USSR REVIEW

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP89T00992R000100240001-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 41
• Document Creation Date: December 27, 2016
• Document Release Date: March 12, 2013
• Sequence Number: 1
• Publication Date: December 1, 1988
• Content Type: REPORT

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Directorate ot
MASTER FILE 1;11F1 ?'L
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USSR Review
December 1988
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PAGE NUMBERS
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TOTAL NUMBER OF COPIES eo 7/
DISSEM LATE
EXTRA COPIES
RECOM CENTER 9
JOB NUMBER
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SOV UR 88-013X
December 1988
Copy 609
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virecturatv in
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4its
USSR Review
December 1988
The USSR Review is published by the Office of
Soviet Analysis.
Reverse Blank
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SOV UR 88-013X
December 1988
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Contents
Articles Settling the Debate on Reasonable Sufficiency
Gorbachev's recent announcement at the United Nations of a
unilateral force cut is a culmination of the "reasonable sufficiency"
debate, at least as it applies to the 13th Five-Year Defense Plan
(FYDP). But even before that announcement, military leaders, in
the late summer and early fall of 1988, have said the military would
probably receive less equipment in the future and would have to seek
qualitative improvements to compensate for the lack of quantitative
increases. During the same period, civilian academics were continu-
ing to argue for their version of reasonable sufficiency and were
becoming more aggressive in criticizing the military's lack of "new
thinking" and its handling of discipline problems.
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The Moscow Human Rights Conference: How Serious 9
Is Moscow?
Gorbachev would like to hold a human rights conference in Moscow
to improve the USSR's image abroad and to showcase his program
for domestic reform. His recent political triumph probably provides
him leeway with the more orthodox members of the leadership to
satisfy some of the West's criteria for holding the meeting. At the
same time, his desire to bring the Vienna meeting of the Conference
on Security and Cooperation in Europe (CSCE) to a quick close to
allow conventional arms talks to begin may give the West additional
leverage in holding out for further liberalization of human rights.
The Soviet 1989 Economic Plan: Can Gorbachev Keep His Promises 15
to the Consumer?
The 1989 plan substantially elevates the priority of consumer
welfare but, in our judgment, does not supply sufficient resources to
back up promised increases in the availability of goods and services.
Moscow's approach could make matters worse?increased spending
for consumer welfare is contributing to substantial growth in the
state budget deficit, and managers are expected to meet ambitious
production targets while accommodating numerous, probably dis-
ruptive, changes in the economic system.
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Soviet Dependence on Imports From the West: Why the Numbers 23
Belie the Rhetoric
Moscow's much publicized concern over the need to rapidly modern-
ize the economy and, more recently, to address consumer discontent
has led many Western observers to assume that Gorbachev will
have to turn to the West for major economic and financial
assistance. The recent spate of credit lines linked to imports of
consumer goods has served to reinforce this theory. In reality,
however, the Soviet Union has reduced real imports of Western
capital and consumer goods and has reduced the growth of real
borrowing since Gorbachev came to power. Soviet preference for an
indigenous solution to Moscow's problems and longstanding concern
over becoming vulnerable to Western economic and financial sanc-
tions, in fact, argue for a much more measured turn to the West.
Notes
Oil Ministry Looking for Increase in Investment Allocations 29
Economic Reform Schedule Revisions
30
Viewpoint Untied Lending to the Soviet Union: A Perspective
Reverse Blank
Untied loans are only a small portion of the USSR's annual inflow
of hard currency and do little either to help underwrite perestroyka
or finance Moscow's overseas empire. Moreover, Moscow has the
wherewithal to find alternative sources of funds should this type of
lending be restricted.
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Articles
Settling the Debate on Reasonable
Sufficiency
Gorbachev's UN speech on 7 December 1988?in
which he announced that Soviet military forces would
be reduced by 500,000 men and by 10,000 tanks,
8,500 artillery systems, and 800 aircraft?is a clear
indication that the "reasonable sufficiency" debate is
not being settled on the military's terms. Since mid-
1979, the concept of "reasonable sufficiency" has
been a subject of intense discussion among the Soviet
leadership, primarily because it has come to be used
as a codeword to justify cutting back on the level of
resources the military receives during the 13th Five-
Year Defense Plan (1991-95). The military generally
opposed any cutback in military spending with the
argument that sufficiency is defined in terms of parity
with the West and that unilateral cuts are ill advised.
Some civilians, meanwhile, were expressing the diver-
gent view that some forces that are in excess of
defensive military requirements and budgets can be
cut.
The timing of the preparation for the 13th FYDP
dictated that the political leadership make the deci-
sion on the appropriate level of resources for the
military in late summer or early fall. Gosplan typical-
ly requires 18 months to prepare the detailed target
indicators for the five-year plan and must have a draft
FYDP before it can proceed. Thus, Gosplan will
require the draft from the General Staff by June
1989, and to meet that deadline it needed the guide-
lines in terms of available resource levels in late
summer or early fall of 1988.
1
The efforts to develop those guidelines undoubtedly
produced a clash between the military leadership and
its supporters and those civilians who thought the
commitment of resources to the military had to be cut
back. Under the aegis of glasnost, these academic
civilians had become increasingly vocal and more
unorthodox in their views. The idea of unilateral cuts
undoubtedly arose with the civilians-
Gorbachev was clearly sympathetic to the views the
civilians expressed, and he, by implication, may have
encouraged their speeches and writings to see if a
strong case could be made for military cutbacks. The
leadership shakeup he engineered in September 1988
undercut the more orthodox wing of the party and
allowed him to advance 13th FYDP guidelines that
probably reflect the civilian view.
Perhaps the first convincing evidence for what these
guidelines looked like is contained in a statement
Marshal Akhromeyev made at an August 1988 meet-
ing of the Soviet General Staff. Akhromeyev was
addressing his staff on what must be done to imple-
ment the decisions of the 19th Party Conference.
Although he defined sufficiency in the traditional
military fashion, he went on to say the military
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SOV UR 88-0I3X
December 1988
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"probably" will receive less arms and equipment. It
was not clear from Akhromeyev's comment whether
"less" meant less than in the current FYDP or less
than the military had requested. Nevertheless, his
statement does imply he knew what the guidelines of
the 13th FYDP were by at least early August. His use
of "probably" may have meant he saw some hope of
reversing that decision but did not consider it likely.
The Krasnaya Zvezda article (August 1988) that
reported Akhromeyev's meeting makes repeated ref-
erences to the importance of emphasizing quality over
quantitative parameters. Akhromeyev notes that be-
cause the combat effectiveness and quality must be
higher it is possible for the military to receive fewer
resources. The theme of quality was emphasized even
more in an earlier Krasnaya Zvezda article written by
Minister of Defense Yazov. According to Yazov,
"The emphasis on quantitative parameters is becom-
ing not only increasingly costly, but less and less
effective in both military political terms and purely
military terms." Gen. A. D. Lizichev, Chief of the
Soviet Army and Navy Main Political Directorate,
speaking at a meeting of the Directorate Party Aktiv
in August, reported this emphasis on quality in exact-
ly the same terms. It seems likely, therefore, that even
if a firm decision had not been made, the military saw
the handwriting on the wall.
The emphasis on quality applies not only to military
hardware but also to "military science" and "compo-
sition of the armed force." A call for increased quality
of "military science" means improvements in military
operations and planning. Increased quality in "compo-
sition" means improved training and discipline. These
two goals are the military's problem; the national
economy cannot provide such improvements. Further-
more, the economy cannot easily make significant
qualitative improvements in "military hardware"?
weapons incorporating advanced technologies. The
military leadership realizes that improvements will
come slowly in this area. Thus, major improvements
in quality will have to come from the military itself
through more efficient planning and use of manpower.
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Another indication that resources for the military
were going to be scarce in the 13th FYDP and may
even be cut comes from the industrial side. Lev
Ryabev, Minister of Medium Machine Building, in an
open press interview admitted "a number of military
programs are being cut, and funds previously allocat-
ed for their development will be channeled toward
more peaceful purposes?specifically, toward the de-
velopment of machine building for the dairy indus-
try." His ministr is responsible for nuclear weapons
production.
Meanwhile, civilian academics continued to present
views on the reasonable sufficiency issue that argued
for major spending cuts. Perhaps the most outspoken
of the critics is Alexei Arbatov, Chief of the Disarma-
ment Section of the Institute of World Economics and
International Relations (IMEMO). In a Mezhdunar-
odnaya Zhizn' article (September 1988), he suggests
that reasonable sufficiency in the strategic area could
be defined by a number as low as 400 1-megaton
nuclear warheads. He further notes that from 10 to 20
percent of the Soviet arsenal would be adequate to
impose unacceptable losses on the enemy, implying
that current force levels give the Soviet Union "tre-
mendous reserve strength." Later in the article he
adds that the Soviet Union is introducing a much
greater variety of models and modifications of weap-
onry systems [than the United States has] producing
them in large batches and frequently replacing them
with new models. As evidence, he quotes the Decem-
ber 1987 joint declaration on counting rules?it listed
six US strategic weapons and 13 Soviet weapons.
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While Arbatov is clearly implying that present levels
of strategic weapons are more than sufficient, it is not
so clear what he thinks the economic benefits would
be from cutting those levels. In the article he refers to
"substantial resources" that could be saved. However,
in a BBC radio interview he argued that cuts in
defense would not be of significant help because the
Soviet economy was so inefficient it could not absorb
the resources made available: "It would be like sowing
seeds on asphalt."
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Other critics of the Soviet military have followed
Arbatov's lead in expanding the scope of the criticism:
? Foreign Minister Shevardnadze?at a conference
sponsored by the Ministry of Foreign Affairs and
attended by Arbatov, a number of other academics,
and government officials?spoke of the need to
establish legislative oversight of the military and
military-industrial authorities. The oversight would
include the use of military power abroad, military
construction plans, and the openness of military
budgets.
? A senior researcher at IMEMO, Alexander Salve-
lyev, criticized the lack of new thinking in the
military. He complained that, although the military
had accepted deterrence concepts long ago, they
were only now beginning to understand the impor-
tance of retaliatory forces on both sides.
? Several civilian writers have criticized the mili-
tary's handling of its discipline problems. Even the
Politburo has become involved, reportedly demand-
ing that military leaders take measures to strength-
en military discipline.
During this period, the civilians seemed to be display-
ing a winner's self-confidence in their discussion of
the reasonable sufficiency issue. Moreover, they
seemed comfortable in spreading their views to other
military-related issues. At a minimum, this suggests
the civilian academics were coming to believe the
political leadership was leaning toward their position.
The military leadership fought back and launched a
sharp counterattack against its critics. Gen. Yuriy
Lebedev, of the General Staff's Legal and Treaties
Department, criticized "scientists of mixed special-
ties" who have "only a vague idea of the subject" in
an obvious reference to the academicians at IUSAC
3
and IMEMO. Also, the military reportedly tried to
revoke the clearances of IUSAC Deputy Director
Kokoshin (another civilian critic of the military) and
of Arbatov in an attempt to make it more difficult for
them to research military subjects. The military was
overruled, however, and Arbatov and Kokoshin are
free, for the moment at least, to continue to make
their case for their definition of reasonable sufficien-
cy.
The decision on unilateral cuts will affect expendi-
tures during the 13th FYDP. Although the elimina-
tion of tanks and artillery already in the inventory will
not cut future procurement, expenditures for opera-
tions, maintenance, personnel, and construction will
be less. Other decisions, not yet visible, may have been
made that will lower future procurement costs by
altering the current pace and scope of ongoing mod-
ernization programs.
We may be able to see such changes even before the
plan goes into effect because the Soviets are trying to
avoid wasting resources in the future. For instance,
they might not begin to deploy a weapon in numbers
or locations if that planned deployment was no longer
part of the 13th FYDP.
An across-the-board cut in military hardware is un-
likely. In an interview with a Western reporter in July 25X1
1988, Soviet Army Gen. Vitaliy Shabanov, after
claiming his country's military budget began to de-
cline "after the start of the current five-year economic
plan in 1986," went on to say that the military had
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already decided to spend more in the future on air
defense, intelligence gathering, and verification of US
compliance with arms treaties. Although Shabanov,
Deputy Minister of Defense for Armaments, may only
have been trying to affect the debate with this
statement, there are some hints of its accuracy.
Nevertheless, despite some increases, it is likely that
downward adjustments in the aggregate level of re-
sources for defense are being made by the political
leadership. If such adjustments are occurring as the
result of a decision on the guidelines for the 13th
FYDP, in addition to the already announced unilater-
al cuts, we would expect to see evidence of major
changes in the scope of Soviet force modernization in
the early 1990s.
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The Moscow Human Rights
Conference: How Serious
Is Moscow?
How Badly Does Moscow Want a Conference?
Moscow has not been entirely consistent in its efforts
to host a human rights conference, having alternated
between periods of intense lobbying for it and periods
of relative inactivity. It is currently pressing aggres-
sivley on both the human rights conference and on
beginning conventional arms talks. Human rights
issues are the last major obstacle to an agreement at
the meeting of the Conference on Security and Coop-
eration in Europe (CSCE) in Vienna and must be
completed successfully before the proposed Conven-
tional Stability Talks can begin.
Tactical considerations have apparently played a ma-
jor role in these cycles. After an initial push following
the unveiling of the proposal, Soviet negotiators in
Vienna seemed to back off and, in some cases,
appeared to lack specific guidance, possibly reflecting
Moscow's absorption in the INF issue and broader
US-Soviet policies. When INF was largely resolved
and a Washington summit put on the agenda, howev-
er, the Soviet leadership concluded the timing was
right to resume a big push on the Moscow conference.
As a result, Soviet diplomats in Vienna and Washing-
ton began a concerted effort to make headway on the
eve of the summit.
Similarly, Soviet officials probably now sense that,
with the Vienna talks winding to a close, this is their
best and last opportunity to get agreement for the
Moscow conference, and they have resumed intense
pressure after a hiatus of several months. Since
August 1988, Soviet officials, from Shevardnadze
down, have dramatically stepped up the pressure.
That month Shevardnadze, in separate conversations
with US, British, and West German officials, urged
the Moscow conference idea, suggesting a trade-off
for Soviet agreement to two more human-dimension
conferences called for by the CSCE review document
to be held in Paris and Copenhagen. In September,
Shevardnadze further escalated pressure, threatening
to torpedo any Western sites for followup conferences
9
if the West excluded Moscow. This gambit was
paralleled by the Soviet representative in Vienna,
Yuriy Kashlev.
Domestic political considerations apparently have also
played a role. Through the hiatus during much of
1987, Gorbachev focused his attention on economic
reform, possibly in the belief that his release of
political prisoners then under way might be creating
the preconditions for later agreement on the confer-
ence. In early 1988, when he was preoccupied with
unrest in the Caucasus and political challenges from
Ligachev, the impetus also temporarily slackened.
However, it again dramatically picked up as Gorba-
chev regained political momentum.
At this juncture there is clearly an element of prestige
at stake, and Moscow apparently is concerned it will
lose face if it fails to get agreement to the Moscow
conference. Although Moscow may at the last mo-
ment discontinue its threats to block a closure to the
Vienna talks over this issue, a human rights confer-
ence retains a high priority for both domestic and
foreign policy reasons. Moscow seems unlikely simply
to give up its insistence on a conference at this time,
but it may be willing to show considerable flexibility
on the type of conference it will accept. Some evi-
dence suggests that the Soviets could agree to any
conference on the subject of "humanitarian issues,"
even on such topics as information exchanges, human
contacts, culture, or education?that is, any usually
considered a bit ancillary to the core human rights
issues. A second consideration is that the Moscow
conference be treated on an equal footing with any
other followup conferences. Kashlev, for instance,
stressed to Ambassador Zimmermann that all human
rights conferences should produce a final document,
or none should.
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In the final analysis, Gorbachev wants Western agree-
ment to proceed with both Conventional Stability
Talks and a Moscow human rights conference. His
actions and statements on these issues suggest he does
not believe he has to give up one to get the other. As a
matter of tactical flexibility, he may now be willing to
decouple the two issues. In fact, Gorbachev adviser
Vadim Zagladin recently told a Western newspaper
that the USSR no longer considered Western agree-
ment to the Moscow conference as a precondition for
concluding the Vienna talks and beginning new con-
ventional arms negotiations. If Soviet negotiators
endorse such a compromise, however, they would
certainly continue to press the West for a firm
commitment to the Moscow meeting almost as soon as
the Vienna session ends.
The Reasons Behind Moscow's Conference Proposal
Since Shevardnadze first unveiled his proposal, Mos-
cow has put increased emphasis on human rights
inside the USSR?taking steps to implement freer
emigration and more freedom of expression for those
willing to work on behalf of Gorbachev's perestroyka.
Two possible hypotheses?not mutually exclusive?
help explain how Soviet officials see the relationship
between the reforms and the proposal for the Moscow
conference:
? Soviet officials decided to implement the reforms in
part to try to persuade Western countries that
Moscow is a democratic and civilized Western state,
which, in the words of British Prime Minister
Thatcher, the West "could deal with." The confer-
ence, they hope, would showcase these reforms.
? Some Soviet leaders, including Gorbachev, may also
hope to use a human rights conference in Moscow to
press their reform agenda.
Human Rights Reforms Intended To Gain Western
Approval. The Soviets are clearly aware of the bene-
fits in public diplomacy they would almost certainly
garner by holding a human rights conference in
Moscow and exhibiting Gorbachev's reforms (emigra-
tion, legal reform, and others) to official CSCE
delegates. Furthermore, the Soviets have used the
West's refusal to agree to the conference to charge the
West with perpetuating baseless myths about Soviet
human rights deficiencies.
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While the Soviets have repeatedly denied that the
conference proposal is intended to score propaganda
points, its timing suggests it was clearly designed to
make capital with Western public opinion:
? Gorbachev apparently concluded that Soviet human
rights abuses could become a major impediment to
his foreign policy and arms control initiatives. At
the 27th Party Congress in February 1986, he
explicitly recognized this by including human rights
as one of the major elements in his "new thinking."
? Economic officials apparently also believed that a
general improvement in the USSR's image might
pave the way for greater scientific and economic
cooperation that could assist in the USSR's modern-
ization.
Several pieces of evidence suggest that Moscow has
either implemented reforms to win Western approval
or has trumpeted the reforms that were under way for
its own reasons to try to persuade the West to agree to
the conference:
? At the very beginning of the Vienna conference, in
November 1986, Foreign Minister Shevardnadze
promised a more activist line on human rights?
promising that Moscow would issue new laws and
administrative procedures in the USSR to solve
existing humanitarian issues. This came at the same
time he proposed the Moscow conference.
? In October 1988, West German Chancellor Kohl
announced that Gorbachev had told him that all of
those considered to be political prisoners by the
West would be released. Gorbachev apparently
promised Kohl that he would stop the jamming of
Deutche Welle and Radio Free Europe/Radio Lib-
erty. In the same press conference, Kohl announced
West Germany's tentative agreement to attend the
Moscow human rights conference.
Using the Conference To Keep "Democratization" on
Track. In addition, Soviet leaders who favor greater
liberalization of human rights may be using the
conference to push forward their own reform agenda.
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According to a US State Department official, Deputy
Foreign Minister Adamishin has denied that Moscow
wants the conference for international propaganda.
Adamishin argued that the human rights conference
is tied to the party congress that will be held in 1991.
He has said that the leadership plans to hold the
congress first and use the conference to fight conser-
vative opposition to further liberalization of human
rights. While this line is obviously self-serving, there
is little doubt that, by holding out for the conference,
the regime is indirectly committing itself to maintain-
ing a higher standard for practice of human rights
and, by opening itself to considerable Western scruti-
ny, forcing better compliance from the police and
KGB.
How Much Give Is There?
Although Moscow dearly wants a conference to sanc-
tify Gorbachev's reforms, how much further it is
willing to go on human rights to get it is unclear. The
regime:
? Ideally would like to showcase actions already tak-
en, particularly those of 1987, such as the release of
nearly 350 prisoners and the rehabilitation of promi-
nent dissidents like Andrey Sakharov.
? Has recently moved a bit by releasing several
individuals who fit a narrow definition of "political
prisoners." (The justice minister recently said there
are 11 such cases.) It has also taken further symbol-
ic steps like allowing Sakharov to travel to the
United States, hoping to get maximum mileage out
of such gestures.
? Is also poised to unveil a new criminal code that
will, in part, address demands to institutionalize
advances in human rights by eliminating or revising
particularly objectionable articles, thus bringing the
USSR into closer conformity with the CSCE Final
Act.
While these moves are part of Gorbachev's broader
domestic and foreign policy strategies?and not di-
rectly pegged to the Moscow conference?they may
be timed to affect the outcome of discussions in
Vienna.
11
Despite regime interest in the conference, certain
Western demands are not being met, possibly out of
concern they would further erode the regime's control
at a time of dramatically increased political activism,
which is already challenging the party's monopoly of
power:
? Apparently the regime is considering the release of
only a small part of the possibly 300 to 400
dissidents still confined in prisons or asylums on a
broad range of charges.'
? Article 70 provisions against anti-Soviet activity will
apparently only be made more specific, not
eliminated.
? The recent Supreme Soviet endorsement of an
antidemonstration law also indicates the regime
feels constrained to bolster its control, despite both
unprecedented opposition from a handful of depu-
ties and its CSCE obligations to grant freedom of
association and speech.
Nongovernmental Organizations: A Particularly
Troublesome Issue
Access for Western nongovernmental organizations
(NGOs) such as Amnesty International and the Inter-
national Helsinki Federation, however, could remain
the most difficult hurdle. The Soviets have continu-
ously fluctuated on the key US demand that NGOs
and unofficial Soviet human rights activists have free
access to the meeting. Because the control of links
between Soviet human rights activists and their West-
ern supporters has traditionally been of supreme
importance to the Soviet leadership, any greater
flexibility on the NGO issue would seem to indicate
an intense desire to hold the conference in Moscow.
' Estimates of numbers of prisoners range widely, with most in the
150-to-300 range. An accounting we completed at the end of
November 1988 indicated that about 360 dissidents are definitely
or probably incarcerated in labor camps, prisons, or psychiatric
asylums. Contradictory or dated information precluded us from
determining whether about 310 others were still incarcerated or
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How Do Soviet Dissidents View the Conference?
Soviet dissidents and refuseniks disagree over wheth-
er the West should attend a Moscow conference.
Andrey Sakharov and some others believe that hold-
ing it could result in benefits, provided Moscow
fulfills some preconditions:
? Almost since the Soviets first made their proposal,
Sakharov has consistently expressed the view that
the West should agree only if the Soviet regime
releases all remaining political prisoners and grants
them "social rehabilitation" (this apparently means
not only their physical release but assurances that
they will not be stigmatized) and if the USSR
withdraws totally from Afghanistan.
? In January 1988, Sakharov expressed wariness to
the US Ambassador in Moscow about Western
insistence on "proper conditions" for the Moscow
conference and Western pressure for higher levels of
emigration. He contended that the best guarantee
for proper working conditions at a Moscow confer-
ence was Moscow's desire to avoid bad publicity in
the West.
? West German Chancellor Kohl's announcement in
late October 1988 that the Soviets had agreed to
release all those considered in the West to be
political prisoners falls short of Sakharov 's first
precondition. The physicist said that the mere
announcement did not justify Western approval for
the conference?that "actions, not promises" are
needed. Furthermore, Sakharov has implied he
would not be satisfied with the release of the
handful of political prisoners the Soviets claim
exist; he has told the US Embassy that the 11
persons whom the Soviets claim are political pris-
oners excludes many whom he would consider as
such.
Most other Soviet dissidents have shown concern
about the Moscow conference. In December 1987,
Sergey Grigoryants, head of the Glasnost Press Club,
told US Representative Steny Hoyer that he opposed
in principle holding an official human rights confer-
ence in Moscow because it would legitimize a situa-
tion that remained unacceptable. He made this point
while arguing that "democratization" had come to a
virtual standstill?with almost no releases from
camps or psychiatric hospitals, a sharper reaction
against demonstrations, and increasing pressure on
unofficial organizations. Soviet refuseniks have said
in several meetings throughout 1988 that a Moscow
conference would let Soviet authorities mislead the
West about the extent of human rights abuses in the
USSR.
The USSR's constant flip-flops suggest a continuous
debate and lack of resolution among Soviet officials
on what price to pay to win Western agreement to the
Moscow conference.
Soviet schizophrenia about whether Western groups
and Soviet activists can have free access to a Moscow
conference became evident immediately after She-
vardnadze made his proposal. In December 1986,
when asked whether groups like Amnesty Internation-
al would be allowed to participate, Kashlev said it
would be subject to negotiation. However, he contin-
ued, "I do not know Amnesty very well, but I know
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many groups that in reality have nothing to do with
human rights but with intelligence services." In De-
cember 1986, the Finnish Foreign Minister told the
US Ambassador about Shevardnadze's visit to Fin-
land earlier that month. When the Finns had asked
whether nonofficial organizations could participate in
a Moscow conference, the Soviet reply was "no
problem" and "everything can be arranged."
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By the fall of 1987, however, there seemed to be some
backtracking or uncertainty, perhaps stemming from
the more assertive behavior of Soviet human rights
activists. The informal human rights seminar orga-
nized by the Glasnost Press Club, only several weeks
before the Washington summit, made the question an
immediate, rather than academic, concern:
? The West German Embassy reported to the US
CSCE delegation in October 1987 that a Soviet
official told the West Germans that groups "inter-
ested in the CSCE process" would be welcome, but
not groups that were "provocative." He used the
Glasnost Press Club as an example of a group in the
second category.
? That month, an aide to Kashlev told a seminar
organized by the International Helsinki Federation
that foreigners, except those who were on a Soviet
lookout list, would be welcome at the Moscow
meeting.
The Soviets were well aware of intense Western
interest in the unofficial seminar; at a plenary meet-
ing in Vienna, Ambassador Zimmermann expressed
support for the coming Glasnost Press Club seminar
as well as a subsequent International Helsinki Federa-
tion visit to Moscow. Ambassador Zimmermann em-
phasized that Soviet treatment of these meetings
would be watched closely and would be a test of
Moscow's acceptance of monitors as generally under-
stood in CSCE language. As a result, Moscow appar-
ently decided the foreign policy gains outweighed
potential domestic risks:
? After several weeks of vacillation and mixed signals,
a nonpaper on the Moscow human rights conference
given on 2 November by Soviet Ambassador Du-
binin to Assistant Secretary Ridgway said that the
Soviets had clarified the issue of access to Moscow
for NGOs, groups involved in protecting rights, and
private individuals. The nonpaper noted that Mos-
cow proposed to open all plenary meetings of the
conference?"which has never been done at any
CSCE forum."
? The Glasnost Press Club conference was allowed to
convene with minimal regime interference in
December.
13
? In January 1988 the regime grudgingly gave way on
demands for participation by Grigoryants and other
former prisoners in a landmark meeting between the
Soviet quasi-official CSCE commission and the
International Helsinki Federation?the first official
NGO to visit Moscow.
In 1988, Soviet officials have not raised the NGO
issue with anything like the frequency that was
evident in late 1987. In a July 1988 session, Kashlev
noted that, while he did not like "preliminary condi-
tions," the precedents in CSCE documents regarding
openness and access would be met. Despite this and
other generally positive signs, the obvious political
sensitivity of allowing Western human rights observ-
ers and former Soviet citizens, long castigated as anti-
Sovie elements, to visit Moscow to scrutinize Soviet
human rights performance suggests this issue might
crop up as a last-minute hurdle to the conference.
The Leadership Angle
We do not have any direct reporting that indicates
that the Moscow human rights conference has been a
serious issue inside the Politburo. It is reasonable to
assume, however, that the various leaders might very
well disagree on this matter. Although even the
conservatives in the leadership would agree that Mos-
cow should get any benefits from public opinion it can
from hosting a conference?Ligachev has, in fact,
publicly made this point?they are much quicker to
sound the alarm over the dangers of foreign influ-
ences, most clearly represented by the presence of
NGOs like Amnesty International, whose presence
would stir up an already boiling pot.
The positions various leaders have taken on issues,
such as human rights demonstrations, glasnost, na-
tionality unrest, and "democratization" in general,
permit us to assume that Gorbachev, Yakovlev, She-
vardnadze, and, perhaps, ideology secretary Medve-
dev favor the initiative to hold a human rights
conference in Moscow. They probably see it as a way
to demonstrate to the Soviet public, as well as to their
more orthodox colleagues on the Politburo, the need
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to continue to institutionalize political and legal re-
form. The institutional role of Foreign Minister She-
vardnadze would make him a natural proponent of the
idea, and he has been the front man in Soviet efforts
to gain agreement to the conference.
On the other hand, Ligachev, Chebrikov, and Shcher-
bitskiy are probably leading the forces in the Politbu-
ro that question the wisdom of opening the country to
foreign monitors of human rights. Former KGB chief
Chebrikov?now a senior party secretary formally
tasked with overseeing administrative organs and
legal reform issues?has made several hardline
speeches concerning the need to manage democratiza-
tion. He is anxious to ensure that reforms do not get
out of hand, present opportunities to Western intelli-
gence services to operate within the USSR, or encour-
age political instability. Such statements clearly sug-
gest he would be among those least enthusiastic about
a Moscow human rights conference that would grant
Western human rights groups an occasion to strength-
en their contacts with Soviet political dissidents, many
of whom have been in the forefront of growing
nationalist and popular front movements. Similarly,
Ligachev's condemnation in July 1987 of the "scum
and debris" that washed up with the waves of restruc-
turing and renewal strongly suggests he would also be
unenthusiastic. Likewise, Ukrainian party boss
Shcherbitskiy has recently gone on record with strong
criticism of the abuses of reform by former dissidents.
He has indicated intense concern about nationalist
activity in his republic, explicitly criticizing former
Helsinki monitors who were freed in Gorbachev's
initial wave of released political prisoners in 1987.
These leaders' views appear to be shared by many
local party officials and Central Committee members,
as indicated by the strong support for recent curbs on
public demonstrations and periodic tough crackdowns
on activists in several republics.
Despite little direct evidence, Shcherbitskiy's concerns
may be shared by the other two regional party leaders
on the Politburo, Moscow chief Zaykov and Lenin-
grad First Secretary Solov'yev, a candidate member.
Concern about a growing spiral of demonstrations has
led them to take a tougher line with activists, particu-
larly in Leningrad. Moreover, their cities would clear-
ly be focal points of attention during any conference,
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undoubtedly causing them untold headaches.
their public statements suggest that both
men are concerned about the burgeoning informal
groups and journals, and Zaykov has expressed worry
about how reform has contributed to nationalist activ-
ism.
A large middle ground of Politburo officials may end
up being influential in the decision on how far to push
for a human rights conference. This group includes
Premier Ryzhkov, party secretaries Slyun'kov and
Nikonov, and government officials such as Gosplan
chief Maslyukov, deputy premier Biryukova, and Ta-
lyzin?who all are focused primarily on economic
issues. While they probably lack the expertise or deep
commitment to the issue, they may be tempted to
accede to Gorbachev's interest in the conference as a
way of improving the climate for East-West trade,
which does relate directly to their formal responsibil-
ities.
These crosscutting equities make Moscow's bottom
line difficult to predict, but it appears that Gorba-
chev's recent leadership shakeup and his assumption
to the presidency give him greater room for maneuver,
which may help explain the latest push to gain
Western acceptance for the conference.
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The Soviet 1989 Economic Plan:
Can Gorbachev Keep His Promises
to the Consumer?
The 1989 plan, announced at an October meeting of
the Supreme Soviet, substantially elevates the priority
of consumer welfare but, in our judgment, does not
supply sufficient resources to back up the planned
production of goods and services. Priorities within
machine building and investment are being refocused
to concentrate resources on key technologies and
consumer welfare programs. Moscow's promises are
largely predicated on unrealistic targets for economic
growth and resource savings. Moreover, Moscow's
approach could make matters worse?increased
spending for consumer welfare is contributing to
substantial growth in the state budget deficit, and
managers are expected to meet ambitious production
targets while accommodating numerous, probably dis-
ruptive, changes in the economic system. Shortages of
consumer goods and inflation may well increase,
potentially fueling popular unrest.
Growing Concerns in 1988
Soviet officials and analysts have expressed growing
dissatisfaction with the performance of the economy.
In 1988 the Soviet economy will rebound from the
extremely poor showing in 1987, but growth will fall
far short of targets set for 1988 in the 12th Five-Year
(1986-90) Plan (see figure 1). Demands to increase
output, while retooling and implementing new eco-
nomic and managerial measures, are probably taking
an increasing toll on performance in many industries.
We estimate total industrial output will grow by
about 2 percent in 1988, with even slower growth in
chemicals and metals production. Agricultural output
is likely to grow by less than 1 percent, as declines in
crop production are balanced by gains in production
of meat, milk, and eggs.
Ambitious Soviet targets are spreading resources too
thinly and thus diluting their impact on economic
performance. Plans to increase spending in such areas
as science, consumer services, and hospitals are proba-
bly on target but state revenues have grown much
slower. Consequently, Soviet officials have to contend
with a large and growing budget deficit and rising
15
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Figure 1
USSR: Economic Growth, 1981-90
Average annual percent growth rates
GNP II Industry M Agriculture a
10.0
7.5
5.0
2.5
Before Since
Gorbachev Gorbachev
-2.5
-5.0
1981-85
a Net of feed, seed,
b Preliminary.
c CIA projection.
86
87b
88 C
waste, and purchases from other sectors.
3197
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inflationary pressures. Likewise, investment growth
will be about 5 percent over 1987, but this spending is
not being assimilated effectively. The rate of housing
completions has fallen, and growth in commissionings
of new plant and equipment through the first nine
months of 1988 is less than 3 percent
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The lack of improvement in consumer welfare has
drawn particular criticism. For years, output of pro-
ducer goods has grown faster than consumer goods,
and the Soviets have favored heavy industry with
investment resources. Since 1985 the Soviets have
relied on stricter quality control and management
reforms in light industry and retail trade to improve
consumer satisfaction, but these have failed to pro-
duce significant results. Although some gains have
been made in housing and consumer services, overall
per capita consumption has stagnated, and inadequate
food supplies have become?according to Gorba-
chev?the most pressing concern on Moscow's agen-
da.
Moreover, Gorbachev's reforms have in some ways
worsened the situation. A wage reform has contribut-
ed to a rapid increase in nominal wages that has
exceeded growth in the supply of goods and services
(see figure 2). Many enterprises have used their new
freedom to plan output by dropping or reducing
production of unprofitable, usually low-priced con-
sumer goods. Wholesale trade reforms have started to
disrupt established channels of distribution. For all of
these reasons, according to Soviet officials and press
accounts, shortages have intensified, and inflation in
the markets for consumer goods and services is on the
rise.
The 1989 Plan: Shifting Priority to the Consumer
The 1989 targets for industrial production have been
lowered somewhat from the original goals of the five-
year plan. Nevertheless, targets for industry and the
rest of the economy remain ambitious, especially
given 1988 performance (see table). Investment
growth is planned to slow, consistent with the original
five-year plan. Adverse conditions in international
markets, primarily weak energy prices, have forced
Soviet planners to scale back nominal targets for
foreign trade from the 1988 plan goals by 2 percent.
Gosplan chief Maslyukov indicated after the Supreme
Soviet meeting that the volume of trade will increase,
but he did not provide details on the structure of
imports and exports.
New Priorities. Soviet planners have clearly departed
from the original 12th Five-Year Plan by setting
across-the-board increases in production targets for
consumer goods and services. Production of consumer
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Figure 2
USSR: Change in Disposable Income
and Volume of Retail Sales
Billion rubles
MI Increment to Increment to
MO money incomes a A. retail trade volume b
30
-5
1981-85 86
average
a CIA estimate.
b Official Soviet sales data in current rubles; deflated
using CIA's estimated retail price index.
87
88
319746 12.88
goods is slated to grow by 7 percent rather than the
original target of 5.7 percent. Retail sales of consumer
goods are to rise 6.1 percent over the plan target for
1988, and services, 8.1 percent. Spending on housing,
education, the environment, pensions, and other social
services will also be increased. To meet longer term
goals for food and nonfood consumer goods, large
increases in investment in food processing and light
industry are planned.
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USSR: Key 1989 Economic Goals Percent
Increase of
1989 Plan Over
1988 Plan
Increase of
1989 Plan Over
1988 Performance b
GNP
4.5
10
Agriculture
2.0
7
Industry
4.0
11
Machinery c
6.0
26
Official plan goals based on gross value of output.
b Based on CIA estimates of production in 1988.
c Civilian and defense machinery.
Almost all sectors of the economy are to contribute to
these efforts to raise consumption:
? The defense-industrial ministries have been tasked
with major increases in the production of such
prestigious consumer durables as color TVs, VCRs,
and PCs, and are to increase production of equip-
ment for food processing and light industry by 25 to
30 percent.
? Deliveries of timber and other construction materi-
als to retail sales are planned to increase by 15
percent over the 1988 plan in order to support
private housing construction and remodeling, espe-
cially in rural regions.
? The transport sectors are being asked to increase the
volume of passenger transport by 5.5 percent for air
travel and 4 percent for train travel over the 1988
targets. Freight shipments are to increase by 2.6
percent.
? Even the hard-pressed energy sector is being told to
increase deliveries of fuel over the five-year target
for consumer and municipal use.
By contrast, overall production of producers' goods is
slated to grow by 3 percent over the planned level for
1988, rather than the original target of 4.5 percent.
Output in the machine-building complex is to grow at
17
6 percent, including 9 percent for high-technology
sectors, and improvements in machinery quality con-
tinue to be stressed. While modernization goals re-
main ambitious, the Soviets are now emphasizing key
areas rather than pursuing across-the-board growth.
According to Maslyukov, the basis of the plan for
machine building is 44 priority areas for technological
development, of which at least 16 are intended to
modernize consumer industries. More generally, out-
put of equipment for consumer-related and high-
technology industries is slated for large increases.
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The 1989 plan calls for slow growth of most industrial
materials, with the focus on improving the composi-
tion of output in metallurgical, chemical, timber, ani25X1
construction materials industries. Output of oil, gas,
and coal is to grow by roughly 3 percent?an upward
revision from original targets, reflecting the resigna-
tion of the leadership to slow growth in energy
conservation and continued reliance on energy prod-
ucts for export earnings. Likewise, planned output of
rolled ferrous metals has been increased above origi-
nal targets for 1989 but still at a relatively slow rate
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Finding the Resources
Moscow is counting on more efficient use of resources
to meet most of the 1989 plan targets. Given the
failure of the economy to meet resource-savings tar-
gets in 1986-88, 1989 targets are probably unrealistic.
According to the 1989 plan, resource savings are to
account for 100 percent of the increased demand for
metals and timber products and 70 percent for energy
products. Soviet officials have been harshly critical of
the waste of investment resources, especially in the
agroindustrial complex, and the 1989 plan appears to
be counting on the reduction of unfinished construc-
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Reforms. Soviet planners are counting on continued
gains in efficiency from the further implementation 25x1
economic reforms in 1989. All of industry and agri-
culture will make the transition to self-financing by
the first of the year, and wholesale trade reform will
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continue to expand. State orders are to be reduced by
at least 50 percent in industry, although certain
"unprofitable" consumer goods remain tied 100 per-
cent to state orders to ensure that they will be
produced. Neither wholesale nor retail price reform is
scheduled for implementation in 1989. It is likely that
retail price reform has been postponed indefinitely;
even reform economists are now expressing skepticism
about its wisdom.
The Soviet leadership is pushing forcefully for the
expansion of the private and cooperative sectors and
long-term leasing arrangements in both agriculture
and industry because these initiatives hold the best
prospects for producing short-term improvements in
the quality of life:
? During the debate on the 1989 plan, officials of the
agroindustrial complex were criticized for failing to
take full account of the potential of cooperatives and
leasing for expanding output in the formulation of
the plan for the complex.
? Converting enterprises to cooperatives or lease ar-
rangements is routinely mentioned as a solution to
unprofitability.
Meanwhile, Soviet leaders continue to place high
hopes on Intersectoral Scientific and Teclmical Com-
plexes to overcome barriers to technological innova-
tion and to speed up modernization.
Reallocation. Maslyukov, in his report on the 1989
plan, indicated that resources are to be diverted from
unspecified producers and exports to meet consumer
welfare goals. Given the thrust of the 1989 plan, it is
fair to assume that heavy industry will bear the brunt
of any transfer of resources. Nonpriority machine-
building sectors are the most likely targets for cut-
backs in resource allocations. According to a deputy
chairman of Gosplan, 260 industrial enterprises are to
be fully or partially converted to production of goods
for the consumer.
Well-endowed Soviet defense industries have been
directed to reequip food-processing and consumer
goods enterprises, and they indeed have inherited
many plants from a disbanded ministry that was
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charged with manufacturing equipment for the pro-
duction of consumer goods and food. The Minister of
Medium Machine Building, the most secretive of the
defense ministries, indicated in a recent interview that
a number of military programs are being cut and that
two enterprises designed for the production of military
hardware will be converted to civil production. Gorba-
chev, in his recent UN speech, also emphasized the
need to convert some weapons production capacity to
civil uses. But, at least through this five-year plan,
defense industry participation is likely to remain
limited, because Gorbachev is probably reluctant to
disrupt major weapon development and production
programs that are key to force modernization.
Investment resources are being redirected to sustain
improvement in consumer welfare into the 1990s.
Investment for housing and other social purposes is to
increase 7.4 percent, while productive investment in
industry and other sectors will remain at "roughly the
1988 level." Productive investment, in turn, is being
shifted to the narrower priorities for developing ma-
chine building and to meeting consumer welfare
targets.
Foreign Trade. With a planned drop in turnover in
1989 from the 1988 plan levels, foreign trade is not
likely to play much of a role in increasing the
availability of capital equipment, industrial inputs,
and consumer goods. Soviet export earnings will be
hurt by soft energy prices and the chronic uncompeti-
tiveness of Soviet manufactured goods on world mar-
kets. Concern expressed during the Supreme Soviet
debate over the draft plan led Moscow to reduce
export plans for tractors, other agricultural machin-
ery, and, perhaps, even some fuel so as to increase
availability to Soviet agriculture.
Imports are to be channeled preferentially to consum-
er goods industries, but with no increase in overall
imports; this requirement implies that other sectors
will experience decreases. Imports from Communist
countries are to help support an increase of 30 percent
in equipment to be applied to retooling of light
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industry. Recently signed lines of credit with Italy,
West Germany, and the United Kingdom for pur-
chase of light industry and food-processing equipment
suggest that increased imports of these items could
begin as early as 1989, although most such imports
will occur in the 1990s. Moscow's reluctance to
increase its hard currency debt, fueled by doubts
about its ability to increase hard currency exports,
suggests that it will draw down these credits slowly.
Prospects
The Soviets are unlikely to come close to meeting
their ambitious output targets, especially for consum-
er goods. Leadership adherence to the high-growth
targets of the 12th Five-Year Plan allows little slack
for enterprise managers to adjust to reforms and to
restructure production to meet the higher priority
attached to consumer welfare. Moreover, while proba-
bly balanced on paper, the plan relies heavily on large
gains in efficiency and resource savings, going beyond
the traditional tautness of Soviet plans. As a result,
the plan does not appear to provide adequate re-
sources to meet even priority targets. Several of the
speakers at the October Supreme Soviet session com-
plained that the 1989 plan was not backed up with the
needed material support.' The inability of Soviet
planners to develop an achievable plan will increase
the gap between incomes and available commodities,
adding to inflationary pressures (see inset, "Coping
With Inflation").
Moreover, the changeover to the new economic mech-
anism, if fully enforced, creates the potential for
serious disruptions to economic performance in 1989.
Enterprises are being asked to finance their own
expenses, including investment, out of profits and to
negotiate directly with suppliers and customers, which
might interrupt traditional supply relationships.
Moreover, planning authorities and ministries have
less control over enterprise activity if things start to go
awry. Output targets passed down from Gosplan are
nonbinding, except for output covered under state
orders (see inset, "Declining Authority of Central
' Some basis for these complaints lies in the traditional haggling
that generally goes on behind the scenes and unfamiliarity with new
forms of planning and distribution.
19
Coping With Inflation
The wage inflation resulting from greater enterprise
control over labor payments and from the wage
reform seems to have taken Moscow by surprise.
Plans for dealing with it are sketchy and unpromis-
ing. Central bank authorities are to monitor increases
in wages to ensure that increases in productivity
exceed wage increases. The Soviets may also be
attempting to slow the pace of the implementation of
the wage reform; so far no targets for further expan-
sion in 1989 have been announced. Moscow, however,
may have little choice but to proceed so as to prevent
unwanted labor movements into those enterprises
that have already adopted the higher wage scales of
the reform. Moreover, until Moscow comes to grips
with other factors contributing to inflationary pres-
sures, administrative efforts to control wage increases
are not likely to have much impact on general
inflation in the economy.
In particular, Moscow's inability to issue a balanced
plan will add further to inflationary trends in 1989.
Some expansion of consumer programs is being fi-
nanced with a sharp increase in government spending
that officials must recognize is not backed with the
necessary goods and services. Finance Minister Gos-
tev reported in his speech on the 1989 budget that
expenditures would rise by 11.5 percent (50 billion
rubles) and revenues by 3.3 percent (15.6 billion
rubles), leading to a deficit of 35 billion rubles. By
contrast, we estimate that the deficit equaling about
80 billion rubles in 1988 will approach 125 billion
rubles in 1989. Measures to address the deficit?
increasing enterprise profits and reducing expendi-
tures on management in government and industry?
are almost certain to be inadequate. Indeed, Maslyu-
kov asserts, "I don't think that the growth of infla-
tion will slow down or come to a halt. A certain
period of time will no doubt elapse before we manage
to cope with this problem."
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Declining Authority of Central Planners
Moscow's ability to control the direction of the
economy has waned as the economy has grown more
complex. Gorbachev 's economic reforms and overly
ambitious five-year-plan targets have intensified this
trend. The discussions leading to the adoption of the
1989 plan were marked by intense dissatisfaction
over the lack of progress in directing resources to
meet priority targets, especially for light industry and
the agroindustrial complex. At one point during a
Council of Ministers' meeting in mid-October 1988,
Ryzhkov interrupted a speaker who was explaining
the reasons for price increases by saying "How could
this happen? Isn't there any control at all in our
country?" Frustrated by the negative consequences of
economic reform that developed this year, Moscow
has implemented several administrative measures
that clearly contradict the spirit of the reform efforts.
The leadership's frustration is likely to grow in 1989
as reforms are expanded. Ministries have been specif-
ically forbidden to add to Gosplan-issued state orders
or to force enterprises to sign contracts. The head of
the State Committee for Material and Technical
Supply stated at the September meeting of the Coun-
cil of Ministers that some enterprises and ministries
were actually planning lower output levels for 1989.
In addition, the role of central planners is also being
challenged by a more active Supreme Soviet. Gosplan
Chairman Maslyukov claimed that?"unlike past
years"?proposals made by the Supreme Soviet's
reviewing commissions had resulted in a number of
important changes in the draft plan, including:
? An increase of 6 billion rubles in the target for sales
of consumer goods.
? An increase of 1.3 billion rubles in capital invest-
ment in the agroindustrial sector (at the cost of
investment cuts in other unspecified sectors).
? An increase of 200,000 square meters in the target
for housing construction.
The Supreme Soviet also is beginning to openly
discuss previously taboo subjects. It has talked about
the budget deficit for the first time, and there have
even been calls for an open examination of the defense
budget. Probably the most startling development at
the late October session of the Supreme Soviet,
however, was the announcement of the recorded votes
on a number of issues, which for the first time in
recent history were less than unanimous.
Planners"). More enterprise autonomy is a risky move
because key economic information, especially prices,
has not yet been adjusted to ensure that an enter-
prise's decisionmaking is consistent with state goals.
In 1988, for example, many enterprise managers
under self-financing have focused on production of
higher priced goods and have allowed wage increases
to outpace increases in productivity.
While the leadership has not backed off from the
high-growth strategy set in the 12th Five-Year Plan
and no doubt hopes for the best, it may be bracing
itself for a rocky road. A leading reform economist
has recently commented that the five-year plan is
Secret
incompatible with the switch to the new economic
mechanism. In an article on the draft plan, a deputy
chairman of Gosplan stressed the importance of quali-
ty over quantity and seemed to imply that achieve-
ment of output targets was not expected. Finally,
Maslyukov in his address to the Supreme Soviet only
"hopes" that proposed energy targets can be met and
admitted that the plan will not eliminate shortages of
consumer goods. Another official went even further,
saying in a speech to the Supreme Soviet that the
acceleration of production of consumer goods will
have "virtually no effect" on pent-up demand.
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At the same time, insistence on pursuing unrealistic
targets increases the prospects for economic disrup-
tions. In contrast to previous five-year-plan periods,
the leadership generally has not used the annual plans
to account and to adjust for the economy's failure to
meet its targets in previous years. The 1989 plan,
therefore, may serve only to exacerbate the dispropor-
tions accumulated to date since Gorbachev's acces-
sion. In addition, planners are attempting to superim-
pose changes in the economic mechanism, including
the planning process, which, at best, were ill-defined
notions when the plan was being drafted. Should the
leadership manage to maneuver the economy through
this transitional period without resorting to adminis-
trative measures to overcome every obstacle, then
Moscow's chances for improving the performance of
the economy in the long run will be improved.
Reverse Blank
21
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Soviet Dependence on Imports
From the West: Why the
Numbers Belie the
Rhetoric
Moscow's much publicized concern over the need to
rapidly modernize the economy and, more recently, to
address consumer discontent has led many Western
observers to assume that Gorbachev will have to turn
to the West for major economic and financial assis-
tance. The recent spate of credit lines linked to
imports of consumer goods has served to reinforce this
theory. In reality, however, the Soviet Union has
reduced real imports of Western capital and consumer
goods and has reduced the growth of real borrowing
since Gorbachev came to power. Soviet preference for
an indigenous solution to Moscow's problems and
longstanding concern over becoming vulnerable to
Western economic and financial sanctions, in fact,
argue for a much more measured turn to the West.
Perceptions and Reality
There has been much discussion both inside and
outside the Soviet Union regarding Moscow's need for
substantial imports of Western equipment, technol-
ogy, and consumer products. Debates initially focused
on the role of Western technology and equipment in
Gorbachev's economic modernization program. They
have subsequently broadened to include those con-
sumer goods and services necessary to legitimize
Gorbachev's regime?and his program of peres-
troyka?among rank-and-file Soviets.
In Western circles, such discussions are often a
critical element in the larger debate over the appropri-
ateness of "helping" Gorbachev solve his domestic
economic problems. Although there may be wide
disagreement over what the West should or should not
do in this regard, there seems to be a consensus within
political and media circles that Moscow will rely
heavily on the West and that the Alliance should take
steps to ensure that it does not inadvertently provide
Moscow with substantial economic and military divi-
dends by competing for Soviet business.
23
Gorbachev and his economic brain trust have not
discouraged Western perceptions of a Soviet need for
massive inflows of Western equipment, technology,
and consumer products. Economic imperatives aside,
it serves Moscow's broader national security objec-
tives to have Western governments "vested" in a
positive outcome of the regime's economic and politi-
cal reform efforts. Discussions of major joint-venture
arrangements with Western firms contain elements of
such vesting. This tactic seems most evident, however,
in Moscow's recent successes in landing the official
blessings of West European governments for the
extension of large credit lines to underwrite Soviet
purchases of equipment in support of domestic efforts
to improve consumer welfare.
Western expectations of increased Soviet economic
dependence, however, contrast sharply with actual
Soviet behavior: trade and financial data demonstrate
that, if anything, Moscow has become more autarchic
under Gorbachev:
? Once one discounts for exchange rate movements,
net indebtedness has risen by only 16 percent since
1985; net real borrowing actually fell by $1.5 billion
last year.
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? Soviet imports of Western capital goods have fallen 25X1
in real terms since Gorbachev came to power;
although attention has recently been given to estab-
lishing credit lines to underwrite future imports,
there are no signs of a substantial upswing in actual
orders. The 1989 Soviet Economic Plan, for its part,
calls for a slight fall in total Soviet imports.
? The leadership cut back substantially on imports of
consumer goods in response to falling export earn-
ings, and imports have yet to return to pre-1985
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levels despite the increased saliency of improved
consumer welfare to the success of perestroyka.
Austrian companies, for example, complain that
sales of shoes and clothes to the Soviet Union?
more than $100 million in 1984?have almost
evaporated.
Understanding Soviet Behavior: Past Lessons .. .
Moscow's reluctance to turn to the West for substan-
tial help is better understood when one considers the
nature of economic problems facing the Soviet leader-
ship and the broader implications of economic inte-
gration for Soviet national security objectives.
The leadership has undoubtedly drawn a number of
sharp lessons from Brezhnev's experience in the mid-
to-late 1970s:
? The emphasis on Western technology and equip-
ment as a means of stimulating and leading econom-
ic modernization did not live up to its advance
billing. While certain sectors?petrochemicals,
automobiles?benefited from Western assistance,
the overall record reveals a pattern of equipment
and technology purchases that were inappropriate to
begin with, never properly installed, or, even in the
best of circumstances, utilized effectively.
? Expanded trade with the West paid political divi-
dends by engendering potentially divisive competi-
tion within the Alliance for Soviet business, both in
terms of heavily subsidized credits and pressures to
relax guidelines of the Coordinating Committee for
Multilateral Export Controls (COCOM). At the
same time, the subsequent application of economic
sanctions to modify Soviet domestic and foreign
policy initiatives made the cost of economic depen-
dency abundantly clear to Brezhnev and his succes-
sors.
The leadership has paid close attention to the econom-
ic and political problems faced by those East Europe-
an countries that were unable to make good on the
gamble of using Western equipment and technology
to jack up economic performance to a higher plane:
Secret
? While some improvements occurred, the East Euro-
pean experience demonstrated that the sought-after
technological and economic gains simply could not
be achieved within an economic environment char-
acterized by central plans and administrative eco-
nomic decision making.
? The price for this failure?economic austerity at
home and a pronounced dependency on the good
will of Western lenders?is still being paid. In some
cases, it is at the heart of political dissatisfaction
within Eastern Europe.
? Soviet concern with avoiding similar mistakes is
captured in a recent interview by the Minister of
Light Industry, who stated that Moscow had decid-
ed "categorically" against instant gratification:
"That path has no future in it. .. and the Soviet
Union will never be able to get out of [such a]
dependence on buying."
... Current Realities
Gorbachev's economic advisers also recognize the
potential gains from increased use of Western tech-
nology and equipment, but they lack the confidence in
the ability of the economy?as currently configured?
to effectively absorb and ultimately diffuse imported
technology on a large scale. They are specifically
sensitive to the incongruence between current admin-
istrative rules and incentives governing enterprise
performance and the competitive economic environ-
ment (price flexibility, decentralized decisionmaking,
competition for sales) needed if the USSR is to draw
effectively on Western technology and equipment:
? Firms lack the ability to bid for domestic resources
or otherwise elicit timely domestic machine-builder
response to their particular requirements. As a
result, enterprises have a distinct bias toward im-
ported equipment?which can be tailored to individ-
ual specifications and delivered on a timely basis?
even when the same or similar equipment is pro-
duced domestically.
24
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Soviet Conservatism Is Seen
In The Decision To...
Reduce Imports...
Hard Currency Imports of
Consumer Goods, 1980-87
Billion US $
12
10
8
6
Total
4
Nongrain
2
111111
0
1980
81
82
83
84
85
86
87
Orders of Western Machinery
and Equipment, 1985-88
Index: 19851=100
200
150
50
1 1 1 1 1 1 1 1 1 1 1 1 1
0 1 II In nr I II III Iv I II III Iv I II
1985 86 87 88
...Rather Than Increase Debt
Real US $
Estimated Change in Gross Debt
8
? Firms are not held fully accountable for the effec-
tiveness of their import decisions. In the absence of
an incentive structure to reward proper choices and
effective absorption or, conversely, to penalize those
who pay little attention to what is purchased and
how and when it is installed, there is little guarantee
that scarce foreign exchange will be well spent.
Steps have been taken to facilitate direct contacts
between Soviet enterprises and Western equipment
suppliers and to properly reward effective decision-
making. At present, however, Soviet enterprise man-
agers are faced with the worst of all worlds: the old
rules governing the selection and purchase of import-
ed equipment have been remanded for many enter-
prises and ministries, but Moscow has yet to fully
develop the sets of procedures to take their place. This
confusion, combined with the uncertainties regarding
the implications of imported equipment for self-
financing, product pricing, and the generation of hard
currency export earnings, may well have resulted in
an aggregate decline in enterprise demand for import-
ed equipment. While some of this decline is entirely
appropriate for the reasons cited, enterprise confusion
has probably resulted in a suboptimal level of equip-
ment imports over the near term.
Import demand is also constrained by Soviet financial
conservatism. This leadership, like those before it, is
sensitive to the national security implications of be-
coming financially overextended. A number of lead-
ing Soviets have been particularly explicit on the need
to avoid any semblance of dependence on Western
financial markets to meet domestic economic impera-
Billion US $ tives. Any Soviets who doubt the rationale behind this
line of argument need look only at the experience of
Change due to
exchange rates
Change due to
net new borrowing
-2
1985
86
87
319747 12-88
25
Eastern Europe, the past imposition of economic
sanctions, and the persistence of those who seek to
monitor and condition credit flows. This conserva-
tism?manifest in a low level of indebtedness, a
substantial "strategic reserve" of gold, and a high
level of liquid asset holdings in Western banks?
argues against a rapid rise in borrowing unless the
ability to repay this debt is fully guaranteed.
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In this regard, the situation facing Moscow in 1988 is
far different from the USSR's position in the early-to-
mid 1970s, when the Soviets allowed their debt to the
West to increase substantially:
? Brezhnev's economic advisers were confident of the
Soviet ability to repay a significantly higher level of
debt with higher priced oil and other natural re-
sources. In 1988, in contrast, Moscow must contend
with stable or declining oil prices and uncertainties
over the quantity-of oil that will be available for
export. The leadership is painfully aware, moreover,
that substantial hard currency sales of manufac-
tured goods are not in the cards for the near future.
? Much of the debt runup in the 1970s was formally
tied to Western agreements to purchase Soviet raw
materials, notably Siberian natural gas, coal, and
wood products. In all cases, the flow of hard curren-
cy earnings far exceeded project-associated hard
currency expenditures, guaranteeing the Soviets an
increase in hard currency import capacity. Although
similar deals cannot be ruled out in the 1990s, there
are few indications that this option is being heavily
pushed.
On the other side of the ledger, Western capital
markets are far more developed and the Soviets more
sophisticated in tapping them. Initiatives such as bond
issues allow Moscow to expand its borrowing before
running up against portfolio constraints and otherwise
reducing access to additional funds and/or raising the
cost of future borrowing. Soviet pragmatists would
contend, however, that current conditions only serve
to allow Moscow to get into bigger trouble faster.
Gorbachev 's Current Initiatives
Soviet emphasis on concluding joint ventures with
Western firms reflects these concerns and limitations.
The deals, by forcing long-term Western involvement
in enterprise decisionmaking and productive
efficiency:
? Improve the likelihood for effective Soviet absorp-
tion of Western equipment and know-how.
? Increase the chances for increased exports of manu-
factured goods to the developed West.
Secret
? Minimize the drain on scarce hard currency by
virtue of Western capital participation and agree-
ments to repatriate profits in the form of products.
The saliency of joint ventures to the leadership's
economic agenda is seen in the regime's willingness to
bend or change the rules in order to attract Western
investors to priority projects. Alternatively, Moscow's
inability to allay Western concerns about the joint
venture's access to raw materials and intermediate
products, the hiring and firing of employees, and the
repatriation of profits in hard currency highlight the
economic barriers to economywide modernization us-
ing foreign investment.
Soviet interest in international organizations such as
meetings of the General Agreement on Tariffs and
Trade (GATT) and the International Monetary Fund
(IMF) has strong political overtones in signaling Mos-
cow's intentions to become a full member of the
international economic and financial community.
From an economic perspective, links to these organi-
zations would improve foreign trade and financing
decisionmaking and otherwise provide the framework
for expanded exports of manufactured goods over the
long term:
? Moscow is probably most interested in becoming a
party to GATT rules and negotiations. Moscow's
cooperation agreement with the European Commu-
nity also reflects the desire to develop a better
understanding of potential export opportunities.
? Discussions with the IMF and the World Bank are
far more exploratory in nature. More than likely,
the USSR is interested in developing a detailed
appreciation of the costs and benefits of member-
ship before making any formal approaches: there is
no financial need to link up with the IMF at this
time.
Beyond joint ventures and a new interest in interna-
tional trade and financial organizations, however,
Moscow's turn to the West is more show than go. By
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k"V?I Vl
all indications, there is no leadership consensus sup-
porting a major turn to the West at this time.
Emphasis continues to be placed on domestic solutions
in the belief that substantial increases in the quality
and quantity of civilian products?both producer du-
rables and consumer goods?will evolve from the
implementation of ongoing programs to:
? Draw on the expertise and productive base of the
defense sector.
? Reduce the barriers to the effective development
and application of Soviet-designed production and
process technologies.
? Decentralize enterprise decisionmaking and other-
wise allow for increased enterprise control over the
quality and quantity of inputs it receives.
? Alter the structure of incentives to better reward
efficient enterprises and productive employees.
? Increase the supply of consumer goods and services
by allowing for greater privatization of economic
activity.
Its own reservations regarding the utility of relying
more on imports notwithstanding, Moscow has not
belittled the belief among Western governments that
Western support for perestroyka can be a profitable
business. In a move somewhat reminiscent of the mid-
1970s, Soviet negotiators are concluding a number of
major credit agreements with Western bank consor-
tiums, explicitly blessed by West European govern-
ments, to underwrite future Soviet purchases of West-
ern technology and equipment for the USSR
consumer goods sector. See the following tabulation
on credit lines extended to the USSR:
Millions US $
Secured,
April 1974?
March 1976
Signed or Under
Negotiation, 1988
Austria
304
Canada
487
France
3,095
1,900
Italy
1,917
775
Japan
1,648
2,000
UK
2,270
1,700
Federal Republic
of Germany
1,334
1,700
Netherlands
250
27
While Moscow could well be lining up credit lines
now to permit more flexibility in resource allocation
decisions pertinent to the 13th Five Year Plan (1991-
95), the spate of activity, size of the lines, and their
explicit and highly publicized link to improving con-
sumer welfare indicate the presence of a political
agenda as well:
? There is no indication that Moscow is prepared to
move quickly to place equipment orders against
these credit lines.
? Unlike the credit lines of the mid-1970s, when
credit competition among Western governments led
to substantial interest rate subsidies, the recently
concluded lines do not offer preferential financing
(outside of the slight interest rate savings from the
presence of government political and economic risk
guarantees) or otherwise materially broaden the
potential base for Soviet borrowing. 25X1
The Soviet initiative comes at a time of consideration
by the US Congressional and executive branches of
the propriety of restricting or monitoring credit flows
to the USSR. Within this context, Moscow?in lining
up large credit lines backed by Western political
leaders?may have sought to steal a march on any
attempt by the United States to develop an Alliance-
wide consensus on the credit issue. More broadly,
Moscow undoubtedly sought to use the credit issue to
promote official Western support to Gorbachev's pro-
gram of economic and social revitalization to the
betterment of its larger foreign policy and national
security objectives.
And the Road Not Taken
Gorbachev may be forced ultimately to turn to the
West for help in transposing the Soviet economy and
may buy time in the interim with substantial inflows
of consumer goods. Such a decision would quickly
become evident to Western analysts by virtue of the
media attention to the signing of specific contracts
and the like. This option, however, holds dangers that
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Gorbachev's predecessors did not have to face, mak-
ing the choice much harder this time around. In many
ways it would be a clear sign of leadership
desperation:
? Unlike the situation in the 1970s, there is no
guarantee that Moscow will be able to repay a
marked increase in hard currency indebtedness.
Barring export increases, the USSR would have to
continually increase the level of annual borrowings
if it were to maintain a flow of imported goods while
servicing an ever-growing debt. It would be only a
matter of years before the Soviet leadership would
find itself potentially vulnerable to Western eco-
nomic and political leverage.
? Western firms will want a significantly greater
managerial involvement and Western physical pres-
ence within the Soviet Union as part of any agree-
ments that meet Gorbachev's demands for Western
technology and managerial know-how.
? Unlike the 1970s?when the Soviet leadership
viewed expanded trade as a means of complement-
ing a basically sound economic structure?turning
to the West this time around will be perceived as a
sign that the regime is incapable of fixing its
economic problems on its own.
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k3V?I VI
Notes
Oil Ministry Looking for Increase in Investment Allocations
The lead article in a recent issue of the journal of the Soviet oil ministry indicated
for the first time that allocations of capital investment for the oil sector are not ad-
equate to maintain current levels of oil production. The article indicated that the
investment requirements of the oil sector are sharply increasing because of the
"depletion and falling productivity of many oilfields and the necessity of maintain-
ing planned levels of production by the mass introduction of remote, low-quality
oilfields with complicated geology and in unfavorable environmental locations."
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The oil sector moved to a self-financing basis in January 1988. Apparently, the 25X1
sector is having trouble finding the money to pay for its escalating equipment
needs. The article indicated that, while state orders account for 94 percent of oil
output in 1988, state orders for the equipment, materials, and instrumentation for
use by the oil industry account for only 70 percent of the sector's needs. The plan
to pay for the difference with profits is not working well because wholesale oil
prices have remained low while oilfield equipment costs have risen sharply. In
addition, the article asserted that the machine-building ministries, prices notwith-
standing, are not capable of producing all the needed equipment because oilfield
equipment is too "narrowly specialized."
Oil production, as indicated in the article, has fallen in recent months. Oil ministry
officials may be trying to build a case for increasing investment allocations or,
should oil output continue to slip, preemptively defending their performance by
blaming the decline on equipment shortages. If the Soviets decide to increase
equipment deliveries to the oil sector, imports from the West would probably
increase because most Soviet oilfield equipment plants are reportedly already
operating at or near capacity.
Economic Reform Schedule Revisions
The reports on the Soviet draft plan and budget for 1989 indicate that the Soviet
leadership has made some adjustments to the schedule for implementing various
economic reforms. Comparison of the reform goals for 1987 and 1988 (see table)
discloses these changes:
29
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Soviet Economic Reform: A Status Report
Reform
Major Purpose
1989 Goals
1988 Results
Final Objective
Enterprise self-financing
Enterprises will bear full economic
responsibility for the results of their
activity. Investment will be fi-
nanced less through budget alloca-
tions and more through an en-
terprise's own resources and bank
credits.
100 percent of industry and agri-
culture; "hope" to complete
changeover of nonproduction
sphere to same principles.
60 percent of volume of output Same as 1989 goals.
in the economy.
Regional/local self-
financing
Republics and local government
will have a greater role in forming
their own budgets and will be ex-
pected to balance revenues and ex-
penditures. Revenues will be
formed from taxes levied on enter-
prises within the region or locale to
fund social/economic development.
Estonia, Latvia, Lithuania, Belo-
russia, Moscow City, and the Tatar
ASSR and Sverdlovsk Oblast
(RSFSR).
Not yet introduced.
Expansion to unnamed regions.
Planning
Enterprises will produce a portion
of their output in compliance with
mandatory state orders and will be
given greater latitude in determin-
ing the remainder.
All enterprises and associations.
State orders are to make up an
estimated 40 percent of industrial
production.
State orders made up 86 per-
cent of industrial production.
State orders are to "eventually"
drop to 20 to 25 percent of total
production.
Supply
Only "scarce" producer goods and
supplies for state orders will contin-
ue to be rationed by the state.
Other supplies will be distributed
through a wholesale trade system
that will allow free purchase and
sale under direct contracts between
providers and users.
Approximately 10 percent of total
industrial production to operate un-
der wholesale trade; 50 to 55 per-
cent of sales through state supply
networks or wholesale trade. a
Over 4 percent of total industri-
al production operated under
wholesale trade. Less than 20
percent of sales through state
supply networks on wholesale
trade.
Wholesale trade reform to cov-
er more than 70 percent of sales
through state supply networks
by 1992.b
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Wages
Entire wage and salary structure in
the production sector will be over-
hauled, but increases are dependent
on an enterprise's ability to finance
them and are tied to increases in
labor productivity.
No announced goal. 1988 goal was
60 to 70 percent of the work force.
(May not be expanded because of
concern that wages are being in-
creased more than increases in la-
bor productivity.)
(We have no information.)
All industrial sectors by end of
1990.
Banking
Decentralizes bank decisionmaking
somewhat and elevates the role of
economic criteria in extending
credit.
Codification of banking practice
through new banking legislation.
Limited decentralization. Some
flexibility in negotiating lending implemented.
rates. Assumed role of liquida-
tors in cases of insolvency.
After price reforms are
Foreign trade
Allows selected ministries and en-
terprises to engage directly in for-
eign trade and enter into joint
ventures.
Unannounced.
Was to be 26 percent of all
imports and 14 percent of all
exports. (Implementation be-
hind schedule.)
No date given.
Wholesale prices
Will be revised to better reflect
resource scarcity and customer de-
mands and will be based on
contracts.
Not scheduled to be implemented.
Not scheduled to be
implemented.
Industry, transportation, and
communication by 1 January
1990; construction and agricul-
ture by 1 January 1991.
Retail prices
Will be made more flexible and
more fully reflective of supply and
demand, probably resulting in
higher prices for foods, rent, and
consumer services.
None; to begin only after full pub-
lic discussion and before 1991 (be-
ginning of 13th Five-Year Plan).
Not scheduled to be
implemented.
Whole economy, presumably
including retail by 1991.
a This goal has been moved from 1990 to 1989. In 1987, the stated
1989 goal was 30 percent of sales through state supply networks
operating on wholesale trade.
b This goal has been slightly reduced. In 1987, the stated 1992
objective was for wholesale trade to cover 80 percent of sales
through state supply networks.
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? A substantial reduction in state orders.
? An accelerated introduction of wholesale trade in state supply networks for
1989?from a goal in 1987 of 30 percent of sales to a goal in 1988 of 50 to 60
percent of sales.
? An introduction in 1989 of regional and local self-financing in Estonia, Latvia,
Lithuania, Belorussia, Moscow City, and the Tatar ASSR and Sverdlovsk
Oblast in the RSFSR.
? An emphasis on selling shares and bonds to employees to provide an alternative
source of investment funds for enterprises.
? An expansion of leasing arrangements both in agriculture and in industry.
? A deemphasis and possible curtailment of the state quality-control program
(gospriyemka).
The most dramatic change is the intent to reduce state orders in industry by more
than 50 percent in 1989 because state orders made up such a large volume of pro-
duction in 1987. State orders made up 86 percent of industrial production in 1988,
according to Gosplan Chief Yuriy Maslyukov, although they were initially
designed to cover 50 to 70 percent of the total volume of output in the
manufacturing industry and a slightly larger proportion in the raw material and
fuel-energy industries. Concerned that output plans would not be fulfilled,
ministries augmented the Gosplan-issued state orders. Many enterprises eagerly
accepted them because they meant guaranteed supplies and sales. In his report to
the Supreme Soviet on the 1989 plan, Maslyukov specified the percentages of state
orders by sector for the coming year. From this information, we calculate that
state orders are expected to drop to approximately 40 percent ' of industrial
production in 1989. This is also the figure used by Soviet economist Abel
Aganbegyan at a conference on wholesale trade held in Moscow at the end of No-
vember 1988.
In 1988 the burdensome system of state orders stymied enterprise independence
and slowed reform implementation. It may also have protected industry from
major disruptions that could have occurred because enterprises were unprepared to
conclude contracts on their own. It is not clear if enterprises are better prepared to
do this in 1989. This time, ministries are constrained from coming to the rescue. In
response to widespread complaints that ministries abused the state order system in
1988, an "interim provision" for 1989-90 was adopted that prohibits ministries
from amending Gosplan-approved state orders and limits the categories of goods
that can be included in them.
' In its summary of the draft plan and budget, TASS apparently mistakenly reported this number as 25
percent; the sector totals do not support this figure. The 25 percent probably refers to state orders for
the machine-building sector.
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LYV.1 VU
Viewpoint
The views expressed in the following article are the author's and do not
necessarily represent a CIA consensus.
Untied Lending to the Soviet Union:
A Perspective
The recent flurry of new credit lines offered the
USSR has fueled the ongoing controversy over wheth-
er and how the West should "underwrite" peres-
troyka. Some argue against any economic relations
with the Soviet Union on the grounds that we have no
guarantee that a "restructured" and hence economi-
cally stronger Soviet Union would pursue fewer poli-
cies at odds with those of the Western alliance. Some
advocate restrictions only on lending to the Soviets to
finance trade because such money enables Soviet
leaders to postpone the reallocation of defense re-
sources to pressing civilian needs. The greatest contro-
versy, however, rages over "untied" lending; that is,
loans provided with no Soviet commitments to any
specific purchases and possibly provided with govern-
ment subsidization. The size of these funds is per-
ceived by some as well above what is needed to
finance Soviet imports and to service debt, thus
providing Moscow with substantial discretionary
funds that can be used to maintain its overseas empire
and fund activities that are inimical to Western
interests.
Underwriting Perestroyka
Gorbachev recognizes that the West has a role to play
in his ambitious plans for the Soviet economy, but he,
nonetheless, hopes to modernize largely from within.
Unlike past regimes, this new Soviet leadership is
aware that substantial imports of Western machinery
and equipment are not a panacea, especially if the
internal mechanisms are not in place to assimilate
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effectively and diffuse such imports. The Soviets
currently bemoan the excessive amounts of unin-
stalled imported equipment lying about in warehouses
and the substantial annual interest payments that
resulted from those hasty purchases. Moreover, Gor-
bachev remains loath to increase further Soviet de-
pendence on Western governments, companies, and
bankers, a view no doubt reinforced by the East
European debt crises in the early 1980s and the
USSR's financial picture, which is less certain be-
cause of low energy earnings and a depreciating US
dollar.
Thus, foreign credits?whether tied or untied, subsi-
dized by Western governments or unsubsidized?are
not at present slated to play a big role in modernizing
the Soviet economy, a fact borne out by current Soviet
financial behavior:
? Moscow has not borrowed much in recent years:
indeed about three-quarters of the $19 billion rise in
Soviet gross debt between 1984 and 1987 is the
result of exchange rate movements, not new borrow-
ing. In 1987, for example, Soviet repayments ex-
ceeded new borrowings, with the entire increase in
gross debt resulting from the appreciation of non-
dollar currencies.
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? To the extent it is borrowing, Moscow is looking
increasingly to tied credits. Beginning last year
Moscow started turning to government-backed lines
of credit geared toward project financing, and the
new lines are linked primarily to purchases of
machinery and equipment for the production of
consumer goods. Moscow's stepped-up use of untied,
general purpose borrowing in the mid-1980s was
driven largely by the low interest rates accompany-
ing the loans, not a heavy demand for unrestricted
cash.
? The attractive terms accorded Moscow when it
borrows are a reflection of its creditworthiness, the
economies of scale inherent in large loans, and the
lack of alternative borrowers. At present, Western
governments are not subsidizing loans to the Soviet
Union and are adhering to OECD guidelines on
interest rates for lending with official backing.
Funding the Overseas Empire
Foreign credits also play a small role in propping up
regimes from Hanoi to Managua. The Soviet Union is
experiencing considerable difficulty in maintaining its
global commitments, to be sure, as resource con-
straints make it tougher to meet competing demands
at home and abroad. A restraint on total lending to
the USSR would have an adverse impact on its ability
to support its overseas empire. But most Soviet sup-
port is in the form of its own domestically produced
products, particularly arms and energy, that are
provided to client states either free of charge or with
overly attractive financing terms.
Untied Western cash could?and to some extent
probably does?work its way through the internation-
al financial network and end up financing overseas
activities. Moscow goes to great lengths, however, to
reduce actual hard currency outlays. Our annual
balance-of-payments estimates for the Soviet Union
consistently show "errors and omissions"?which we
believe encompass hard currency expenditures on
overseas activities?averaging less than $4 billion.
This order of magnitude seems reasonable when one
considers that the US budget for 1986 lists US
expenditures on the conduct of foreign affairs and
foreign information and exchange at $3.3 billion.
Secret
Given Moscow's more austere approach to funding its
missions abroad and the soft nature of Soviet expendi-
tures in much of the Third World, we are comfortable
with the statement that actual hard currency costs fall
in the $3 billion range or less.
Soviet aid to Cuba is a good case in point. Estimated
annual economic aid to Cuba is on the order of $5
billion, but only $300-400 million of this is hard
currency ending up in Cuban coffers. This is the cash
we believe Moscow forwards to Havana as a result of
selling oil destined for Cuba in Western oil markets.
Money is fungible, and it is highly unlikely that the
elimination of untied credits, while not cutting overall
lending, would impact on Moscow's foreign ventures
in any way. At best such a loss would prove an
"inconvenience." The Soviets could easily compensate
for a loss of untied funds by stepping up their use of
supplier credits. The switch would not be without
costs because Moscow could no longer easily tap the
Eurocurrency market and would have to document
imports before receiving credits. But Western finan-
cial institutions would, over the medium term, very
likely develop mechanisms allowing for the easier
provision of "tied" credits to the USSR. In conjunc-
tion, the Soviets could readily finance overseas activi-
ties from current hard currency inflows, gold reserves,
or assets on deposit in Western banks. Total hard
currency inflows from all sources?the pool that
Moscow can draw from?have averaged about $40
billion since 1983. In addition, Moscow has gold
reserves worth well over $30 billion at current market
prices and about $14 billion on deposit in Western
banks.
A Final Caveat
None of this is to imply that the Western alliance does
not have a stake in coordinating an economic strategy
to deal with Moscow's new economic overtures. Nor
does it mean that the West could not improve upon its
efforts to monitor Soviet financial flows. But these
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JUL I GIL
measures should be undertaken with the understand-
ing that the West will not "make or break" Gorba-
chev's economic program. Gorbachev recognizes that
his enormous economic problems are domestic in
origin and require largely domestic solutions.
Attempts to impose further restrictions on world
capital markets are proving divisive within the West-
ern alliance, and, for the most part, they concentrate
on a rather small share of Moscow's current economic
dealings with the West. This year the Soviet Union's
imports from the West are likely to top the $25 billion
mark. To date Moscow has also completed over 90
joint-venture contracts with Western firms and is
negotiating additional deals?some reportedly worth
billions of dollars. Such "mutually beneficial, nonstra-
tegic" transactions provide Gorbachev with far more
flexibility to cope with hard choices than do current
low levels of untied credits.
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