SOVIET TRADING METHODS UNDER SCRUTINY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP08S01350R000601900006-6
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 6
• Document Creation Date: December 27, 2016
• Document Release Date: March 7, 2012
• Sequence Number: 6
• Publication Date: July 1, 1974
• Content Type: REPORT

Declassified in Part - Sanitized Copy Approved for Release 2012/03/07: CIA-RDP08SO135OR000601900006-6
July, 1974
SOVIET TRADING METHODS UNDER SCRUTINY
Comment on Moscow's Radio Peace and Progress, to mark the second
anniversary of the nationalisation of the Iraq Petroleum Company (IPC), hailed
it as a "historic victory" for the Iraqi people following "a violent struggle
against the imperialist beasts", and described the IPC as "more like an octopus
encircling Iraq, strangling it and sucking all of its blood". The radio claimed
on June 3, 1974, that the firm support of the Soviet Union and other "Socialist"
countries had been an important element in the victory. In fact, the Russians
themselves have profitable interests in oil and other commodities supplied by
the Middle East and Maghreb countries, and their trading methods are causing some
concern.
According to Radio Peace and Progress, "Eighty per cent of the Iraqi
budget depended on the royalties that were given as charities to the country".
Even then, "the oil monopolies used to juggle the accounts of these royalties
and thereby plundered vast sums from Iraq".
In 1972, the Soviet Union concluded a long-term agreement to buy Iraqi
oil and to help Iraq develop oil production in North Rumaila. The recent Radio
Peace and Progress broadcast followed an Iraqi News Agency report on May 29 which
detailed another agreement, signed the previous day between Iraq and the USSR,
for the third stage of the North Rumaila project. This should raise the field's
output to an annual 42,000,000 tons from August, 1975 - compared with 5,000,000
tons in April, 1972, when Moscow first became involved. The Economic Counsellor
at the Soviet Embassy in Baghdad described the project as a prominent symbol of
Iraqi-Soviet friendship - and for the Russians it has been a lucrative friendship.
The Beirut newspaper, An-Nahar, reported on May 14 that Iraq supplies the USSR
with 300,000 barrels of oil per day. Over the question of payment for the oil,
however, the amity has lately been under strain.
Moscow, reluctant to use its stocks of convertible currency, favours
barter deals in which Soviet aid and exports are paid for by deliveries of crude
oil. But because Soviet technical and especially military aid is hard to value,
n since it does not appear on any'open market, the Russians sometimes obtain their
`/ ail at an artifically cheap price and re-export it to the West for much higher
prices, paid in convertible currency. According to reports at the end of 1973,
aq is agreed to purchase arms for oil worth f6 million, and the Russians had
re-sold the oil to West Germany for E18 million, even before it was delivered.
This practice is permitted under an Iraqi-Soviet protocol of August, 1970,
Declassified in Part - Sanitized Copy Approved for Release 2012/03/07: CIA-RDP08SO135OR000601900006-6
 Declassified in Part - Sanitized Copy Approved for Release 2012/03/07: CIA-RDP08SO135OR000601900006-6
-11
covering Soviet oil imports up to 1979; other agreements, dating from July, 1972,
provide for the repay a nt in crude oil of Soviet loans to raa made u ntil
On April 1, 1973, the Beirut Daily Star quoted the Middle East Economic
Survey as saying that the Iraqis "see no reason to saddle themselves with any
more restrictive barter arrangements when hard cash is readily available", and
that Soviet and East European customers were "likely to be asked to pay hard
cash just like Western buyers". Since then, Iraq has evidently got tougher.
According to the Lebanese magazine Al-Sayyad of April 24, 1974, Iraqi officials
said that their country would gradually cancel the barter deals with the Soviet..
Union and Eastern Europe w is had "imposed on Baghdad a certain non-profitable
ecaffomic policy and enabled the States buying the oil to re-sell it for high
,prices on the international market". Frequently, the magazine added, Iraq did
,not need the goods supplied by these States, but did need convertible currency,
sand yet it was "forced by the barter deals t
h
i
o accept w
at
t needed and what it
`did not need".- The Iraqi experience has had a precedent in cotton exports
rom Egypt and the Sudan to the Soviet Union, but whereas cotton is an annual
crop
oil is a once-onl
wastin
asset
h
h
,
y
g
, so t
at t
e problem is especially important
for Iraq.
Iranian gas supplied "cheaply"
A similar situation has occurred With regard to Iran. In 1973, the
Russians strongly supported the Shah's measures to obtain higher prices from
the International Oil Consortium, and a Moscow Radio broadcast in Persian on
April 15, 1974, quoted Foreign Minister Gromyko as saying: "Our country backs
the developing countries' struggle against the imperialist monopolies who are
exploiting their national resources". The commentary added that "utilizing
the support of the Socialist camp, the oil-exporting countries, united within
OPEC, have found a genuine opportunity to force the biggest Western oil
monopolies to give in to their lawful and just demands... Iran, too, is taking
part in the joint anti-imperialist struggle of the oil-producing countries".
But the new agreement was far from satisfactory, being still a "colonialist
distribution of profits between Iran and the monopolies", benefiting "major
businessmen and oil-guzzlers". The radio added that "So long as the parasitic
go-between of the monopolies exists, Iran and the rest of the oil-producing
countries are not the complete masters of their black gold". However, the peoples'
struggle against oil imperialism was gaining fresh momentum; "There is no doubt
that the Iranian people, who have written a great many glorious pages in the
history of this struggle, will now also participate in it actively".
The bone of contention, however, is the related commodity of natural gas.
Iran sells the Russians an average of about 10,000 million cubic metres of dry
gas per year and, according to Pars Radio on June 6, 1974, quoting the National
Iranian Gas Company, the figure for April, 1974, alone was some 810,000,000
cubic metres. An article in the Iranian newspaper Kayhan International on May 23,
1974, entitled: "Russia getting Iran's gas on the cheap", noted that Iranian
exports of gas to the Soviet Union dated from an agreement in 1966, which was
part of a larger deal providing for Soviet assistance to projects such as the
Isfahan steel mill. The gas, pumped across the Soviet border through a pipeline
constructed at Iranian expense, was'to help finance these projects and repay
Russian credits. The agreement fixed the price of gas at }8.7 cents per 1,000
cubic feet at the then rate of exchange, a low price but one that was related
to the prevailing conditions in international oil dealings. Ironically, it was
the Soviet Uai.on..that insisted on an "escalation clause" providing for automatic
adjustment to the gas price for any movement in fue2-prices of under 30 per cent
and for negotiations between the two parties on gas prices when fuel prices moved
by more than 30 per cent.
Declassified in Part - Sanitized Copy Approved for Release 2012/03/07: CIA-RDP08SO135OR000601900006-6
 Declassified in Part - Sanitized Copy Approved for Release 2012/03/07: CIA-RDP08SO135OR000601900006-6
At that time, oil prices seemed likely to fall and the Russians thought
the clause would protect their interests; however, oil prices rose by 42 per
cent between 1971 and 1973, and so the gas price had to increase. In June, 1973,
the Russians agreed to pay 35 per cent more, which was still below the
international prices. When, between October and December, 1973, the posted price
of oil more than quadrupled, the Russians disregarded the Iranian requests for an
increase in gas prices and have been paying only some 30 cents per 1,000 cubic feet
of gas. Pointing out that this is one-fifth of the international price of
$1.50, the Tehran Journal asked on May 28: "Is there a difference between
colonial. exploitation of oil from similar exploitation of gas?"
The problem is aggravated by a projected three-way deal under which,
according to the Kayhan International article, Iran will deliver 13,000 million
cubic metres of gas to West Germany, but at the Iranian-Soviet frontier. West
Germany would in fact get its gas from Soviet fields and would pay the Russians
a "transit" fee, although no physical transit of the gas occurs. Iranian gas
would therefore go where the Soviet Union needed it, to the consumers and
industries of the Southern Caucasus., saving the Russians the expense of
constructing long pipelines from their distant reserves in the North and yielding
the transit fee as a bonus. Furthermore, under current price structures,
Moscow could make huge profits by charging West Germany fully for its own gas
while underpaying the Iranians for theirs. An adjustment taking full account
of the increase in oil prices would increase the price by 1.24 dollars per 1,000
cubic feet, although, according to Kayhan International, Iran is seeking
an increase of only 62 cents. But the Russians did not even reply to the
Iranian proposals.
Chinese viewpoint
Many of the details of the Soviet gas deals were first disclosed in
Oktobre, the organ of the pro-Chinese Marxist-Leninist Association of Finland,
which also dealt with similar problems experienced by Afghanistan. In a commentary
on June 11, 1974, New China News Agency (NCNA) referred to the "social-imperialist
acts of the Soviet Union" and said that "Iran's demand is completely just, but
the Soviet revisionist leading clique is brazenly violating the agreement and,
deliberately delaying a reply to Iran's reasonable demand, is blatantly plundering
Iran's natural gas". Moscow, it said, adhered to treaties and agreements "when
they work in its favour and violates them wantonly, or even tears them up, when
they do not".
The Russians have replied by accusing the Tehran Journal of trying to
"damage Iranian-Soviet relations" and the editor of being a paid agent of
Western interests. Pravda has also attacked Iran's demands for gas price
increases. In a Persian language broadcast on April 6, 1974, Moscow Radio
referred to the original aid-for-gas agreement and said that the gas "used to go
to waste". The Soviet Union had abundant resources, but, "wishing to help a
friendly country like Iran to expand its economy... signed an agreement which,
at the time, the Iranian Press called 'The deal of the century"'. The commentary
admitted that the Soviet Union had gained some advantages from the deal, but
said that while the price of Iranian gas went up by 35 per cent in 1973, the price
of Soviet equipment supplies had not been raised. On the allegations that the
Russians were reselling Iranian gas at a higher price to European countries, the
radio said: "This is a truly nonsensical rumour, the groundlessness of which
could be proved by a simple calculation", and added that a pipeline from the
Iranian gas fields to Moscow or even the Soviet western frontier would "involve
considerable cost". The newspaper Echo of Iran commented on June 2, 1974: "In
good faith, Iran accepted the costs of building one of the world's most expensive
Declassified in Part - Sanitized Copy Approved for Release 2012/03/07: CIA-RDP08SO135OR000601900006-6
 Declassified in Part - Sanitized Copy Approved for Release 2012/03/07 : CIA-RDP08SO135OR000601900006-6
and largest gas pipelines to deliver the Khuzistan gas to the Soviet Union.
Should the Soviet Union not pay a price that will at least write off the cost
of the pipeline construction? How can Pravda justify this plunder at a time
when the oil producing countries have regained their rights?"
The London Times reported on June 24, 1974, that Iran was now seeking
a fourfold rise in gas charges to the USSR and that a delegation led by
Mr Taghi Mossadeghi, the Managing Director of the Iranian National Gas Company,
had been in Moscow for talks on the subject - at Soviet invitation. The report
added that Iran apparently wanted to bring the price of gas more in line with
that of other energy resources. According to The Times on July 1, the Russians
did not agree to Iran's demand and made no counter-offer.
Deal over Moroccan phosphates
Another commodity in which the Soviet Union has an interest is
phosphates, the vital ingredient in agricultural fertilisers. Morocco has the
largest known reserves of these, about 60 per cent, and last year exported 17
million tons out of a total production of 19 million tons. It also tripled the
price, to about $43 a ton, and Moroccan authorities have warned that further
increases will be imposed. Under a barter deal with Morocco, the Russians will
strike a new phosphate mine, Morocco's fourth, at Meskalas, plus a new harbour
and integrated railway system. They will also supply petroleum products,
timber, electro-mechanical plant and other equipment. Morocco, over a 25-30
year period beginning in 1990, will send 10 million tons of phosphates a year
to the Soviet Union, though the Russians are likely to receive some 3-5 million
tons a year from 1980. This will apparently not pay completely for Soviet
assistance since, according to The Times of May 13, 1974, Morocco will make up
the balance with citrus fruit, other produce and some minerals (probably food
preserves, clothing, copper, lead and zinc). The report added that the agreement
had yet to be ratified by the Russians.
The London ['inaneial Times said on May 7, 1974, that the Meskalas
project had yet to be fully coated, but this would be done as work progressed -
which will give Moscow plenty of opportunity to adjust the costs. While the
production target is 10 million tons to meet Soviet needs, it "may be expanded
to allow Morocco to produce additional supplies at Meskalas for export to its
other markets. That will depend on the outcome of the feasibility studies now
under way to establish the full extent of the deposits and the finance available".
It seems, therefore, that Morocco will only get any net benefit from Meskalas if
and when there is production surplus to Soviet requirements; meanwhile, as prices
inevitably rise, the Russians will be safeguarded by the terms of the barter
deal from any drain on their convertible currency reserves or from any Moroccan
attempt to raise prices to other customers. Indeed, as the Russians will get
quantities of other Moroccan produce and minerals as well, Rabat is paying a high
price for Soviet assistance. Some idea of what Moscow will save is evident from
opinions that Moroccan phosphate prices may go as high as $100 per ton; should
it become necessary for the Russians to argue about this, they have only to
re-value their side of the barter. But while Moroccan phosphates are worth what
the free market will pay for them, Soviet equipment and services are worth what
Moscow says they are.
There have already been indications of'Moroccan dissatisfaction with
Soviet trade practice. In September, 1973, there were Moroccan hews agency
reports that both Morocco and Tunisia had demanded the abrogation of trade
agreements with the Soviet Union and wanted to discuss new arrangements to be
based on payment in hard currency. Moscow was reported to have agreed in
principle to abrogation. The reports added that in the past year, Moroccan
exports to the Soviet Union had been worth 240,200,000 French francs, while
Declassified in Part - Sanitized Copy Approved for Release 2012/03/07: CIA-RDP08SO135OR000601900006-6
 Declassified in Part - Sanitized Copy Approved for Release 2012/03/07: CIA-RDP08SO135OR000601900006-6
imports from it had totalled F189,000,000. From this, it is impossible to avoid
the conclusion that payments problems arose when Moscow found itself in a
deficit position. On January 26, 1974, Maghreb Arabe Presse (MAP) reported snags
in the export of early season fruit to the Soviet Union, which had refused to
pay $267 per ton, while the Moroccan authorities had found the offer of $166
unacceptable. Nevertheless, MAP disclosed on February 23 that the Russians had
bought one third of Morocco's citrus production since 1971 and that a joint
Moroccan-Soviet company, SORESMA, had been formed to promote bi-lateral trade.
Declassified in Part - Sanitized Copy Approved for Release 2012/03/07: CIA-RDP08SO135OR000601900006-6
 Declassified in Part - Sanitized Copy Approved for Release 2012/03/07: CIA-RDP08SO135OR000601900006-6
STAT
Declassified in Part - Sanitized Copy Approved for Release 2012/03/07: CIA-RDP08SO135OR000601900006-6