FINAL DRAFT OF RESPONSE TO NSSD 2-86

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP92T00533R000100040010-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 59
• Document Creation Date: December 27, 2016
• Document Release Date: July 23, 2013
• Sequence Number: 10
• Publication Date: December 5, 1986
• Content Type: MEMO

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NATIONALSECURMYCOUNCL
WASHINGTON. D.C. 20506
December 5, 1986
MEMORANDUM FOR ALLEN WALLIS, State
ALAN WOODS, USTR
LOUIS LAUN, Commerce
i>DgF,INE HOFFMANN, CIA
FRANK VARGO, Commerce
JAMES GRIFFIN, Treasury
DOV ZAKHEIM, Defense
SUBJECT: Final Draft of Response to NSSD 2-86 (U)
Attached for your concurrence is the final draft of the study
undertaken at the President's direction in National Security
Study Directive 2-86 on Recent Soviet Initiatives in
International Economic Affairs. (S)
Please communicate agency comments directly to me by COB,
Wednesday, December 10. When these have been received, the
document will be forwarded to the President. (C)
Ale nder H. Platt
Director of International Economic
Affairs
Attachment
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Response to NSSD 2-86
Soviet Initiatives in International Economic Affairs
TABLE OF CONTENTS
Executive Summary
NSSD Review: I. Review of Soviet Activities in TAB I
International Economic Affairs
II. Historical Overview of Past
Soviet Participation in
International Economic
Institutions
Forecast: Future Soviet Actions
Analysis/Conclusions
Appendix
A. NSSD 2-86
B. Past History of Soviet Participation
C. Background Papers
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Soviet Initiatives in International Economic Affairs
NSSD 2-86
EXECUTIVE SUMMARY
On September 16, 1986, the President signed National
Security Study Directive 2-86 (Appendix A) requesting an
interagency examination of recent initiatives undertaken by the
Soviet Union in the area of international economic affairs.
The Departments of State, Defense, Treasury and Commerce, the
Central Intelligence Agency and the Office of the United States
Trade Representative participated in the preparation of this
study. The NSSD called for the collection and review of all
evidence relating to recent Soviet interest in international
economic issues, a summary of past Soviet participation in
international economic institutions and a forecast of potential
future Soviet activities in this area. Finally, the NSSD
required the preparation of analysis and conclusions drawn from
the material collected. (S)
The NSSD review of Soviet activities in international
economic affairs identified some increased Soviet interest in
the field, most notably a Soviet application for participation
in the new trade round and hightened interest in General
Agreement on Tariffs and Trade, and expressions of interest in
membership in the World Bank and International Monetary Fund.
Other areas of some increased activity are the international
financial markets and a potentially renewed interest in joint
ventures with the West. The Central Intelligence Agency
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forecasts cautious but steady Soviet involvement in Western
economic activities. (S)
The study concludes that Soviet participation, while
initially aimed at building experience, will also present the
Soviets with new opportunities and forums to challenge U.S.
policy objectives. It also poses some risk to U.S. security
interests by creating increased opportunities for KGB activity
and the potential for disrupting financial markets. (S)
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I. Review of Soviet Activities in International Economic
Affairs
The interagency NSSD group identified the following develop-
ments which suggest increased Soviet interest in greater partici-
pation in the international economic system. (S)
A. Reorganization of Soviet Trade Bureaucracy
Several changes have recently been made in the Soviet
bureaucracy which suggest a new Soviet approach to international
trade. On an operational level, certain ministries and
enterprises have been given increased autonomy to engage directly
in importing and exporting without the intervention of the
Ministry of Foreign Trade (MFT). To coordinate these entities, a
new Foreign Economic Commission has been created made up of
representatives from MFT and various other economic
organizations. Other organizational changes include the
establishment of a new Administration for International Economic
Relations in the Ministry of Foreign Affairs, headed by Dr. Ivan
Ivanov, a reform minded academic; and the establishment of the
State Committee for Economic Cooperation (GKES) to oversee joint
venture activity. (S)
B. Soviet Interest in the GATT
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The recent overtures by the Soviet Union to play some role
in the General Agreement on Tariffs and Trade is the most
dramatic example of a new Soviet interest in the western
international economic system. (S)
On several occasions since 1979, the Soviets have informally
explored participation in GATT affairs; however, their
application to the GATT Secretariat to participate in the new
round of trade negotiations in mid-August was the most overt
expression of interest to date. In support of their application,
the USSR indicated to its trading partners that, among other
things, the USSR wished to move its economy more into the
framework of international economic relations, that closer
associations with the GATT would help expand trade with GATT
members and that Soviet interest in the GATT is "100 percent
economic." With selected countries, the USSR also pointed out
that it would serve as a counterweight to the United States in
the GATT for smaller contracting parties over whose interests the
United States "runs roughshod." (S)
The Soviet application for participation in the Uruguay
round was successfully sidetracked at Punta del Este because of
strong U.S. and nearly unanimous European opposition. However,
future Soviet interest in GATT can be expected either directly or
indirectly (through the application to the GATT of client states
such as Bulgaria), especially as the GATT comes to terms with the
readmission of the People's Republic of China. (S)
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C. Soviet Motives for Encouraging EC-CEMA Talks
Shifts in the Soviet Union's strategy to treat the European
Community ("EC") as a political entity and to allow countries
that are part of the Council on Mutual Economic Assistance
("CEMA") to have bilateral ties with the EC are key concessions
that could lead to significant progress in EC-CEMA talks. (S)
The Soviet objective for enhancing the likelihood of success
of these negotiations appears to be to gain greater political and
economic access to the Community, possibly, in part, to gain EC
support, or at least a softening of the EC position, for Soviet
entry into the GATT. In addition, the Soviets stand to gain from
direct access to the EC decisionmaking process, obtaining West
European technology and enhancement of CEMA's prestige. (S)
D. Soviet Initiatives Towards IMF/IBRD Membership
Although a Soviet official in August said the Soviet Union
is taking no steps towards IMF membership, at a conference in the
Soviet Union in July, Soviet academics told their U.S. counter-
parts that the Soviet Union should consider seeking IMF
membership. Further conflicting reports of possible Soviet
interest in the IMF/IBRD have recently been received. Close
attention must be paid to further developments in this area, as
Soviet membership would probably result in a significant
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dimunition in U.S. influence in these organizations and a likely
erosion of U.S. Congressional support. (S)
E. Soviet Interest in International Bond Market
In mid-July the Soviet Union and United Kingdom signed an
agreement settling outstanding claims arising before 1939. Part
of the agreement provided for the settlement of private claims
arising from Tsarist bonds issued before October 1917. In recent
days the Soviets have indicated an interest in exploring
resolution of outstanding defaulted bond claims in the United
States. Taken together, these actions may suggest an interest by
the Soviets to create good will in the financial markets as a
precursor to active Soviet bond market participation. Except for
a small participation in a syndicated bond offering for a Finnish
entity (as a lender), there has been no such Soviet activity.
(S)
F. Soviet Strategies for Coping with Hard Currency
Shortages
Soviet oil export earnings, which accounted for roughly half
of non-arms related hard currency earnings in 1985, will fall by
about $5-6 billion this year. This is likely to reduce total
1986 hard currency earnings to $23-26 billion, down from a peak
of $34 billion in 1984. As noted above, the prospect that such
export revenues will remain depressed for the rest of the decade
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is undoubtedly one reason for the new Soviet interest in
international economic institutions and stimulating manufactured
goods exports. In the meantime, however, the Soviets have been
forced to take steps to meet the resulting foreign exchange
shortfall:
Gold Sales -- Soviet gold sales have increased
significantly. Sales through Auguest 1986 were an estimated $3
billion, $1 billion more than in all of 1985. The Soviets could
earn another $1 billion from such sales in the last few months of
1986 before disposal of major additional quantities cause a
substantial depressive effect on price. The intelligence
community estimates the Soviets could sell about 400 tons of gold
(220 tons more than in 1985) before the price is significantly
affected. (S)
Import Cuts -- Soviet planners have started to implement
selected import cuts, although not of a magnitude that reduced
earnings may later require. Consumer-related purchases will
probably be cut most severely, and machinery and investment goods
the least. Given a continued world grain glut, the value of
Soviet agricultural imports could fall significantly if the
weather is reasonable and agricultural productivity improves.
(S)
Expanded Soviet Activity in International Financial Markets
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Gorbachev has expanded Soviet 'ties to international financial
markets to offset declining hard currency earnings, diversify
Soviet sources of funds, and gain economic intelligence.
According to Western financial statistics, Soviet commercial debt
increased by $6.5 billion in 1985, and over $3 billion in the
first six months of 1986. Although short-term borrowing
increased, the Soviets also took advantage of their strong credit
rating to raise about $2.8 billion in medium- and long-term
syndicated loans on favorable terms. Moscow also made greater
use of supplier credits and in some instances sought deferred
payments for Soviet purchases. (S)
The Soviets will probably continue to be more active in
international financial markets. This will take the form of
increased gold sales (including bilateral gold swaps); increased
borrowing (third party borrowings, ECU denominated borrowings,
indirect supplier credits, and possible entry into the Eurobond
market); and expansion of foreign-based financial entities (e.g.,
joint Soviet-Arab banks, investment banking relationships). (S)
While the USSR's excellent credit rating might facilitate a
modest level of additional borrowing, there is no indication the
Soviets will implement a long-term strategy of heavy borrowing as
a reaction to lower export earnings. The leadership, recognizing
the political dimension of borrowing, is reluctant to place
itself in the position of being overly dependent on the West.
The Soviets would also not want to jeopardize their ability to
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finance grain imports in a bad harvest year. But even the most
liberal estimates of expanded Soviet financial market activity
would still result in a relatively small role for the Soviet
Union in international financial markets. (S)
G. Soviet Expressions of Interest in Joint Ventures
There is increased Soviet interest in the establishment of
joint ventures -- to include Western management and equity
participation up to 49% -- between Soviet and Western entities.
However, other than indications that the Soviet Union is
investigating new regulations to promote such relationships,
details on the terms they are prepared to offer are still to be
provided. The Soviets appear to be soliciting proposals from
Western firms in order to ascertain what types of joint ventures
(on what terms) are feasible. Even so, our knowledge of the
extent of contact between Western firms and the Soviet Union on
joint ventures is still anecedotal and fragmentary. (S)
The advantages to the Soviet Union of increased joint
venture contacts are clear: new sources for hard currency,
improvement of consumer goods, access to managerial know-how, and
an opportunity to increase pressure on Western companies and
government to obtain high technology otherwise unavailable to
them. Yet the Soviets may be reluctant to concede real
management control, or access to the Soviet industrial hinterland
to prospective foreign partners, and there will inevitably be
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bureaucratic resistance to new ways. For their part, prospective
foreign partners are likely to be interested in the Soviet
domestic market, while the Soviets seem to see the program as a
means to stimulate manufactured goods exports. (S)
Overall, lack of clear new Soviet regulations and a
prognosis for lengthy joint venture negotiations over differing
objectives make a marked introduction of Soviet-Western joint
venture activity unlikely in the next few years. (S)
H. Soviet "International Economic Security Initiatives"
Soviet Foreign Minister Shevardnadze's September 23 address
to the United Nations General Assembly included a strong pitch to
establish a new, comprehensive system of international security
-- the Soviet theme that ties together all of Gorbachev's dispa-
rate disarmament and foreign policy initiatives. Included in the
Foreign Minister's speech is a call to establish economic vehi-
cles to channel assistance to Third World countries and to
develop a global scientific and technical cooperation program.
Both efforts presumably would be carried out under UN auspices.
The Soviets have formally introduced a proposal to this effect
for consideration at this year's UNGA. Economic security,
however, is only one small element in the proposal -- the refer-
ence to it is vague and debt is the only area specifically
mentioned. (S)
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Soviet interest in pursuing a multilateral approach to
global security problems stems from ideas detailed in Secretary
General Gorbachev's report to the Party Congress last February.
Unfortunately, the Foreign Minister's UNGA statement sheds no
additional light on the Soviet proposal beyond what was offered
last February. (S)
None of these ideas in the Soviet UNGA proposal are new.
For the economic items, the Soviets simply have resurrected
outdated north-south themes -- areas where Soviet economic
interests are small and the prospects for political visibility
are high. By weaving them together in one overall framework,
however, the Soviets are trying to create an illusion of newness
and to lend concreteness to what Gorbachev calls "new political
thinking" embodied in a series of proposals dating back to early
1986. The Shevardnadze speech is the most recent opportunity for
the Soviets to plug their proposed security programs. However,
Soviet reforms in this area, self-characterized as ideologically
correct, promise greater compatibility with the economies of the
West while maintaining the state controlled nature of the Soviet
system. (S)
II. Historical Overview of Past Soviet Participation in
International Economic Institutions
Soviet participation in international organizations spans
six decades, from the time the USSR joined the Universal Postal
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Union (UPU) and the International Telecommunications Union (ITU)
in the mid-1920s. The USSR had a brief association in the 1930s
with the International Labor Organization (from which it withdrew
in 1939 and again rejoined in 1954). The other organizations
under review were not established until after World War II.
Overall, Soviet participation in international organizations
reflects basic Soviet foreign policy interests. The USSR has
made good use of highly visible forums to attack its enemies,
support its Third World friends, and defend its interests in
debate and in staff studies. (S)
Over the years, Moscow has been careful to join those
organizations which best serve its interests. For example, the
Soviets are keen to join organizations where they can obtain
information and studies on economic trends. Among the
specialized agencies, the Soviets tend to congregate where they
have access to sophisticated Western technology [e.g., the
International Atomic Energy Agency (IAEA)]. The Soviets are
cooperative with the West in a number of these venues including
the World Meteorological Organization (WMO) and the IAEA. The
USSR has tended to shy away from those organizations that require
sizable funding commitments and or information that it considers
sensitive. Thus, until recently, Moscow has avoided the GATT and
IMF, where bargaining power and reciprocity count for more than
polemics. (S)
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Soviet behavior in international economic organizations has
varied considerably from a highly propagandistic, obstructionist
approach in UNESCO, and a somewhat less antagonistic stance in
ILO and UNCTAD, to a businesslike and constructive approach with
minimal politicization in WIPO, IAEA, and ICAO. Not
surprisingly, the Soviets seem to be most constructive and least
polemical when they share with us the goals of the organization
and see at least some degree of benefit to themselves. (See
further discussion, Appendix B.) (S)
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FUTURE SOVIET ACTIONS
How Moscow proceeds relative to recent initiatives will
depend, in large measure, on future leadership decisions
regarding (a) the role of Western technology and equipment in
Gorbachev's modernization drive, (b) the extent of Western
managerial involvement and corporate ownership, and (c) the
acceptable level of hard currency indebtedness, (d) the degree to
which Gorbachev is able to implement the "restructuring" of the
Soviet economic system. Moreover, it will take some time before
these decisions are made:
o The leadership will likely spend the next year or two
assessing the sufficiency of ongoing domestic programs--
shifts in investment priorities, management reorganizations,
and the discipline campaign--before reconsidering their
conservative positions regarding Soviet reliance on foreign
technology and equipment and systemic economic reform.
o It will take awhile for Gorbachev's new team of managers to
acquire the experience and expertise necessary to confidently
move heavily into the international financial and commercial
arenas. (C)
Until the Soviets complete the formulation of their long term
trade strategy, we can expect cautious but steady movement into
the international economic arena. In the area of joint ventures,
the first contracts could be signed as early as next year.
Although with less fanfare, the Soviets are likely to encourage
expansion of coproduction and utilization of Western management
services. The Soviets are also likely to look for more
opportunities to participate in joint projects in the Third World
with Western firms. While the Soviets have used Western
equipment to enhance the competitiveness of their bids on
projects in the Third World in the past, they have rarely formed
direct partnerships with Western firms when bidding on these
projects. Arrangements like the one they are negotiating with
Kuwait could provide the necessary funding without Moscow having
to offer credits. More remote is the possibility of Soviet
multinationals, primarily in cooperation with Western firms.
According to Soviet provisions for joint
ventures will include the right to establish subsidiaries in
third countries. (S)
Progress along these lines is apt to be slow. While some
Western firms may be willing to make a relatively small
investment to gain entry into the Soviet market, most are likely
to take a wait-and-see attitude. Years of dealing with
cumbersome Soviet bureaucracies, shoddy Soviet manufactures, and
unimpressive results from joint ventures with other socialist
countries will make most businessmen wary. The Soviets
themselves are apt to approach actual negotiations cautiously.
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Granting the amount of Western control of production decisions
that would be required by the Western parties would go against
the grain of most Soviet managers. At present, it appears that
there is still a considerable amount of uncertainty among
mid-level Soviet officials who deal regularly with Western
businessmen over what exactly joint ventures will entail. (C)
Even if impediments to successful joint ventures can be
overcome, the level of investment is likely to be too small to
have much of an impact on expanding Soviet exports of
manufactured goods. Nor will the recent changes in the foreign
trade apparatus likely have much success in expanding exports.
Although they will probably improve the operation of trade by
removing the MFT as a cumbersome middleman for some trade actors,
the changes do not remedy the lack of domestic incentives for
producers, the irrational price structure, and the inadequate
technological base that underlie the poor position of Soviet
manufactured goods in world markets. In addition, depressed
earnings from traditional exports will severely constrain
purchases of foreign equipment that could compensate for some of
these shortfalls. (C)
How the Soviets will respond to lackluster export
performance is difficult to predict. They are most likely to
introduce piecemeal adjustments to deal with some of the specific
problems that develop. They might try isolating the
export-oriented producers and joint ventures from the
inefficiencies of the economy, much as the defense industries are
protected. However, the benefits of trade--especially in areas
of technology assimilation and diffusion--would be similarly
isolated. (C)
As long as Moscow continues its conservative approach towards
reliance on Western technology, an increased role for the USSR in
the international financial arena is unlikely. The Soviets will
probably become more adaptable to new financial instruments and
more flexible in the management of their assess. For example,
reports that Soviet-owned banks are now permitted
to hold certain Western bonds in their portfolios. But the
present limitations on Moscow's currency earnings, coupled with
some vestiges of traditional Soviet conservatism, are likely to
restrict sharply any large-scale speculative approaches to
financial management. Gold trading and real estate scandals
involving Soviet-owned banks and the resulting tightening of
central control from Moscow are indicative of Moscow's attitude.
(S)
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The Soviets will continue their approaches to a variety of
multilateral economic organizations for both political and
economic reasons. GATT will probably remain a key area of
interest to the USSR both for the prestige factor and the chance
to participate in negotiations which they consider will affect
their interests. Lackluster trade performance and a trade sector
that remains largely under the control of central authorities
will, however, undermine Soviet arguments that their system is
becoming more compatible with the aims of the GATT. (C)
For largely political reasons the Soviets will continue to
press for formal EC-CEMA relations although probably without
expectations of anything but minimal economic gains. IMF and
World Bank membership are not likely to be pursued actively at
least not at the the present time. Disclosure requirements and
less control over its economic aid are likely to deter any
serious Soviet interest. Nor would the Soviet leadership be
willing to accept being labeled as developing country in order to
get access to World Bank credits. (C)
The USSR will almost certainly become more active in
promoting its own solutions to international economic issues. It
may perhaps go as far as proposing new international forums for
dealing with such issues, especially if it feels strongly enough
that it is being unjustly discriminated against by existing
institutions. What forms the new Soviet proposals are likely to
take are difficult to predict. We will probably see a
repackaging of old proposals with slightly different nuances
rather than bold new proposals. To the extent that the content
of Soviet initiatives remains similar to past proposals,
international response is likely to be lukewarm at best. In
addition, the small Soviet share of world trade coupled with the
expected lackluster trade and economic performance could weaken
Soviet positions. (C)
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Analysis/Conclusions
On the basis of the relevant information identified in the
interagency review, the following conclusions can be drawn in
response to the questions posed in NSSD 2-86:
1. Increased Soviet interest in participating in interna-
tional economic affairs is driven by: (a) a desire to establish
a role for the Soviet Union in international economic affairs
commensurate with its global role in political and security
affairs, (b) a means of increasing East-West contacts for the
purpose of gaining access to Western high technology, management
skills and economic intelligence, (c) a necessary step to offset
hard currency earning declines resulting from lower oil prices,
(d) as a means of diversifying its source of funds, and (e) in
order to develop an export policy that shifts its emphasis from
the sale of natural resources to finished products, as a spur to
Soviet modernization and global competitiveness. (S)
2. The NSSD process identified the following evidence of
increased Soviet interest in international economic affairs:
a. Application to take part in the new round and
increased interest in GATT.
b. Expressions of interest in the World Bank/IMF.
c. Reorganization of the Soviet trade bureaucracy.
d. Some additional activity in the international
financial markets.
e. Encouragement of EC-CEMA talks.
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f. A possible new approach to joint ventures with the
West. (S)
3. Future Soviet activity in the international economic
arena will probably be cautious, but steady. Possible areas of
increased activity:
-- GATT will probably remain a key area of interest to the
USSR both for its prestige and the chance to participate in
negotiations which they consider will affect their interests.
Lackluster trade performance and a trade sector that remains
largely under the control of central authorities will, however,
undermine Soviet arguments that their system is becoming more
compatible with the aims of the GATT. (C)
-- IMF and World Bank membership are not likely to be
pursued actively at the present time. Disclosure requirements
and the risk of less control over its economic aid are likely to
deter any serious Soviet interest. (C)
-- A sharply increased role for the USSR in the
international financial arena is unlikely. In particular,
large-scale speculative approaches to financial management will
be sharply restricted by current limitations on Moscow's currency
earnings, coupled with some vestiges of traditional Soviet
conservatism. (C)
-- For largely political reasons, the Soviets will continue
to press for formal EC-CEMA relations although probably without
expectation of anything but minimal economic gain. (C)
In general, the USSR will almost certainly become more
active in promoting its own solutions to international economic
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issues. It may perhaps go as far as proposing new international
forums for dealing with such issues, especially if it feels
strongly enough that it is being unjustly discriminated against
by existing institutions. What forms the new Soviet proposals
are likely to take are difficult to predict. We will probably
see a repackaging of old proposals with slightly different
nuances rather than bold new proposals. To the extent that the
content of Soviet initiatives remains similar to past proposals,
international response is likely to be lukewarm at best. In
addition, the small Soviet share of world trade coupled with
expected lackluster trade and economic performance could weaken
Soviet positions. (C)
4. Increased Soviet participation in the major
international economic institutions would generally not be
helpful to U.S. objectives. Past history indicates that the
quality of Soviet participation in international economic
institutions depends largely upon the degree to which they share
with the U.S. the goals of the specific organization and
recognize some benefit to themselves. The nearly total
incompatibility of the Soviet economic system with that of the
West, however, would make Soviet membership in certain key
institutions, such as the GATT and IMF/IBRD, extremely
undesirable. This would be for both technical reasons and
because of the risk of politicizing heretofore non-political
institutions. (S)
An additional risk would be the increased numbers of Soviet
officials in the West necessitated by expanded membership in
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international fora, which would provide opportunities for
increased KGB activity. (S)
5. There are several implications for the international
economic system presented by increased Soviet interest and
activity in economic affairs. To the extent that Soviet activ-
ities on international markets bring it closer to the interna-
tional economic community, the West probably benefits since it
gives the Soviets a greater stake in working to solve problems
within the system. Such a stake, however, is not likely to weigh
heavily in Soviet decisions where political and strategic
interests are involved. (S)
Increased cooperation with Western firms is likely to
improve Soviet assimilation of Western technology in given
enterprises, although diffusion throughout the economy is likely
to continue to be difficult. Soviet ability to make effective
use of Western equipment and technology has been constrained in
the past partly by the inability of Soviet managers and engineers
to work hand-in-hand over an extended period with their Western
counterparts. A vested interest by Western business in the
effective use of Western equipment and technology, backed by a
sustained on-site presence, could substantially improve their
use. Moreover, Western firms involved in joint ventures with the
USSR are likely to want to incorporate state-of-the-art
technology into these projects and could press their governments
to relax COCOM controls. Furthermore, joint ventures established
outside the USSR or subsidiaries of joint ventures in third
countries could give Soviet technicians greater access to
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controlled-technology without it being transferred onto Soviet
territory. (S)
Greater Soviet involvement in international trade and
financial markets would make it easier for Moscow to hide the
level of its financial activities through the use of numerous
instruments such as interbank deposits, borrowing from non-bank
institutions or banks outside the BIS reporting area. In the
past, Soviet reliance on government-backed credits and a select
grouping of major commercial banks in the U.S. and Western Europe
provided Western governments with the ability to effectively
monitor, and, to some extent, control the level and terms of
Soviet borrowing. (S)
Increased trade with the LDCs could recoup some of the lost
Soviet prestige and influence in the area. The Soviets would
likely be willing to lend to debt-ridden LDCs at attractive rates
to obtain contracts for projects, particularly those that would
generate repayments in raw materials needed for the domestic
economy. While this would not represent a shift from current
Soviet policy toward the Third World, higher quality Soviet
exports combined with LDC debt problems would make trade with the
USSR more attractive than in the past. (S)
If the regime decides in several years that it must rely
more heavily on Western technology and equipment for its
modernization efforts to succeed, we would expect to see a much
bolder Soviet entry into the international economic arena and an
even greater impact on U.S. policy interests. Under such
circumstances, we could expect a major increase in the flow of
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Western technology to the USSR with a commensurate rise in Soviet
hard currency borrowing. Moscow's low indebtedness, substantial
reserves of near-monies such as gold and energy, centralized
control over resources, and large
would make the USSR an attractive
investment. (S)
Western governments would have to contend
interest group of manufactured goods exporters
unexploited internal markets
market
for Western direct
with a growing
seeking more
favorable trading conditions -- low-interest credits, reduced
export controls, better bilateral relations in general. The
pressures from the business community would be even greater if
the Soviets implement internal reforms that result in interna-
tionally competitive joint venture and equity arrangements. In
fact, the Soviets
the Europeans and
encourage them to
could dangle lucrative trade deals in front of
reiterate the theme of Pan-Europeanism to
adopt trade policies vis-a-vis the USSR that
are at variance with U.S. policy. A similar policy could be
adopted with the Japanese. (S)
6. Soviet membership in the most important international
economic institutions and an increased Soviet presence in
international economic affairs will pose serious challenges to
U.S. policy objectives. The West has been moving towards
globally integrated financial and commodity markets at a rapid
pace, and increased Soviet understanding of how these markets
operate carries a risk that Moscow may attempt to manipulate
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LLA.MLA
these markets to the detriment of U.S. national security
interests.*
It is conceivable that the Soviet Union could
precipitate a crisis without its role being known, for example,
by the judicious placement of false data into the system. We
believe such actions would be unlikely as long as the USSR's
growing role is paying off in economic and even political
dividends. If Moscow perceives few economic benefits and remains
a minor player in these markets, however, then the economic loss
it would suffer would pale compared with the potential for
significant damage to Western economic stability. (S)
The USSR could conceivably employ disruptive tactics for a
variety of reasons.
-- Financial or commercial market disruption could be
initiated to preoccupy the interests of Western governments at a
time when the Soviets were engaged in activities -- say in
Eastern Europe or the Middle East -- which would otherwise result
in a united response from the alliance.
-- If the Soviets come to the conclusion that they cannot
effectively compete with the West technologically and
economically and that failure in this regard carries substantial
risks to their long-term ability to maintain strategic parity,
they might attempt to precipitate a more severe economic crisis
in the West, seeking to create a snowball effect that could not
be controlled by Western governments. They could, for example,
The Department of Treasury dissents from the view that the
Soviets are capable of causing the disruption of the
international financial markets noted in the text.
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seek to exacerbate a situation of possible future strains, such
as those caused by a severe recession, in hopes of causing major
and sustained economic damage to the West. (S)
7. In any case, U.S. policy towards the economic
initiatives of the Soviet Union should be to monitor closely
activities in those areas where there has been a moderate
increase in Soviet interest, while firmly opposing Soviet
membership in international economic institutions of primary
functional importance to the United States. (S)
In the areas of international financial markets and joint
ventures, there is insufficient evidence of increased Soviet
activity to raise alarm. In the short run, Soviet presence in
the international financial markets is likely to be small as a
result of basic Soviet conservatism, lack of financial expertise
and a desire not to appear to depend on the West for financing.
Similarly, the poor performance of joint ventures with East
European countries, the lack of clarity in Soviet regulation and
the protracted time required for negotiation make it unlikely
that many U.S.-Soviet joint ventures will be formed in the near
term. These areas require further close monitoring with a view
towards detecting a disruptive Soviet presence in the
international financial markets, and carefully reviewing joint
venture activities in civilian areas. Some joint ventures could
pose serious problems from the export administration perspective,
possibly serious enough to require changes in U.S. laws and
regulations. We need to explore these problems, and any
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solutions must be consistent with U.S. and other Western national
security needs and our COCOM obligations. (S)
Of more immediate concern is the recent Soviet application
to take part in the new round and interest in the GATT and
possible interest in the IMF/IBRD. Past history suggests that
Soviet participation in international economic institutions may
not be entirely negative for U.S. interests. Depending on the
organization and the extent to which the Soviets and the U.S.
share similar objectives, the U.S. can tolerate Soviet
participation in some organizations, despite the USSR's use of
such membership to gain access to Western technology, economic
intelligence and as a basis for KGB activity. However, the
United States must respond firmly to Soviet attempts to join the
most important functional Western economic institutions, the GATT
and IMF/IBRD. The fundamental importance of these institutions
to the United States and the functional inability of the Soviet
Union to play a constructive role in their work makes it
imperative for the U.S. to block Soviet membership. (S)
-- The Soviet's desire to take part in the new round was
derailed through active U.S. objection on the basis of sound
substantive (i.e. non-political) reasons: the incompatibility of
the USSR's huge non-market economy with the functions and
objectives of the market-oriented GATT. The U.S. must strongly
maintain this position. Strong European support (at least up
until now), the consensus nature of GATT business and the
unlikelihood that the Soviet Union will make the fundamental
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AV
policy changes to make this system GATT compatible makes their
essential admission to the GATT unlikely. (S)
-- Soviet interest in the IMF/IBRD is still academic, but
U.S. policy should be to block such an application if it occurs.
Although the Soviets, who in the past have been hostile to these
institutions, are unlikely to be willing to participate in the
exchange of information that is an essential part of membership,
the U.S. should be alert to further Soviet actions in this area,
and be prepared to take such measures to deny Soviet membership.
(S)
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3618
----: THE WHITE HOUSE
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NATIONAL SECURITY STUDY
DIRECTIVE NO. 2-86
WAS
September 16, 1986
SOVIET INITIATIVES IN INTERNATIONAL ECONOMIC AFFAIRS (S)
Introduction
This National Security Study Directive establishes the Terms of
Reference for completing a review of recent initiatives undertaken
by the Soviet Union in the area of international economic affairs.
The Study will be coordinated by the National Security Council
Staff. (S)
Objective of the Review
To assess the significance of greater Soviet interest in global
economic institutions and affairs; to develop U.S. policy on
appropriate response to new Soviet initiatives in international
economic affairs; and to begin preparation of U.S. positions on
economic issues for the next meeting between President Reagan and
General Secretary Gorbachev. (S)
Scope
The review will address the following topics: (S)
First Stage: To be completed by October 1, 1986.
-- Soviet Interest in International Economic Affairs: Full
review of information relating to recent Soviet interest in
international economic issues, including but not limited to
assessments of the significance of: (S)
o The reorganization of the Soviet Ministry of Foreign
Affairs ('MPV) to include a new Administration for Interna-
tional Economic Relations. (S)
o The application of the Soviet Union to participate
in the new round of multilateral trade negotiations under
the General Agreement on Tariffs and Trade. (S)
O Suggestions that the Soviet Union is interested in
joining the IMF/IBRD. (S)
o In the financial sector, settlement with the UK on
defaulted Czarist bonds and first time Soviet participation
in a Eurobond syndication. (S)
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- - -
(
o Increased volume and sophistication in Soviet inter-
national financial market transactions. (S)
o Soviet 'International Economic Security Initiative',
which will presumably be tabled at the UNGA. (S)
o Soviet motives for encouraging BC-CEMA talks. (S)
o Soviet expressions of interest in joint ventures,
possibly involving western firms management and significant
western on-site participation. (S)
-- Past History: The following will be helpful in preparing
for discussions with the Soviets on their participation in
international economic institutions: (S)
o Summary review of Soviet official comment on exist-
ing international institutions (GATT, INF/IBRD, etc.) to
which they have applied or may apply for admission. Review
should focus on Soviet comments at time of creation of those
institutions and in the past ten years. (S)
o Summary reports of past Soviet participation in
specialized international institutions, e.g., UNCTAD,
UNESCO, ILO, WHO, FAO, ICAO. Which have they 'politicized'?
To which have they made a positive contribution? What have
been their substantive positions on economic issues in these
fora? ($)
-- Forecast: An assessment of what future initiatives in
the inteiERIBWil economic field the USSR might undertake and
what other international and financial institutions to which they
might apply. (S)
Second Stage
-- Analysis: An assessment of the potential significance
to the international economic system of the recent Soviet inter-
est in participating in major international economic insti-
tutions: (S)
(1) What has driven the new Soviet interest? (S)
(2) What changes have taken place in Soviet domestic and
international economic policy? (S)
(3) What changes are under consideration? (S)
(4) How compatible is Soviet participation to the
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functioning of the major international economic insti-
tutions? (S)
What are
economic
What are
national
the general implications for the international
system of Soviet participation? (S)
the specific implications for United States'
security? (S)
What are the pros and cons of possible U.S. policy
responses to these expressions of Soviet interest? (S)
A paper covering these topics should be prepared under the
direction of the National Security Council, and completed no
later than October 15, 1986. (S)
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I. HISTORICAL OVERVIEW OF SOVIET POLICY TOWARD AND PARTICIPATION
IN INTERNATIONAL ECONOMIC INSTITUTIONS
Soviet participation in international organizations spans six
decades, from the time the USSR joined the Universal Postal Union
(UPU) and the International Telecommunications Union (ITU) in the
mid-1920s. The USSR had a brief association in the 1930s with the
International Labor Organization (from which it withdrew in 1939 and
again rejoined in 1954). The other organizations under review
were not established until after World War II. Overall, Soviet
participation in international organizations reflects basic Soviet
foreign policy interests. The USSR has made good use of highly
visible forums to attack its enemies, support its Third World
friends, and defend its interests in debate and in staff studies.
Over the years, Moscow has been careful to join those
Organizations which best serve its interests. For example, the
Soviets are keen to join organizations where they can obtain
specialized agencies, the Soviets tend to congregate where they
have access to sophisticated western technology [e.g. the
International Atomic Energy Agency (IAEA)]. The Soviets are
cooperative with the West in a number of these venues including the
World Meteorological Organization (WMO) and the IAEA. The USSR has
tended to shy away from those organizations that require sizable
funding commitments and or information that it considers sensitive.
Thus, until recently, Moscow has avoided the GATT and IMF, where
bargaining power and reciprocity count for more than polemics.
Multilateral Trade & Finance Institutions
IMF/IBRD The Soviet Union took an active part in the Bretton
Woods neogtiations leading to the establishment of the International
Monetary Fund (IMF) and the World Bank (IBRD). Soviet negotiators
made numerous specific proposals, some of which were accepted and
even today are part of the IMF's Articles of agreement. At the end
of the Bretton Woods conference the Soviet delegate approved the
final agreement, but subsequently the Soviet Union did not ratify
the Articles Of Agreement (and thus did not become a member of the
IMf/IBRD). Soviet representatives were still present, however, as
observers at the first meeting of the IMF in Savannah, Georgia, in
March 1946.
Numerous reasons have been offered to explain why the Soviet Union
did not join the IMF and World Bank. The most convincing of these
relates to the Soviets' voting share and the requirement to provide
economic information, including the amount of gold and foreign
exchange holdings. When the IMF was established, 20 percent of
members' votes were required to exercise a veto. The United States
alone had a 31-percent share of the total vote, while the USSR,
Czechoslovakia, Poland, and Yugoslavia combined would have had only
17 percent of the vote.
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Since the birth of the IMF/IBRD, Soviet rhetoric has portrayed
these institutions in a most unfavorable light. Soviet polemics and
propaganda directed at the IMF in recent years have centered on IMF
adjustment programs and their negative impact on Third World
countries. Soviet harsh attitudes toward the World Bank may be
influenced by the fact the USSR would not be eligible to borrow from
the Bank--its per capita income exceeds the IBRD maximum for loan
eligibility--and would be required to contribute a substantial
subscription to capital. Moreover, the World Bank in recent years
has placed increased emphasis on private sector initiatives, which
conflict with Soviet ideology.
On several occasions Soviet officials and academics have
flirted with the possibility that the USSR might seek to participate
in the IMF. In June 1973, M. Alkhimov, then vice minister of
foreign trade, declared in an interview with Business Week that
participation of the USSR in the IMF was not totally excluded,
although there were strong objections to such a move, including
objections to the aforementioned weighted voting system and the
obligation to furnish economic information. Most recently, in July
1986, Soviet academics told a delegation of US economists that the
Soviet Union is studying the potential benefits of IMF membership.
However, the head of the Ministry of Foreign Affairs' new
International Economic Relations Department--a leading force behind
the efforts to participate in international economic fora--is quoted
as saying the Soviets "are taking no steps toward participation in
the Fund (IMF) or gaining access to its credits."
GATT. Until its recent heightened interest in the organization,
the USSR always publicly opposed the General Agreement of Tariffs
and Trade (GATT) and the never realized International Trade
Organization (ITO). The Soviet Union was repeatedly offered
invitations to participate in the formation of GATT (which took
place in October 1947) but it refused. As an alternative to the
formation of the GATT, the Soviet Union pushed strongly for
improving the world trade system through the United Nations. Even
after the GATT was formed, the USSR attempted unsuccessfully to
arrange trade cooperation agreements through UN agencies like the
Economic Commission for Europe (ECE) and the Economic and Social
Council (ECOSOC).
From the time of establishment of the GATT up until the recent
Soviet request for participation in the new round, the USSR has
denounced the organization, particularly for being unable to stop
the alleged wave of protectism in the West in the 1970-80s. At
times the Soviet Union has flirted with the idea of changing its
policy toward international trade. During the Kosygin economic
reform period of the mid-1960s, Soviet officials made strong
declarations about the importance of more international trade
contacts, without specifically referring to the GATT.
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The possibility of the Soviets approaching the GATT began in
earnest in 1975 with studies on the subject, according to Soviet
trade officials. By 1979, this initiative had gained significant
support in the ministry of foreign trade. The subsequent
deterioration in relations with the West as well as the general
complacency of the Brezhnev government at its end put a stop to the
approach to GATT.
Specialized International Institutions
Soviet interest in specialized organizations has continued
through the postwar years with the USSR joining many organizations
within the UN System. Along with providing key international
sevices in such fields as communications and transportation,
organizations of this type have given the Soviet Union access to a
wide range of economic, technical, and regional information.
The Soviet Union initially adopted a low profile and defensive
posture in these bodies. However, as the West began to lose its
working majority in the UN with the arrival of newly independent
Third World countries, Soviet involvment in economic and social
organizations began to increase substantially. The change in
Soviet response to these organizations was calculated to win the
favor of Third World countries, to protect the USSR from unwelcome
UN initiatives, and to further the Soviet agenda.
Among the specialized agencies, the Soviets tend to congregate
where they have access to sophisticated Western technology. For
example, 69 Soviets were among the 1,500 staff members of the
International Atomic Energy Agency (IAEA) in 1984--which is
technically not a specialized agency but an independent
intergovernmental organization under the aegis of the United
Nations. The IAEA is responsible for drawing up and implementing
the safeguards agreements provided for in the Nuclear
Non-Proliferation Treaty as well as for developing siting, safety
and reliability standards for nuclear power stations. IAEA staff
has access to sensitive nuclear-related information from 110
members. Not only is the Soviet IAEA contingent large, representing
14 percent of all Soviets employed by the Secretariat, but it is
also high level.
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The Soviets have had a keen interest in joining organizations
that exchange information and conduct studies on economic trends.
This is reflected in their active involvement in UN-related
economic conferences, commissions, and research organizations such
as the United Nations Conference on Trade and Development (UNCTAD)
and the Economic Commission for Europe (ECE), as well as various
organizations and commissions that deal with commodities and
resources. Membership in such groups not only provides a source of
potentially useful information but also a forum for portraying
Communist economic philosophy in its most favorable light and
pointing out any perceived inequity in the Western economic system.
Despite their interest in cultivating Third World support,
the Soviets have been selective in their participation in
multilateral aid organizations and have provided only minimal
contributions to UN aid organizations. The principal Soviet
rationale put forward for not participating in aid-giving
organizations is that Third World poverty is the result of Western
colonialism and is perpetuated by neocolonialism. The Soviets argue
that the USSR is not a colonial power and is therefore not
responsible for Third World poverty or obligated to provide aid.
The USSR's low interest in the aid and humanitarian
organizations is a factor in Soviet staffing patterns. No Soviets
work for the UN High Commissioner for Refugees, the Food and
Agricultural Organization (FAO) in which the USSR is not a member,
or the International Fund for Agricultural Development (IFAD). Only
four Soviets work for the United Nations Children's Fund (UNICEF)
and four for the UN Development Program, the two key UN aid
agencies.
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II. ASSESSMENT OF PAST SOVIET BEHAVIOR IN
INTERNATIONAL ECONOMIC ORGANIZATIONS
INTRODUCTION AND SUMMARY
Soviet behavior in international economic organizations has
varied considerably, form a highly propagandistic, obstructionist
approach in UNESCO, and a somewhat less antagonistic stance in ILO
and UNCTAD, to a businesslike and constructive approach
with minimal politicization in WIPO, IAEA, and ICAO. Not
surprisingly, the Soviets seem to be most constructive and least
polemical when they share with us the goals of the organization and
see at least some degree of benefit to themselves.
Organizations
WIPO--World Intellectual Property Organization
Businesslike and Constructive; The Soviets have acted in a
constructive manner in this organization, and have not
generally obstructed its work or U.S. initiatives. As any
nation, they have periodically formed coalitions with others
to advance reasonable positions that benefit them
economically.
IAEA--International Atomic Energy Agency
Businesslike and constructive; The Soviets share With us a
significant interest in safeguards and non-proliferation.
Their participation is constructive with minimal polemics.
ICAO--International Civil Aviation Organization
Businesslike; The Soviets do not make a major contribution to
the ICAO, although per U.S. rep they maintain a high standard
of professionalism and are contributing in a positive manner
to the current Assembly. They accelerated their financial
contributions to help ICAO cope with late U.S. payments. USSR
rep commented off-the-record that KAL shootdown focussed more
attention to ICAO within Soviet government, and the Soviets
have been more active since.
ILO--International Labor Organization
Mixed; The Soviets are trying to modify the structure of the
ILO to increase the power of governments and reduce that of
labor and employers, thereby making it more responsive to
their own goals. In addition, they sometimes pursue
propaganda lines linking economic development to disarmament.
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ECE--Economic Commission for Europe
Mixed, with some propaganda and polemics; At the technical
level, the Soviets cooperate reasonably well, for example on
the High Level Meeting on Enviroment. On the other hand, we
have blocked the proposed HLM on energy, which they appear to
want to use for propaganda. The Soviets occasionally use the
ECE for propaganda, and have placed Soviets in the ECE
Secretariat who collect intelligence and slant the
organization's work toward Soviet aims.
UNCTAD--United Nations Committee on Trade and Development
Mixed, with moderate propaganda and polemics; although the
Soviets are generally businesslike, they usually don't pass up
opportunities to present propagagnda. For example, they often
try to persuade Third World nations of the validity of the
Socialist approach to international trade issues. However
factors that reduce the oportunities for Soviet influence in
UNCTAD are their very low level of development asssistance and
the structure of UNCTAD, which helps to contain Soviet efforts
by placing them in a separate division for non-market
economies.
UNESCO--United Nations Educational, Scientific, and Cultural
Organization
Highly politicized; The Soviets have politicized all aspects
of UNESCO and use it as a political forum from which to attack
Western interests and spout disarmament proaganda. In it,
they support all types of extremist positions of the NIEO.
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Background Papers
Soviet Foreign Trade Sector Reorganization
Reorganization of the foreign trade sector is both a prerequisite
for and consequence of the Soviet attempt to carve out a greater role
in world trade and thereby eventually establish for the Soviet Union
a role in international economic affairs commensurate with its status
as a political and military superpower. Fundamental reform, however,
either is not being contemplated by Moscow leadership or currently is
beyond its reach. Instead, in classical Soviet fashion,
institutional and personnel changes are the primary focus of the
reorganization at this point. Several entirely new entities are
being created to oversee the reform effort - at the expense of
entrenched institutions - and a younger generation of less
experienced bureaucrats is replacing much of the "old guard" in the
foreign trade sector.
The sectorial reorganization is prompted by Gorbachev's desire to
improve Moscow's export profile and terms of trade. Much like an LDC,
the USSR has a high proportion of raw material exports to machinery
and equipment exports, with the reverse true for imports. By allowing
increased Western contacts for people directly involved in the
production process, the Soviets intend to improve access to Western
high technology -- a prime objective of and prerequisite for
Gorbachev's ambitious plans for improving the domestic economy
through rapid advances in the machine-building sector. A more
immediate objective of the restructuring may well be to recoup hard
currency earnings lost as a result of weak export commodity prices,
especially oil.
With this reorganization in the foreign trade sector, the Soviets
seem to believe their trade structure will become more compatible
formally with the international trade system, on which they are
depending in part to bolster their multilateral political and
economic objectives. Among the latter are their recent bid to
participate in the GATT's new round of trade talks and their attempt
become direct participants in shaping international trade in the next
decade.
The thrust of the reorganization is consistent with Gorbachev's
domestic priorities in restructuring the Soviet economy -- a
combination of improved centtal control with greater autonomy at the
lower level. Also, the Soviets have gone to some length to
characterize the changes as ideologically correct, claiming they
maintain the state's monopoly on trade while making their system more
compatible with the international trade system.
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Operational Changes. The heart of the reorganization is increased
autonomy for certain ministries and enterprises. In late September
Moscow announced the establishment of guidelines for direct trading
links between selected ministries and enterprises and Western firms.
Effective January 1987, the new rules will permit some 20 ministries
and 70 enterprises, as yet unidentified, to engage directly in
importing and exporting without the intervention of the Ministry of
Foreign Trade (MFT) or other economic organizations in Moscow.
Additional enterprises may be added as they develop sufficient
foreign exchange earnings. However, with respect to the larger Soviet
economy, the changes planned thus far are limited. The bulk of
Soviet economic entities are unaffected by the new guidelines.
Planning and party authorities will retain their tight control over
the Soviet economy.
The affected ministries and enterprises will be allowed to
establish their own self-financing (khozraschet) foreign trade firms,
authorized to seek foreign exchange credits from the foreign trade
bank (Vneshtorgbank). The new guidelines will permit the affected
organizations to use some portion of their hard currency export
earnings to purchase imports from the West. These new rules also
afford the selected enterprises more individual leeway to define
their relationships, such as joint ventures, with Western firms.
However, requiring these enterprises to produce for both the domestic
and foreign markets poses problems with respect to self-financing,
production levels and prices, which could delay actual operations
under the new rules.
Organizational Changes. A new Foreign Economic Commission, chaired
by a Deputy Chairman of the Council of Ministers, is being created to
oversee the reorganization. Composed of the Ministry of Foreign
Affairs (MFA), MFT and various economic organizations, it will serve
to coordinate the activities of the entities involved in foreign
trade. Although it is supposed to facilitate trade, the new .
Commission appears to be one more bureaucratic layer between foreign
suppliers and domestic producers.
A new Administration for International Economic Relations, with
responsibility for handling broad international economic issues, has
been created in the MFA. Dr. Ivan D. Ivanov, well-known in the West
as a reform-minded academic, has been appointed head of the new
administration. In addition, the MFT is being reorganized from top
to bottom as part of the effort to improve the efficiency of the
foreign trade apparatus and to weed out corruption.
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Despite the guidelines' statement that the MFT and the State
Committee on Foreign Economic Relations, in that order, will continue
to exert a "control" responsibility over foreign trade, the MFA
appears to be establishing a substantial role for itself. The MFT's
own ineffectiveness has prompted at least some of the changes and it
seems clear that it will lose several functions.to the two new
entities. Viewed together with the creation of the new MFA
administration and Ivanov's appointment, it looks like that the MFA,
not the MFT, will have the major policy-making role in Soviet
international economic relations.
Personnel Changes. Personnel changes which tend to confirm MFA's
ascendancy are in the works as well. For some time there have been
strong hints that Foreign Trade Minister B. I. Aristov, a fading
apparatchik - not a 'new ideas' man, will soon depart; the
front-runner to replace him is MFA First Deputy A. G. Kovalev. Ivanov
is a likely candidate for a deputy position in the new Foreign
Economic Commission, and that its new chairman is V. M. Kamentsev,
recently appointed Deputy Chairman of the Council of Ministers.
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Soviet Interest in GATT Membership
Historical Background. The General Agreement on Tariffs and Trade
was drawn up in Geneva in October 1947. The Soviet Union did not
participate in the work of the International Trade Organization
Preparatory Committee, nor in the rounds of tariff reductions
negotiated in the 1940s and 1950s or in the Kennedy Round which was
concluded in 1967. Participation in these negotiations was limited
to GATT Contracting Parties (CPs) and those countries negotiating
accession to the GATT. Although the Tokyo round of Multilateral
Trade Negotiations (1973-79) was open to all interested countries,
the Soviets chose not to take part. Since 1979, and prior to the
most recent overtures, Soviet officials have made periodic informal
contacts with U.S. and other GATT CPs to explore receptivity to
Soviet participation in GATT affairs. In each case, the Soviets were
met with a distinct lack of enthusiasm, and interest abated.
Recent Overtures. The most recent overtures began in April and May
of this year. At that time, Soviet officials in a number of CP
capitals raised the issue of possible Soviet observership in the
GATT. The Soviet Commercial Minister in Washington called at USTR
and the Departments of State and Commerce to renew expressions of
Soviet interest in GATT observership. A short time later, in Moscow,
the Soviet Foreign Trade Ministry called in a number of the USSR's
trading partners to make a presentation on why the USSR-should be
more active in the GATT. The following points were made at these
presentations:
the USSR has a great interest in observing the New Round
negotiations in order to gain experience with GATT procedures;
the USSR wants to move its economy more into the framework of
international economic relations and would use GATT observership
to "review what changes need to be made in the Soviet economic
structure to qualify for full membership;"
the USSR has an important stake in the international economy and
should have observer status in the GATT to monitor world trade
developments which affect Soviet interests;
the USSR believes closer association with the GATT would help
expand trade with GATT members;
Soviet interest in the GATT is "100 percent economic"; and,
(with selected countries) the presence of the USSR in the GATT
would protect the interests of smaller GATT CPs from the United
States, which "runs roughshod" over their interests.
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Participation in the Uruguay Round. In mid-August 1986, the USSR
sent a note to the GATT Secretariat announcing a desire to
participate in the New Round talks. They stated that such
participation would help them gain experience leading towards a
decision on accession in light of the ongoing re-organization of the
Soviet economy which provides for increased autonomy and
responsibility of enterprises in their business relations. This
request was also conveyed bilaterally to our Embassy in Moscow in
early September.
The Ministerial Declaration approved by GATT CPs at Punta del
Este provides for terms of participation that, in essence, limit
participation in the negotiations to current CPs, countries already
in the process of negotiating accession, and LDCs that initiate
accession negotiations by April 1987. These criteria exclude Soviet
participation in the Uruguay Round.
GATT CP Reaction to Recent Soviet Overtures. A majority of developed
GATT CPs oppose Soviet involvement in the GATT, either as
observer/applicants or in the Uruguay Round negotiations. Australia
would not oppose Soviet participation in the new round. Switzerland
has taken no position. GATT non-market economy (NME) CPs are on
record as supporting Soviet involvement. India favors Soviet
participation, and some LDCs are ambivalent or mildly supportive.
There are also reports that the EC would exchange support for USSR
GATT participation for diplomatic or trade concessions.
NMEs and the GATT. The participants in the original GATT
negotiations drafted the contractual obligations of the GATT from the
perspective of market economy countries whose trade responds to
changes in prices that are determined by supply and demand. This
orientation towards a free enterprise economy is inherent in the
GATT's basic provisions. State trading was seen as an exceptional
situation; GATT Article XVII requires that state-trading enterprises
not discriminate in their foreign trade.
Nevertheless, several NMEs are members or observers in*GATT.
Czechoslovakia and Cuba were members before they became Communist
states; Poland, Hungary and Romania joined more recently. Bulgaria
is an observer. China, an observer now, has formally applied to
resume the seat vacated by Taiwan in 1950. The United States ceased
to apply the GATT to Czechoslovakia in 1951. The trade embargo with
Cuba renders most GATT obligations between the U.S. and Cuba. The
U.S. denied most favored nation treatment to Poland in 1981 and,
under the terms of the Trade Act of 1974, grants it on a year-to-year
basis to Hungary, Romania and China. In carrying out its trade
policy, the U.S. considers Yugoslavia a market economy.
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EC-CEMA Relations
Overview. On-and-off negotiations since 1973 between the European
Community (EC) and the Council on Mutual Economic Assistance (CEMA),
as well as between the EC and individual CEMA members, may be
entering a decisive stage. Soviet leader Gorbachev's willingness to
to treat the EC as a political entity and to allow CEMA countries to
have bilateral ties with the EC are key concessions that could lead
to significant progress in EC-CEMA talks.
The earnestness with which CEMA (read the USSR) has pushed the
process along this past year suggests that Gorbachev was not simply
interested in form over content. It seems to represent a
willingness to give up up a longstanding ideological position in
return for greater political and economic access to the Community.
This complements Soviet moves in other areas (especially finance) to
become, or appear to become, more pragmatic, "responsible" players on
the international commerce and finance scene. Recent Soviet efforts
to get involved in the GATT also fit into this picture. The Soviets
may hope to gain EC support, or at least a softening of the EC
position, for Soviet entry into the GATT.
The Soviets are interested in having direct access to the EC
decision-making process, participating in a forum which excludes the
United States, obtaining West European technology, and CEMA's
prestige. East European countries worry that the Soviets could use
an EC-CEMA accord to crimp their ties with Western Europe. Some
would like their own bilateral channels with the EC, linking EC
economic concessions to diplomatic ties. The USSR and several of its
bloc allies hold that EC-CEMA relations should precede links between
the EC and CEMA member countries; Hungary and Romania in contrast
clearly prefer direct dealings with the EC before multilateral ties
with CEMA are realized.
Moscow's decision to allow individual CEMA countries to sign
bilateral agreements with the EC represented a significant
concession. It removed, at least partially, what had been a
source of anxiety for bloc allies (especially those such as
Romania and Hungary, particularly interested in commercial deals
with the EC), namely that an EC-CEMA accord would allow the Soviets
to control the dialogue between East and West Europeans more
effectively.
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In the EC, the Commission is especially interested in an EC-CEMA
agreement, which would enable it to insert itself into East-West
politics, traditionally the preserve of the EC-12. The Federal
Republic of Germany, Italy, and the smaller EC states support the
broader agreement, while the United Kingdom and France are less keen.
Both the EC Commission and member states profess to be well aware of
such pitfalls as Moscow's desire to use EC-CEMA relations to monitor
West European ties with Eastern Europe. A major inducement for the
EC member states to agree to an EC-CEMA accord would be the
credibility gained by the Commission if it could demonstrate that at
least two East European countries--Romania and Hungary are currently
the most serious candidates--would establish diplomatic relations
with the EC "within hours" of EC signature of a joint declaration
with CEMA.
Underlying the complexity of organization-to-oganization ties is
the disparity between the EC and CEMA as institutions. The EC is a
cohesive, independent entity with sweeping powers in the trade field.
CEMA, in contrast, represents a hodgepodge of bilateral agreements;
it is dominated by the economic, and political, might of the Soviet
Union and falls far short of an effective multilateral economic
organization.
The sequence of bilateral and multilateral recognition among
the parties may prove critical to the outcome of the process. To be
credible, the Commission's dual-track approach (bilateral ties with
the East Europeans along with EC-CEMA ties) must show achievement
with at least two East European countries before EC-CEMA mutual
recognition. The USSR argues for EC-CEMA ties first. To varying
degrees, this position is supported by the German Democratic
Republic, Poland, and Bulgaria. The East Europeans have never seen
it in their interest to have the USSR use an EC-CEMA accord to
increase its control over relations between East European countries
and Western Europe. Hence some of the East European countries may
try to negotiate and even sign a bilateral accord with the EC before
an EC-CEMA one narrows their room for maneuver.
Current Status
The EC Commission participated in an initial experts' meeting
with CEMA in Geneva September 22-24 to discuss a proposed umbrella
declaration which would establish relations between the two
organizations. The CEMA team was headed by Deputy Secretary General
Kurowski, while the EC team was led by a deputy office director.
Commission negotiators had a mandate to agree on nothing -- not even
a date for a second round (although one may occur before year end).
The Commission did not table an EC-agreed draft declaration, and
discussion focused on Community "questions" on the CEMA-proposed
draft.
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EC insistence that any agreement include a "territorial" clause
(read a Berlin clause) met with unexpected resistance from CEMA
negotiators. The EC also told CEMA counterparts that references to
trade or commercial relations in the proposed declaration would have
to be deleted. The Commission made clear that propaganda-style
language on world peace should be deleted and that it wanted
references to negotiation of agreements deleted. CEMA negotiators
reportedly stated that CEMA members were free to negotiate commercial
agreements and to establish bilateral relationships with the
Community.
The Community is pursuing bilateral negotiations on economic
cooperation agreements with Romania, Hungary, and Czechoslovakia. It
is initiating talks with some of the other bloc states on possible
bilateral arrangements. A cooperation agreement between the EC and
Romania appears likely in the near future. This arrangement would
expand somewhat the 1980 industrial-trade arrangement (the most
comprehensive agreement signed to date between the EC and a bloc
country). Romania is anxious to conclude an agreement with the EC
lest an EC-CEMA accord reduce its room for maneuver on the bilateral
front.
EC-Hungarian talks are stalled over trade concessions. Forty
percent of Hungary's non-bloc exports go to EC countries, and the
Hungarian Government has been pushing for (and the EC resisting) a
trade agreement which knocks down some of the EC import restrictions
that currently affect some 300 Hungarian agricultural and industrial
products.
Background. The EC-CEMA dialogue stalled in 1978 after years of
sporadic discussions, primarily because of Moscow's refusal to accept
the EC Commission as spokesman for the EC. At the same time, the EC
insisted that CEMA's structure did not parallel its own and that,
under any EC-CEMA agreement, the EC as a whole would have to
negotiate bilateral agreements with individual CEMA member states.
The dialogue received a shot in the arm when newly appointed
Soviet General Secretary Gorbachev raised the issue with Socialist
International President Willy Brandt and Italian Prime Minister
Bettino Craxi during their visits to Moscow in May 1985, saying that
Soviet attitudes toward the EC needed change. Moreover, Gorbachev
cleared the way for talks by speaking, for the first time, of the EC
as a "political entity."
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In June 1985 the CEMA Secretary General sent a letter to the EC
Commission President Debra proposing a formal relationship between
the two organizations. Subsequent exploratory correspondence from
the Commission yielded a CEMA draft joint declaration (which was
discussed at the September 1986 meeting between the two
organizations). In December 1985 the Community approved a response
to the CEMA overture. The response included separate letters
(eventually sent in early 1986) to the CEMA Secretary General and to
each state. In these letters the EC indicated its willingness to
discuss establishment of ties with CEMA provided ties were also
established between the EC and the individual members of CEMA. By
June 1986 the CEMA secretariat and each CEMA member had replied
indicating a willingness -- albeit with different nuances and
priorities -- to proceed with the EC's "dual track" approach.
Subsequent contacts between the two organizations resulted in the
September 22-24, 1986 meeting.
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Soviet Initiatives Toward IMF Membership
At a conference in the Soviet Union in July, Soviet academics
told their U.S. counterparts that the Soviet Union should consider
seeking membership in the IMF. IMF membership would allow another
point of access to the international financial community as the
Soviets seek to manage the recent decline in hard currency earnings
and pursue Soviet leader Gorbachev's modernization efforts. However,
Ivan Ivanov, head of the newly created International Economic
Relations Department of the Foreign Affairs Ministry, said in August
that the Soviet government is taking no steps toward applying to the
IMF. (U)
If the Soviets were to seek membership and succeed, the United
States would lose some influence in these institutions as all
members' quotas would be reduced and voting power would be
redistributed accordingly. Based on the size of their economy and
level of trade, the Soviets would gain a sizable quota which would
translate directly into significant voting power-- to the possible
detriment of the United States. The percentage of total votes
controlled by the United States would drop and the Soviets could
leverage their voting share to greater influence by encouraging bloc
voting with third world and other socialist member countries. The
potential for the "politicization" of both institutions would thus
rise sharply. In the United States continuing financial support for
the IMF might erode in Congress. (C)
If the Soviets were in fact to seek membership, they would have
to weigh the gains in influence and status made by joining the IMF
against their reluctance to provide the economic information that
would be required. The Soviet sense of secrecy in such matters would
probably preclude any substantial movement toward a formal
application. (C)
If the Soviets did make a serious attempt to join the Bank--and,
subsequently the World Bank--the United States alone would be hard
pressed to keep them out. The United States cannot veto a Soviet
application. (C)
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Expanded Soviet Participation in International Financial Markets
Under Gorbachev the Soviet Union has expanded its ties to the
international financial markets significantly, diversifying its
sources of funds and increasing borrowings. This development is
probably a function of three factors: 1) need for new sources of
hard currency as oil export earnings decline, 2) the present
participation within the international community, and 3) recognition
that participation in western financial markets is a potentially
lucrative avenue for gaining economic information of intelligence
value. (S)
The Soviets responded to the decline in hard currency earnings in
1985 by reducing imports by 5 percent and increasing sales of gold by
$800 million to $1.8 billion. Hard currency borrowings also rose by
$6 billion, raising the level of net debt to over $14 billion. (S)
Similar efforts can be expected in 1986. The Soviet Foreign
Trade Minister Aristov has indicated that western imports could fall
by 25 to 30 percent. The Soviets have already concluded numerous
long term syndicated loans worth $1 billion in 1986, three of which
were over subscribed. The Soviet Union can be expected to borrow
$1-2 billion per year over the next few years. (S)
Increased gold sales have the best potential for a significant
increase in revenues. In the first quarter of 1986 the Soviets sold
100 tons of gold (75 tons in direct sales to the Japanese government)
totaling $1.1 billion. The Soviets may try to increase direct sales
and bilateral gold swaps to avoid dealing in the international gold
exchanges. One of the Soviet's wholly-owned western based banks,
Moscow Narodny Bank (MNB) in London, has been ordered to sell as much
gold as possible short of allowing the price to drop. According to
some analysts the Soviets could sell as much as 450 tons this year
without affecting market prices, and thereby raise at least $3
billion. (S)
The Soviets can also be expected to follow a plan of segmenting
the financial markets through borrowings from a variety of sources.
This would both obscure their debt position and prevent their credit
rating to slip in any one of the available markets. No one source
will provide the Soviets with a large increase in funds. Moreover,
exploiting them will require a high, sustained level of flexibility
and sophistication. (S)
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Third party borrowings involving Soviet owned banks in the
west could increase the Soviet's access to hard currency funds.
Through a series of complicated transactions involving non-BIS banks,
Soviet-owned banks in the west could borrow funds in the interbank
market that would ultimately show up as deposits of the Soviet Union.
No evidence exists that the Soviets have made significant use of this
source of funds. Given the Soviet Union's high credit ratings, such
short-term borrowings don't provide significant amounts of lower
interest credit compared to standard long-term syndicated loans. (S)
Another example of the Soviet's increased sophistication in the
international capital markets is demonstrated in the increased use of
ECU denominated borrowings in 1985. Such loans help cushion against
the swings in an erratic foreign exchange market. (s)
The Soviet Union is also increasing its activity in the forfait
market using indirect supplier credits. This secondary market allows
western exporters to sell Soviet issued notes for a discount in
exchange for immediate cash payment. (S)
The Soviets have also used clearing account arrangements with
other non-CEMA nations willing to pass on hard currency imports for
credit on such accounts. (S)
In the area of the Eurocurrency markets, the Soviets recently
helped underwrite a syndicated bond offering in which it assumed
about $3 million worth of the total of $100 million. This
reflects an acknowledgment by Soviet Foreign Trade Bank officials
of the need for Soviet-owned banks to remain active in the
international capital markets on the investment side to maintain
the viability of these banks. Although the Soviets have yet to issue
any instruments in western financial bond markets, recent information
point to a possible Soviet dollar or yen denominated bond offering in
the Japanese markets. (S)
In order to better take advantage of the range of financing
options available, the Soviet Union is seeking to increase its
participation in international financial markets through foreign
based financial entities. The Soviets are reportedly interested
in establishing a joint Soviet-Arab bank in Bahrain as well as
joint banking operations in Kuwait (which is presently negotiating
with the Soviet Union a $150 million loan) and in other important
financial centers. The Soviets are also attempting to increase ties
to western bankers through consultations and investment banking
relationships to provide Soviet personnel experience in portfolio
investment. (S)
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Despite the Soviet's best efforts, it is not likely that they
will be able to generate much more than an additional $1.5-3 billion
in hard currency revenues, all but $500 million from gold sales.
Reducing hard currency imports ill be necessary to make-up the better
part of the $6 billion hard currency export earnings shortfall the
Soviet Union will face in 1986. Soviet reluctance to increase
borrowings beyond the levels indicated represent the Soviet's concern
to maintain a high credit rating among western bankers and to avoid
even the perception of dependence on the west for financing. The
balance can be made up through suppressed imports of non-critical
goods. (S)
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Settlement of UK-Soviet Financial Claims
On July 15, 1986 the Soviet Union and the United Kingdom signed
an agreement settling outstanding claims by both parties arising
before 1939. Under the agreement both sides waived their respective
claims, thus unlocking 45 million pounds from a frozen Russian
account in the United Kingdom to settle 400 million pounds in private
UK claims arising primarily from Tsarist bonds issued before October
1917. United Kingdom claimants may receive as little as 10 percent
of the value of outstanding claims. (u)
Another 2.65 million pounds were released to the Soviet Union
from a separate account used to handle diplomatic expenses. (U)
Initial speculation was that this agreement was a precursor to
active Soviet participation in the London Eurobond market. Except
for a small participation in a syndicated bond offering by a Finnish
entity (see below), the Soviets have yet to make an offering of their
own in the bond markets. Within recent days the Soviets have
indicated an interest in exploring resolution of outstanding
defaulted bond claims in the United States. (S)
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Soviet Interest in Joint Ventures
Current Soviet interest in "new forms of economic cooperation"
with foreign firms, including joint ventures, surfaced in
endemic problems of the Soviet economy and the sharp reduction in
ventures appears to have been made at the top earlier this year, the
Soviets are far from decided on how to proceed. Therefore, Soviet
plans for joint ventures will become known only as decisions are made
over the next several years. (U)
Most of what we know comes from reported statements by Soviet
officials to foreign businessmen and government officials. The
of September 24, 1986, "On Meesures to Improve the Management of
of new forms of economic relations with firms in capitalist
countries, including cooperation in the scientific, technical, and
productions fields, and the setting up of joint enterprises," but
provides no further details. Considerably less attention is given to
cooperation with Western firms, in fact, than to joint ventures with
enterprises of CEMA countries, which are covered in a companion
resolution. (U)
Efforts to implement the joint venture decision have proceeded on
two parallel tracks to date. (C)
On the one track have been the analytic efforts of key government
bureaucracies which are garnering information about joint venture and
drafting regulations for Politburo approval. Three competing
Committee on Science and Technology, and the State Planning
Committee--have been talked with analysis and, possibly, drafting of
legislation. Presumably, the newly established state Foreign Economic
Commission of the Council of Ministers will now have a hand in the
issue also. (C)
Requests for information and recommendations went out to Western
business organizations (such as the U.S.-U.S.S.R. Trade and Economic
Council and the U.S. Department of Commerce). Presumably, analyses
also are being made of the Yugoslav, Chinese, and East European
experience, among whom only the East Germans have not adopted a joint
venture law. (C)
On the other track, the Soviets have been inviting proposals from
Western firms for joint ventures. Officials at the Soviet Trade
Representation in the United States believe that drafting of a of a
joint venture law and negotiations with Western companies will
proceed in parallel. Western company proposals would provide a
pragmatic guide against which to measure and decide among regulations
being proposed by the Soviet bureaucracies and also would provide
"instant success" for the regulations once promulgated. Without
adoption of regulations, however, projects are unlikely to get beyond
the proposal stage. (C)
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The Soviets have expressed interested in entering into joint
ventures both in the U.S.S.R. and abroad. The latter already have
some precedent, such as the Soviet-American fishing joint
venture Marine Resources, and would require far less adjustment
to their economic system than internal ventures. (U)
Domestically, the Soviets are likely to seek joint production and
marketing arrangements with Western companies involving some
sharing of managerial responsibility. They may even enter into joint
ventures, which are commonly defined by experts as involving three
elements: joint management, joint capital contribution, and
risk/profit sharing. Any joint venture arrangement is likely to be a
contractual joint venture, in which rights are established by
contract rather than by ownership. Equity joint ventures, in which
foreigners own elements of the enterprise, are not possible under the
Soviet constitution. (U)
According to Soviet announcements, a foreign partner will be able
to have capital participation up to 49 percent, eligibility for tax
concessions, the ability to repatriate or reinvest profits, and the
opportunity to exercise managerial and quality control. The Soviet
partner will have to be an "approved enterprise." They will probably
be selected from the more than 20 ministries and 70 enterprises which
are to have the right to engage directly in exporting and importing
as of January 1, 1987. Joint ventures are supposed to be free of the
national economic plan and are to operate in a "balanced manner"
(probably meaning that hard currency earnings will have to equal
imports paid for with hard currency). (U)
Soviet officials have reportedly told some Japanese companies
that they hope to conclude joint venture agreements by the fall of
1987. Before that, however, a myriad of complex decisions concerning
capital contribution, management, taxation, pricing, labor and wages,
materials supply, financing, and marketing need to be made. In view
of their uncertainty as to how to proceed and the reorganization of
foreign trade now getting underway, it seems likely that it will be
several years before joint venture agreements are concluded on any
scale. (C)
Soviet Motivations. While the Soviets discussed joint ventures in
the late 1970's, their interest was never great, largely because they
felt their economy was doing fine and because rising prices for
energy exports made it possible to maintain the level of imports they
desired. Now, because of a sharp decline in export earnings
resulting from the fall in oil prices, there is a dramatic new need
for the Soviets to increase exports, and to substitute for imports.
In contrast to the 1970's, there is also a widespread conviction that
the economic mechanism needs significant change. (U)
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During the 1970's, Soviet leaders referred repeatedly to the need
to make a transition from being an exporter overwhelmingly of raw and
semiprocessed materials to an exporter of manufactured goods. They
desired the higher prestige accorded to exporters of industrial
goods, as opposed to fuels and materials, and the advantages which
they perceived accruing to exporters of value-added goods. Yet they
did virtually nothing, and the structure of their exports did not
change over the last fifteen years. Reportedly, the Soviets plan to
exclude raw material extraction from joint ventures, and are trying
to focus on ways to increase exports of manufactured goods for hard
currency. (S)
In the past, the Soviets have acquired production capacity
through purchase of equipment, technology, licenses, entire turn-key
plants and compensation deals. Turn-key plants provided them with
equipment, technology, and start-up assistance. Compensation deals,
such as the fertilizer exchange arrangement with Occidental
Petroleum, provided turn-key plants, credits for the purchase of the
plants, and export earnings to repay the credits and cover further
purchases of plant and materials from Western companies. (U)
In many cases, however, imports of Western equipment and
technology did not lead to the increases expected by the Soviets in
exports of manufactured goods, or modernization of products.
Sometimes, when the end product went into production it was already
outdated by Western standards, there were no marketing channels for
it, or the products became subject to dumping charges. (U)
Undoubtedly the Soviets hope that the quality, sophistication,
and modernity of the production technology that they acquire from
the West will be higher in a joint venture, where the foreign partner
has a stake in the enterprise using it, and that the Western partner
will be motivated to update that technology over time in order to
maintain the competitiveness of the enterprise. Joint ventures also
could allow the Soviets access to technological and managerial
know-how that are not easily transferred through equipment sales.
(U)
There are other motives as well for the Soviets. They probably
hope that investment by Western companies will provide another source
of capital for them. Joint ventures also fit in with their hopes for
encouraging Siberian development and expanded economic activity in
the Pacific Basin, where for ten years they have been pursuing a
Sakhalin oil and gas development project with the Japanese. Improving
the availability and quality of consumer goods also may be sought in
this fashion, with one report suggesting that the main thrust in
joint ventures will be consumer goods. (C)
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The move to joint ventures is thus the next stage in the Soviet
search for more productive interaction with Western companies.
Whether it will answer any better than the earlier arrangements or be
any more successful in attracting Western producers than have Eastern
European attempts will depend on how far the Soviets are willing to
open their economy, how attractive conditions will be for Western
companies, and the policies of Western governments. (C)
Policy Questions for Soviets. The Soviets will have many problems to
solve in meshing joint ventures with their economy. For example,
potential Western partners will want to have access to the Soviet
market, and the Soviets will have to decide how to allow joint
ventures to compete with domestic concerns. (U)
Many of the qualities of a successful joint venture are at odds
with traditional Soviet philosophy and way of doing things. True
joint ventures require adaptation of foreign ideas and methods of
management and marketing. Large joint ventures with foreign
partners sharing in decisionmaking would create a significant degree
of contact between foreign company officials and local managers and,
possibly, workers, something Soviet decisionmakers have gone to great
lengths over the years to avoid. (U)
The key to success for joint ventures in the Soviet Union will be
the degree to which the Soviets are willing to allow the ventures
decisionmaking freedom and direct contact with Soviet workers and
enterprises. Since this is in conflict with Soviet ideology and past
practice, it will be difficult for the Soviets to allow the extent of
change needed. The Soviets probably are not cognizant of the
importance of this point, and may be dismayed when they discover what
will be required to persuade Western firms to conclude significant
joint venture agreements. Without significant pressure from the
highest levels, they are likely to offer only reluctantly and
gradually some of the incentives and features foreign firms will
want. (C)
Response from Western Firms. The full-scale of Soviet approaches to
Western firms is not known. Among firms reportedly approached were:
a Danish firm for a textile production joint venture in Estonia; a
Western firm of unknown nationality for processing of Soviet titanium
sponge; Japanese firms for joint ventures in lumber, cutting-tool
production, fisheries products processing, and production of rice
based snack foods; and American firms in chemicals and agri-business.
A joint venture for paper making reportedly already has been
concluded with a Finnish firm, although from the sketchy information
available it may be more of a compensation deal than a true joint
venture. (S)
Many of the Western companies operating in the Soviet market are
likely to be willing to discuss joint ventures with the Soviets.
They will probably consider this necessary if they are to maintain
good relations with Soviet purchasers in order to continue or expand
their export sales to the Soviet market. (U)
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Firms are likely to proceed quite slowly, however, in actually
concluding joint venture agreements which involve investment of
significant company resources. They will have to make comparisons
with investment opportunities elsewhere and consider political
uncertainties. With the Soviets, companies will be starting from
scratch in designing arrangements for joint management, repatriation
of profits, sharing technology, marketing outside the plan in the
domestic market, valuation in convertible currency of foreign and
domestic inputs, limited liability for foreign partners, and free
trade zones. (U)
Western firms have responded in a very limited manner to
invitations from Eastern European countries to participate in joint
ventures. As a result, joint ventures in Eastern Europe have not
brought about increased flow of technology or capital. (U)
Negotiations of joint venture agreements will probably be
protracted, and only small ones are likely to be created at first. At
least initially, the Soviets will offer very little, and they will
demand a great deal, such as substantial export performance clauses.
As a result, Western companies probably participate on only a limited
basis. The first agreements will probably be signed by companies
whose leaders have a special interest in the Soviet market and
encouragement from their governments. (C)
Soviet Contacts with Western Governments. The Soviets have mentioned
their interest in joint ventures to government officials in several
Western countries, including the United States, Japan, and Sweden.
Generally, Western officials have expressed interest in Soviet
intentions, without stating support or opposition. (C)
Under Secretary of Commerce Bruce Smart emphasized that the
Soviets should limit their consideration of joint ventures to
non-strategic areas, when he met in September with U.S.S.R. State
Committee for Science and Technology deputy chairman Kirill Dyumayev.
In response to an earlier Soviet request, Commerce provided the them
with some Departmental publications on the international climate for
investment, methods for attracting investment to local communities,
and U.S. foreign trade zones. Commerce reminded the Soviets that
firms conducting operations in the United States would have to comply
with applicable U.S. laws and regulations, including those governing
transfer of technology and equipment. (C)
As Soviet consideration of joint ventures continues, the United
States and other Western countries will need to ensure that
consideration of joint ventures by Western companies does not
undercut policies designed to prevent export to the U.S.S.R. of
strategic technology and imports at less than fair value. (C)
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A review will be required of relevant U.S. policies, laws, and
regulations, such as travel controls; policy on Soviet purchase of
property in the United States; Export Administration Act and Export
Administration Regulations; Department of Defense Industrial Security
Program; import legislation and procedures; and financial controls.
(C)
A review of experience with joint ventures in Eastern European
countries and China will help to assess the outlook for joint
ventures in the Soviet Union and what is needed for effective
administration of strategic trade controls and import controls. (C)
The USSR's International Economic Security Initiative
Soviet Foreign Minister Shevardnadze's 23 September address to
the United Nations General Assembly included as strong pitch to
establish a new, comprehensive system of international security--the
Soviet theme that ties together all of Gorbachev's disparate
disarmament and foreign policy initiatives. Included in the Foreign
Minister's speech is a call to establish economic vehicles to channel
assistance to Third World countries and to develop a global
scientific and technical cooperation program. Both efforts
presumably would be carried out under UN auspices. The Soviets have
formally introduced a proposal to this effect for consideration at
this years UNGA. Economic security, however, is only one small
element in the proposal--the reference to it is vague and debt is the
only area specifically mentioned. (C)
The Soviets first broached their ideas about an economic security
initiative in general terms at the United Nations last year. On 17
December 1985 they achieved passage of a UNGA resolution requesting
the Secretary General to prepare a study on a system for
international economic security to present at the 42nd General
Assembly in 1987. At ECOSOC at Geneva in July they submitted a
resolution calling upon the Secretary General to identify in that
study concrete problems and to propose action-oriented
recommendations for dealing with them. Only Syria cosponsored and
most developing countries seemed unenthusiastic. (U)
Soviet interest in pursuing a multilateral approach to global
security problems stems form ideas detailed in Secretary General
Gorbachev's report to the Party Congress last February.
Unfortunately, the Foreign Minister's UNGA statement sheds no
additional light on the Soviet proposal beyond what was offered last
February. As outlined by Gorbachev, the security initiative has four
elements:
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o A military sphere calling for renunciation by the
nuclear or conventional war, a variety of arms control
agreements, and a mechanism to effect proportional,
balanced reductions in military budgets;
o A political framework for confidence building measures
and Helsinki type agreements to ban the use of force in
international relations, and drawing up effective
methods for preventing international terrorism;
o A humanitarian component to provide a vehicle to combat
"apartheid and fascism" as well as an apparent
willingness to resolve family and other human rights
cases;
o An economic segment to establish a system of equal
economic security, remove economic blockages and handle
economic sanctions, and create vehicles to handle the
international debt problems. Included in this proposal
is an effort to draw up principles to govern the use of
part of the funds released from military budget
reductions to provide LDC's some economic relief. (C)
None of these ideas is new. For the economic items, the Soviets
simply have resurrected outdated north-south themes--areas where
Soviet economic interests are small and the prospects for political
visibility are high. By weaving them together in one overall
framework, however, the Soviets are trying to create an illusion of
newness and to lend concreteness to what Gorbachev calls "new
political thinking" embodied in a series of proposals dating back to
early 1986. The Shevardnadze speech is the most recent opportunity
for the Soviets to plug their proposed security program. The regional
and functional proposals that encompass Moscow's program include:
o The 15 January plan for the elimination of nuclear
weapons by the year 2000;
o Shevardnadze's mid January letter to the UN calling for
a worldwide congress on the problems of economic
security, subsequently reiterated in Gorbachev's party
congress speech;
o The April Soviet statement on the Asian-Pacific Region
which called for confidence building measure and a
reduction of naval activities in the Pacific,
supplemented by the Secretary General's Vladivostok
proposal;
o The 11 June "Budapest" proposal for conventional
disarmament in Europe;
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The 11 June letter to the UN Secretary General outlining
a Soviet plan for a new world space organization and a
"star peace program"
o The Foreign Minister's 8 July letter to the UN proposing
an international conference on the Mediterranean and a
negotiated withdrawal of the US and Soviet fleets. (C)
It remains open how serious the Soviets are about pushing their
economic security initiative. Soviet officials privately have
portrayed the proposal as a responsible initial bid to move economic
issues of concern to Moscow into the international arena. (C)
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