism was to take effect in all of light industry in 1986 but has ap-
parently been delayed until 1987. The publication of the resolution is part of
Gorbachev's campaign to assure consumers of high-level concern with their
plight. The new method of management has not proved successful in solving
the industry's problems with unreliable suppliers and lack of responsiveness to
consumer demand because it continues to limit enterprises' choice of suppliers
and to emphasize plan fulfillment. The new system increases rewards for
meeting contracts and raises penalties for nonfulfillment, but enterprises will
continue to concentrate on meeting the goals of central planning rather than
other East European countries.
Eastern Europe's surplus in hard currency trade plunged last year to $3 billion,
reversing the four-year upward trend. Exports fell 3 percent as prices for
agricultural goods softened, and bad weather reduced production in most
countries. The redirection of some exports to the USSR probably contributed
to the fall in hard currency sales. Imports surged 5 percent because of
emergency purchases of energy and grain and increased purchases of capital
goods and raw materials probably planned to redress cutbacks made during
the 1981-83 financial crisis. Particularly poor performance nearly erased
Hungary's surplus and put Bulgaria into deficit. This year, Western bans on
food imports from the region in the wake of the Chernobyl' accident will
further weaken trade prospects. Trade problems will complicate debt servicing
by Romania, Poland, and Yugoslavia and may discourage bank lending to the
25X1
25X1
25X1
25X1
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Secret
The Wuqiangxi hydropower project, canceled twice in the last decade for
Canceled Hydroproject budget and geologic problems, is again under construction, according to
Chinese press reports. Scheduled for completion in 1994, the dam will
supposedly have 1,200 megawatts (MW) of power capacity, compared with
original plans for 1,750 MW. Government officials have stressed Wuqiangxi's
benefits in flood control as well as in generating electricity. China may be
using concessionary financing from Japan to build the dam; before its second
cancellation, Wuqiangxi was one of China's first recipients of low-cost loans
from Japan's Overseas Economic Cooperation Fund. If that funding is
reactivated, it will restrict China to Japanese suppliers for most equipment
imports, including the turbine generators
33 Secret
23 May 1986
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 a .
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Secret
Secret
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