(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000707200001-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 36
• Document Creation Date: January 12, 2017
• Document Release Date: October 6, 2010
• Sequence Number: 1
• Publication Date: October 5, 1984
• Content Type: REPORT

Directorate of Scerct
Intelligence
Weekly
International
Economic & Energy
See, et
DI JEEW 84-040
5 October 1984
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COPY 694
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Secret
International
Economic & Energy
Weekly
iii Synopsis
1 Perspective-Implications of the IMF/IBRD Annual Meetings
Energy
International Finance
Global and Regional Developments
National Developments
13 Nicaragua: Declining Levels of Foreign Assistance
17 Israel: Growing Union Militancy
21 USSR: Dependence on Western Equipment for Oil and Gas Development
25 India: Defense and Development
29 Vietnam: The Empty Foreign Exchange Till
Comments and queries regarding this publication are welcome. They may be
Directorate of Intelligence
Secret
5 October 1984
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Secret
International
Economic & Energy
Weekly
Synopsis
1 / Perspective-Implications of the IMF/IBRD Annual Meetings
The joint annual meetings of the IMF and IBRD ended last week with a
feeling of optimism among members of the international financial community.
13 Nicaragua: Declining Levels-of Foreign Assistance
Most developed and Latin nations will continue to scale back aid as their
government leaders become more pessimistic about their ability to buy
political moderation in Managua. Although support from Communist nations
is expanding substantially, we do not believe that it will fully compensate for
the loss of Western and Latin funds.
17 Israel: Growing Union Militancy
The new Israeli Government cannot carry out any effective austerity program
without the cooperation of the Histadrut, the powerful trade union organiza-
tion. Histadrut leaders acknowledge the need for emergency measures to deal
with Israel's rapidly declining foreign exchange reserves and 400-percent
inflation rate. Histadrut leaders are coming under growing pressure, however,
from younger union militants demanding more aggressive protection of worker
interests
21 USSR: Dependence on Western Equipment for Oil and Gas Development
Although the USSR has relied largely on domestic equipment in the produc-
tion of crude oil and natural gas, it has turned to the West for selected high-
quality equipment. Any embargo of technology by the developed West would
raise Soviet costs and entail delays of 18 to 36 months before alternative
supplies emerge.
25 India: Defense and Development
India has undertaken a massive modernization of its armed forces-fourth
largest in the world-without straining its economy or hampering its develop-
ment programs. Any increasing flow of more sophisticated and costly weapons
from the Soviet Union and Western suppliers, however, is likely to aggravate
India's foreign payments problems later in the 1980s.
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DI IEEW 84-040
5 October 1984
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29 Vietnam: The Empty Foreign Exchange Till
Rapidly growing obligations on its $1.5 billion hard-currency foreign debt,
combined with a dismal export performance, have produced Vietnam's worst
foreign exchange shortage since the formal reunification of the country in
1976. A multilateral debt rescheduling remains unlikely as long as Hanoi
refuses to adopt an IMF-supported austerity program and move ahead with
economic reforms.
Secret
DI IEEW 84-040
5 October 1984
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Secret
International
Economic & Energy
Weekly
Perspective Implications of the IMF/IBRD Annual Meetings
The joint annual meetings of the IMF and IBRD ended last week with a
feeling of optimism among members of the international financial community.
A number of proposals were discussed and acted upon during the formal
sessions, but the most significant developments occurred just before the start of
the meetings. These events included a developed country proposal for a debt
conference next spring and the signing of IMF letters of intent by Argentina
and the Philippines.
The convening of a debt conference-which has long been advocated by
Mexico-was proposed by the United Kingdom at a meeting of G-10 finance
ministers in Washington and at a meeting of Commonwealth finance ministers
in Toronto during the week preceding the IMF/IBRD meetings. The
initiative:
? Emphasized the need for creditors and debtors to discuss in a medium-term
context external indebtedness, international capital flows, trade policies, and
the role of surveillance in dealing with these issues.
? Underlined the importance of preparing now for the next phase of the debt
crisis-restoration of LDC growth and development.
The IMF's Interim Committee endorsed the proposal and agreed to use the
Committee's meeting next spring for the discussion.
Agreement by Argentina and the Philippines to initial letters of intent with the
Fund ended long and arduous negotiations with the two financially troubled
countries. Following on the heels of the Mexican and Venezuelan debt
restructurings, creditors-particularly commercial banks-were pleased that
the current case-by-case approach to the debt problem is working. They
emphasized, however, that they expect further difficult negotiations among
themselves over new money and rescheduling for Argentina and the Philip-
pines.
The recent developments have eased tensions between debtors and creditors.
At a time when debtor countries are seeking to politicize the debt issue and
move it beyond the plane of basic creditor-debtor negotiations, the internation-
al financial community was able to point out the bright spots of the debt
situation and illustrate that the issue is being handled. The call for the debt
conference was strategically timed in that it both answered and defused
debtors' calls for more drastic actions. Moreover, major US banks lowered the
prime interest rate by 0.25 to 0.5 percentage point last week, answering
another major complaint of debtors.
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DI IEEW 84-040
5 October 1984
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Now that the major creditor governments have expressed their commitment to
deal with the longer term aspects of the global debt situation, they have their
work cut out for them. The establishment of a debt meeting under the auspices
of the IMF next spring has bought some time, but creditors must work to re-
solve some of the problems facing debt-troubled countries or face a renewed
round of debtor calls for more radical action. Among the issues that must be
dealt with are protectionism, increased loans, aid, and investment.to develop-
ing countries, and global interest rates.
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Secret
Spot Oil
Market Trends
Energy
Spot crude oil prices have crept up slowly in the last few weeks, with prices for
most crudes gaining 5 cents to 10 cents per barrel over the month of
September. The spot price for Arab Light approximated $28 per barrel in
early October-compared with its official price of $29-and spot prices for
light African and North Sea crudes are now about $28.50 per barrel, about
$1.50 below official levels. Spot prices for West Texas Intermediate have risen
about 50 cents per barrel over.the month; most of this increase probably is due
to preliminary oil-inventory rebuilding following the onset of cooler weather.
Preliminary data indicate that in recent months commercial oil stocks have
held steady or declined slightly, compared with the normal seasonal third-
quarter increase. As a result, inventories are about 3 to 5 percent below usual
levels, and, as long as OPEC production does not significantly exceed demand,
we expect spot prices to continue to strengthen in coming weeks as buyers
Nigeria Bids for
Another Production
Increase
Algerian-French
Gas Agreement
move to replenish stocks. 0 25X1
OPEC in September.
granted Nigeria an increase of 100,000 barrels per day (b/d) above its assigned
quota of 1.3 million b/d in August and a 150,000-b/d increase in September.
Lagos was unable to take advantage of OPEC's reprieve in August, however,
and oil output fell 250,000 b/d short of the target. As a result, Lagos in
September resorted to aggressive marketing tactics, including bartering oil for
$1 billion worth of Brazilian goods and equipment-a departure from its usual
practice. Nigeria's output increased to the 1.45-million-b/d level allotted by
If demand for OPEC oil remains weak in October, we believe Nigeria will
meet strong resistance to an extension of its quota increase. Libya's representa-
tive to OPEC recently stated that Nigeria's reprieve was temporary
Sonatrach, the Algerian state oil and gas corporation, and the French utility,
Gaz de France,, have reached an agreement that allows for a 10-percent
reduction in the volume of LNG that France was previously scheduled to
import from Algeria, according to US Embassy reporting. High-ranking
French officials have indicated that the agreement does not involve any price
adjustments-Gaz de France is currently paying about $4.40 per million Btu
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Strong US Dollar
Increases Crude Oil
Costs
natural gas suppliers over the long term.
including transportation and regasification-and that the question of Gaz de
France's making up contractual volumes at a later date remains open to
further discussion. The agreement reduces Gaz de France's annual contractual
commitment of 9.1 billion cubic meters (bcm) by about 1 bcm and will help
ease the current gas glut in France. The press reports that the utility's natural
gas stocks exceeded normal levels by about 1 bcm last year, costing the
company about $20 million to finance. The agreement reflects an apparent
willingness on the part of the Algerians to make concessions rather than
jeopardize relations with their largest customers and risk losing them to other
percent increase in oil demand.
The continued strength of the US dollar is still a major factor limiting oil de-
mand in the developed countries. In March 1983, OPEC reduced crude oil
prices by $5 per barrel to stimulate demand for oil and economic recovery. Be-
cause crude oil prices are denominated in US dollars, however, the apprecia-
tion of the dollar against West European currencies has largely offset lower
dollar crude oil prices. Partially as a result of these increases, West European
oil demand grew by less than 0.5 percent in first half 1984. In contrast,
Japanese yen crude costs have declined 13 percent, contributing to an 8-
Crude Oil Cost Per Barrel National Currency
February
1983
April
1983
August
1984
Percent Change
August 1984/
February 1983
US (Saudi benchmark, US dollar)
34
29
29
-14.7
Japan (yen)
8,032
6,894
7,018
-12.6
France (franc)
234
212
258
10.0
West Germany (DM)
82
71
84
1.6
Italy (lira)
47,532
42,120
51,852
9.1
United Kingdom (L)
22
19
22
-0.5
Greece (drachma)
2,841
2,436
3,341
17.6
Netherlands (guilder)
91
80
94
3.8
Norway (Nkr)
242
207
240
-0.7
Spain (peseta)
4,412
3,940
4,791
8.6
Sweden (Skr)
253
217
241
-4.7
Turkey (lira)
6,622
6,007
11,248
69.8
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Secret
Turkish-Iraqi Pipeline
The Turkish State Petroleum Pipeline Company (BOTAS) expects to award
preliminary design contracts in October for a second Iraq-Turkey crude oil
pipeline, according to the US Embassy in Ankara. Turkish officials say the
line will add 500,000 to 800,000 b/d to the existing capacity of 1 million b/d
for Iraqi crude oil shipments through Turkey, and will be economical even if
the Iraqi-Saudi pipeline is built and the Persian Gulf is reopened to Iraqi
exports. Bidders have been asked to include financing plans in their proposals.
Turkish enthusiasm for greater revenues from transit fees on Iraqi crude
probably has caused BOTAS to take the lead in soliciting bids for this project.
For its part, Baghdad is preoccupied with the Iraqi-Saudi pipeline. Moreover,
even if the Turkish pipeline is built, Iraq's need for favorable financing is likely
Construction of New
Soviet Oil Production
Platforms
Australian Coal To Be Australian coal is being shipped to China for the first time in 45 years. Press
Shipped To China
to delay Ankara's proposed January 1987 completion.
The Soviets have begun constructing offshore oil production platforms at their 25X1
new construction yard at Primorsk, although production buildings are not yet
operational roduction platforms being
assembled manually. The new yard, the largest of its kind in the world, is be-
ing constructed with French technical assistance and will use French equip- 25X1
ment. Annual capacity is estimated to be at least four deepwater platforms
when the yard is fully operational, probably by late 1985. The output from this
yard will greatly enhance Soviet capabilities for the production of oil and
natural gas in deepwater areas of the Caspian Sea. 25X1
reports indicate that BP Australia recently signed an estimated $9 million
contract to export steam coal to the People's Republic of China. The reports 25X1
state that 250,000 metric tons will be shipped by the end of this year, and an
additional 750,000 tons may be shipped in 1985. China is attempting to
expand coal production and to develop a coal export capacity. Thus, we believe
the deal is only an interim arrangement to meet essential needs. The contract
underscores Australia's aggressive marketing efforts. Coal exports in 1984 are
expected to exceed last year's record level of 61 million tons. 25X1
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 International Finance
Argentine Financial Argentina's accord with the IMF will stave off the worst of the country's
Update financial problems for now, but difficult negotiations with commercial credi-
tors lie ahead. Buenos Aires will gain access to up to $1.6 billion in IMF lend-
ing once the Fund formally approves the stabilization package finally ham-
mered out in September. According to the press, IMF Managing Director de
Larosiere told the Argentines that he would recommend approval of the
program if the country's creditors are willing to provide sufficient funding in
support.
Late last month, Argentina repaid a $100 million bridge loan
extended by US banks in March and $100 million toward the $1 billion in in-
terest arrearages. Because of the Argentine actions, the banks agreed to roll
over a $750 million bridge loan until 15 January and to open negotiations on
rescheduling debts and new money. In the interim, Buenos Aires faces the
difficult task of complying with its IMF program.
Senegal-IMF
President Diouf's recent decision not to raise rice prices this year will defer any
Negotiations Stalled possible IMF standby agreement until at'least early 1985. The US Embassy
estimates that, without a Fund program. and accompanying financial relief
from donors and international creditors, Senegal will face a financing gap of
nearly $100 million by yearend and fall further behind in meeting foreign debt
obligations. Dakar reportedly is counting heavily on Saudi Arabia to provide
about $50 million in budgetary support, but-according to IMF staffers-the
Saudis are unlikely to disburse funds until Dakar comes to terms with the
Fund. We believe that, at least for now, Diouf would rather face the loss of
outside financial aid than risk adverse popular reaction to further food-price
hikes as he prepares for local government elections this fall.
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Global and Regional Developments
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Secret
Komatsu:
Production in the
United States
EC-China Trade
Accord Signed
West European
Stock Prices Rise
USSR-Morocco
Relations Warming
double its share of the US market in the next five years.
Japan's Komatsu Limited, the world's second-largest heavy equipment manu-
facturer after Caterpiller Tractor, plans to build bulldozers and other con-
struction.machinery in the United States. According to press reports, Komatsu
is negotiating with several US construction-machinery firms to acquire
existing manufacturing facilities and distribution links; if an agreement cannot
be reached, Komatsu may build its own plant. The move underscores
Komatsu's desire to increase its market share in the United States. It has 15
percent of the international construction-machinery market, but only 7 percent
of.the US market because of high transport costs and its limited dealer
network.. By establishing a US manufacturing base, Komatsu is aiming to
The European Community and China have concluded a second five-year trade
agreement that establishes a broad framework for expanding economic
relations but does not include specific deals or dollar amounts. The accord calls
for increased investment opportunities for EC businessmen in China and
foresees economic cooperation in agriculture, energy, and high technology.
The Ten reaffirmed their intent to expand economic aid to Beijing, which last
year totaled less than $5 million, but the near-bankrupt Community was
unable to commit specific sums. Since the 1978 agreement, which extended
reciprocal MFN treatment, total EC-China trade has grown about 50 percent
to about $4.8 billion in 1983, with the balance slightly in favor of the
Community. Major EC imports from China include textiles, clothing, and
agricultural products; exports are mainly machinery, steel, and chemicals.
market, prices on the Frankfurt exchange increased 4.6 percent.
Stock prices on the major West European exchanges rose in the third quarter.
Gains were concentrated in export-oriented firms, particularly those benefiting
from the dollar's rise and from continued strength in US import demand.
According to the Financial Times All-Share Index, prices on the London
exchange rose 9.8 percent, surpassing the 8.4-percent increase posted by New
York's Standard & Poor's 500-stock index. Almost every stock with good
export prospects gained in London. Consumer-oriented companies with strong
markets in the United States fared particularly well on the Paris Bourse,
pushing up the index by 5.3 percent. Led by chemical, machine-tool, and
automotive firms that account for much of West Germany's exports to the US
Rabat's foreign trade but supplies 20 percent of its oil.
A visiting Soviet. trade delegation is receiving unusually prominent press
coverage and attention from high-level Moroccan officials, according to the
US Embassy in Rabat. The two sides reportedly signed protocols to revive both
a previous trade. agreement and a joint venture to develop Moroccan phos-
phate. Meanwhile, discussions.are continuing on a broader oil-supply arrange-
ment and an agreement to increase trade. The USSR accounts for 4 percent of
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Soviet trade delegations have made annual visits to Morocco for many years.
King Hassan probably arranged the increased press attention this year to
demonstrate his eagerness to address deteriorating social and economic
conditions. He also wants to improve trade with Moscow, particularly the sale
of phosphates-Morocco's primary export-because of the growing trade
deficit with Moscow and the weak international market for phosphates.
Mexico Increases
Exports to Cuba
Mexico's drive to increase exports to Cuba is working. First-quarter 1984
exports to Cuba reached $18 million; twice last year's average quarterly level.
Expanded trade credits, which now total $90 million, are the primary factor
boosting sales of light manufactures, including copper wire and clothing.
Nevertheless, even with the recent surge in sales, Mexican exports to Cuba still
constitute only 0.3 percent of Mexico's total merchandise exports.
While Cuba lacks the market and hard currency to become a major importer
of Mexican goods, Mexico City will continue broadening its trade relations
with Havana. In part, this reflects Mexico's efforts to maintain its nonaligned
credentials. Mexico City and Havana currently are negotiating an expanded
bilateral trade pact to include tariff reductions and other measures to facilitate
trade.
National Developments
Developed Countries
British Concern
About Unemployment
In a speech before the IMF last week, Chancellor of the Exchequer Nigel
Lawson announced that the British Government will give top priority to the
battle against unemployment, which is still rising toward 13 percent despite
the economic recovery. New government measures will be consistent with
Thatcher's noninterventionist strategy for managing the economy. Under
consideration is a further deregulation of both labor and product markets to
improve economic efficiency and spur job creation. Wage restraint will
continue to be encouraged to stem the negative effect of rising labor costs on
employment. Specific job-creation programs probably will not be considered.
Government officials believe that this could jeopardize progress made so far in
reducing government spending, inflation, and interest rates.
Icelandic Labor
Troubles
A growing number of labor disputes-newspaper printers and some state
employees and teachers are already on strike-are disrupting the Icelandic
economy. Union leaders are reopening industry agreements under the compre-
hensive 13.8-percent wage settlement negotiated with the government last
February. Labor is demanding additional wage increases of 8 to 30 percent to
compensate for losses since indexation was abolished in 1983. The center-right
coalition government is threatening to mandate wage settlements to deter more
strikes despite fears that such a move could provoke a crisis within the
coalition.
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Secret
NICs' Trade Surplus
With Big Seven
Increases
Less Developed Countries
Korea followed with increases of 37 and 35 percent, respectively.
exports cut Singapore's first-half deficit to $1.8 billion. Taiwan and South
The six newly industrializing countries' (NICs) trade surplus with the Big
Seven rose over 70 percent in first half 1984, reaching $9.7 billion. Most of the
increase reflected gains by Brazil and Taiwan. Trade statistics for the Big
Seven show that NIC exports to the Big Seven were up 25 percent from a year
earlier; imports increased only 16 percent. While Singapore and South Korea
are the only NICs with trade deficits with the Big Seven, a 40-percent jump in
NICs: First-Half Trade Balance With
Big Seven a
First Half
First Half
1983
1984
1983
1984
NICs
Imports
5.4
7.0
Exports
35.5
44.5
Balance
4.4
3.8
Imports
29.9
34.8
Singapore
Balance
5.6
9.7
Exports
2.5
3.5
Brazil
Imports
5.3
5.3
Exports
5.2
6.7
Balance
-2.8
-1.8
Imports
2.8
2.9
South Korea
Balance
2.4
3.8
Exports
5.5
7.4
Hong Kong
Imports
6.5
7.7
Exports
5.1
6.0
Balance
-1.0
-0.3
Imports
4.9
6.0
Taiwan
Balance
0.2
0.0
Exports
7.4
10.1
Mexico
Imports
5.0
5.9
Exports
9.8
10.8
Balance
2.4
4.2
a Both import and export data are valued f.o.b. NIC exports were
derived by dividing Big Seven imports from the NICs by 1.1; NIC
imports were obtained by using Big Seven export data.
Drought Cuts
Pakistan's
Wheat Harvest
Drought reduced wheat production by 10 percent to 11 milliion tons during the
fiscal year that ended 30 June. The drop in output already is causing higher
prices-wholesale wheat prices in Lahore have increased by 16 percent from a
year earlier and open-market prices for flour in Karachi are about 50 percent
above the price in government ration shops. The government is planning to
fulfill its export commitment to Iran but is not making additional export sales.
Islamabad claims the bad harvest will make advances of wheat to the Afghan
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Malaysian Bank
Rescue Attempt
caused by a decline in workers' remittances.
refugees more difficult. The US agricultural attache believes the government
will have to import 600,000 tons of wheat to supply ration shops, maintain ade-
quate buffer stocks, and retain some flexibility to moderate price increases.
The adverse trade impact will add to the deterioration in the current account
Malaysia's national oil company, Petronas, plans to acquire the financially
troubled Bank Bumiputra-the country's largest commercial bank-from
another government corporation. Malaysian officials hope the takeover by the
highly profitable Petronas will strengthen public confidence in the bank, which
last July assumed responsibility for about $1 billion in bad loans incurred by
its Hong Kong subsidiary. The bailout, however, faces possible legal obstacles.
Opposition politicians and a leading Malaysian lawyer contend that Petronas's
parliamentary charter prohibits investment in any venture that is not directly
related to the petroleum industry. If the Petronas bid is blocked, the
Malaysian Government would be hard pressed to find another rescuer and
could be forced into providing the bank with a direct infusion of funds-a
move that would be politically controversial for Prime Minister Mahathir.
Nigeria's Disaffected Overtures to the beleaguered private sector by General Buhari's military
Ecuador Begins
Economic
Liberalization
More Austerity Under
New Panamanian
President
Secret
5 October 1984
they eventually will be forced to accept the arrangement.
regime were recently rebuffed. Attendees at a government-sponsored confer-
ence were sharply critical of government import licensing and foreign ex-
change policies that threaten import-dependent industries and favor fly-by-
night businesses over established enterprises. Private-sector arguments were
strengthened when for several weeks the central bank did not release any
foreign exchange for imports. The regime's offer of five-year, no-interest
promissory notes to cover outstanding government debts to local firms was
rejected outright by the firms, even though most companies apparently believe
According to US Embassy reports, Ecuadorean President Febres-Cordero is
gradually implementing free market policies. In the first eight weeks of this
administration, domestic economic policy changes have focused on the easing
of widespread price controls. While seven essential consumer items will remain
subject to price ceilings, most product prices will be determined by market
forces. We judge that the move is consistent with Febres-Cordero's plan to
decrease government intervention and make the economy more competitive.
The government hopes the immediate inflationary impact of price liberaliza-
tion will be offset by new investment and increased production over the longer
President-elect Barletta plans to tighten Panama's austerity program to gain
additional support from the IMF, World Bank, and commercial creditors when
he takes office on 11 October. Agreements for a new standby loan and
subsequent external debt rescheduling will be necessary if Panama is to
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Secret
Soviet Grain
Harvest Lagging
Soviet Meat
Production Up
1984 Soviet
Gold Sales
efforts.
continue servicing its debt, which is equal to 85 percent of GDP. The new
.measures-including reductions in consumer subsidies and cuts in public-
sector spending-will be strongly resisted by opposition groups and the left
wing of the ruling party. We expect that Defense Chief Noriega, the military
strongman who handpicked Barletta, will probably support Barletta's initial
million-ton level estimated by a Soviet trade official in mid-September.
According to data released by Moscow last week, the grain harvest is now two
weeks behind the average pace of the past five years. By 24 September, Soviet
farmers had cut only about 101 million hectares of grain compared to the
average of nearly 110 million hectares for 1979 to 1983. The latest slowdown
has been caused by a combination of unfavorable weather in the northern
Urals and late-maturing crops in Siberia. Because some 1 to 2 million hectares
of grain probably will not be harvested, total Soviet grain production is now ex-
pected to be only about 180 million tons. This would be 15 million tons less
than the estimated output last year and 60 million tons below the target. The
crop could be even smaller if the weather deteriorates markedly during the
next few weeks, but there is little probability that it will drop to the 160-
tories, and near-peak grain imports.
Meat production is almost certain to reach or slightly exceed government goals
for the second consecutive year. Published production figures for the first eight
months of this year indicate that Soviet meat production increased 7.6 percent
over the comparable period in 1983. The growth in meat output this year is
due largely to a record harvest of forage crops last fall, a second consecutive
mild winter that reduced the demand for feedstuffs, record livestock inven-
felt mainly next year
The Soviets could achieve a slight increase in consumer meat consumption if
meat imports remain high, but they may choose instead to rebuild low meat in-
ventories. The impact on meat production of this year's poor grain crop will be
Moscow has sold about 50 metric
probably reflects continuing improvement in Moscow's hard-currency position.
In first half 1984, the USSR ran an unprecedented surplus in its trade
accounts, the result of continuing. high levels of energy exports. While Soviet
cash requirements will be higher in the second half of the year-agricultural
purchases alone could be perhaps $1 billion higher than in the January-June
period-other alternatives allow Moscow to avoid depressing prices by selling
tons of gold as of mid-September, compared with the 60 metric tons we
estimate the USSR marketed in calendar year 1983. The pace of sales
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Cuban Sugar Outlook
Secret
5 October 1984
tapping its own overseas banks for credits to finance grain purchases.
gold in an already thin market. In addition to sizable cash reserves, the USSR
has been generating syndicated loans among West European banks, and
propaganda ploy.
Cuba continues to set ambitious sugar production targets despite adverse
domestic conditions and a world sugar glut that has sent prices to 13-year lows.
Production in 1983/84-a near-record high of 8.2 million metric tons-still
fell short of Havana's 9-million-ton target largely because of equipment
failures, fertilizer shortages, and unseasonable rains. Because of the premature
harvesting of seed cane last year, delayed planting this year, and the spread of
cane diseases, output in 1984/85 probably will fall well below the 10-million-
ton target. Moreover, Havana's highly touted goal of producing 12 million tons
of sugar by 1990 is regarded by most industry analysts as an overly optimistic
cut its economic dependence on sugar.
Havana's apparent decision to devote massive resources to sugar production
over the next few years probably was influenced heavily by Moscow and is
likely to be reflected in the 1986-90 CEMA plans now under consideration.
The Soviet Union-which purchases at premium prices more than half of
Cuba's sugar exports-reportedly rebuffed Havana's longstanding desire to
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Nicaragua: Declining Levels
of Foreign Assistance
Financial assistance to Nicaragua from non-Com-
munist countries has begun to decline. With a few
exceptions, we believe that most developed and
Latin nations will continue to scale back aid as
their government-leaders become more pessimistic
about their ability to buy political moderation in
Managua. Although support from Communist na-
tions is expanding substantially, we do not believe
that it will fully compensate for the loss of Western
funds. Loss of foreign financing will further depress
living standards, intensifying already widespread
popular discontent over the economy. The Sandi-
nista Directorate will use a combination of carrot-
and-stick tactics to try to forestall the spread of
strikes and other antiregime demonstrations. To
the extent that Western governments perceive in-
creased internal repression, we believe they will
tend to scale back aid even further, helping to
perpetuate the cycle.
Latin Support Tumbles
Financing from Latin American nations beset by
financial crisis has fallen dramatically this year,
largely because of concern among leaders in the
region about the regime's repressive policies and its
closer ties with Cuba and Eastern Europe. We
expect Latin American economic support to reach
$135-145 million this year, compared with about
$220 million in 1983. We project a further decline
in the total again next year.
Mexico, Nicaragua's largest Latin donor since the.
1979 revolution, has slashed its aid from about
$150 million in 1983, to at most $90 million this
year. We believe President de la Madrid's cutback
was prompted by.his willingness to respond to US
concerns, by Mexico's financial problems, and by
his dissatisfaction with the direction of the Nicara-
guan revolution. The major cut has been in Mexi-
can oil shipments, which until 1984 had been
Nicaragua: Current Account Million US S
Balance, 1983-84
Current account balance
-750
-755
Trade balance
-555
-555
Exports (f.o.b.)
400
390
Coffee
157
140
Cotton
108
110
Imports (c.i.f.)
955
945
Oil
130
150
Weaponry
105
150
financed by credits that neither side anticipated
would be repaid. We expect that Mexican oil
shipments this year will reach at most $80 million;
down from roughly $130 million last year.
Financing from Venezuela and Brazil, substantial
donors in the early years of Sandinista rule, fell to
about $10 million each in 1983 and probably will
total roughly $5 million each this year. Nicaragua's
credit lines with Brazil are exhausted and are not
likely to be renewed.
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Venezuelan President Lu-
sinchi's strong opposition to Sandinista policies
probably precludes a resumption of any major
assistance.
Argentina is the only Latin American nation to
have substantially increased its credits this year,
and those seem likely to be cut back after Novem-
ber. President Alfonsin, arguing that economic
leverage might induce the Sandinistas to open the
political process, agreed in March to a $45 million
line of credit. Argentine aid had previously been
limited to a $15 million credit line extended in
appreciation for Nicaragua's support during the
1982 Falklands war. Should Managua adopt more
repressive tactics after the November elections,
Alfonsin, in turn, probably would discreetly scale
down disbursements under the current credit and
take a harder stance in the future.
Economic support from the West has passed its
peak, but will decline more slowly than Latin
financing. We estimate that assistance from West-
ern industrial nations will total at best $80 million
this year, down about $8-10 million from 1983, and
that it will decline again next year.
Few leaders of Western industrial nations remain
persuaded that their assistance can be used as
leverage to induce the Sandinistas to adopt a
different political course. For some, however, small
financial gestures to the Sandinistas will remain a
relatively cheap way to shore up domestic support
from the left.
The Netherlands committed itself in 1981 to a five-
year reconstruction program disbursing $10-15
million per year. The Hague, however, recently told
US officials that it will phase out its aid almost
completely after the program expires next year,
largely because of dissatisfaction with Sandinista
political and military policies. In August, Dutch
officials decided to step up their assistance to Costa
Rica.
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5 October 1984
Nicaragua: Projected Official Million US $
Foreign Financing, 1984
662-686
71-80
2-3
14-18
8
13
5-10
85
150
Multilateral 26-31
World Bank 2-6
Inter-American Development Bank 20
European Economic Community 3-4
UN Food and Agriculture
Organization
Financing from West Germany, which averaged
about $19 million annually during 1979-81, will
also disappear. West German officials have told the
US Embassy that no new commitments will be
made. Like the Dutch, German officials have told
US diplomats that this policy shift is motivated in
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large part by the Sandinistas' failure to allow
prospect that more French military aid will be
political pluralism.
Spain has been one of Nicaragua's most consistent
financial supporters, disbursing by our estimates
$10-20 million in supplier credits and humanitarian
aid every year since 1979. Madrid also rescheduled
Managua's $62 million bilateral debt in early 1981
on fairly easy terms, and forgave $2.3 million in
overdue interest, according to the US Embassy in
Managua. Madrid's current program-a $45 mil-
lion, three-year line of supplier credits-will expire
in 1986. Nicaragua has been trying to negotiate a
second, $5 million line from Madrid, but reporting
from reliable sources indicates that officials are
frustrated with the slow pace of negotiations
We doubt that Madrid will grant the additional
credits soon or be willing to renew the $45 million
package after the current one expires. Since it was
announced in mid-1983, we believe that Prime
Minister Gonzalez has become increasingly disillu-
sioned about the nature of Sandinista rule. More-
over, we believe that Gonzalez-like Argentina's
Alfonsin-might discreetly slow the pace of dis-
bursements should there be a return to substantial-
ly tougher domestic policies after the upcoming
Nicaraguan elections. Thus, we project that Span-
ish financing in 1984 will probably total $10 mil-
lion, in contrast to an estimated $15-20 million last
year.
We expect French support, however, to remain at
roughly the same level this year as last-an esti-
mated $18-22 million. Should plans for a new
geothermal project go forward next year, Paris
would lend $9 million toward its cost, and probably
provide some $10 million in other assistance. For-
eign Minister Cheysson, however, has made state-
ments increasingly critical of the Sandinistas in
recent weeks. We believe that this emerging con-
cern over Nicaragua's political direction will, at a
minimum, preclude Paris from significantly in-
creasing its financing, and perhaps induce a gradu-
al decline.
France is the only West European power to have
granted military assistance-$16 million in a mix
of credits and grants in 1981. There is little
forthcoming.
Aid from other Western nations will remain rough-
ly constant this year. Austrian aid amounting to $8
million in 1983 probably will not be repeated this
year. Canadian assistance could approach $13 mil-
lion, roughly double 1983 levels, but almost half
the money is to go for a water-purification project
and does nothing to ease Managua's most pressing
problems of paying for consumer and industrial
imports.
Declining Multilateral Aid
Prospects of substantial funding from, multilateral
sources are increasingly poor. Nicaragua is $10
million in arrears to the International Monetary
Fund, which this summer cut off Nicaragua's
access to Fund resources. Similarly, Managua's
roughly $7 million arrearages to the World Bank
recently prompted Bank management to declare
Nicaragua in default-the first such case in Bank
history, according to US officials. Bank rules speci-
fy that no disbursements can be made to countries
in default.
We believe that
roughly $3 million is being held up by the default.
Disbursements from the Inter-American Develop-
ment Bank will probably total about $20 million in
the year ending June 30, 1985, down from the
previous year's $33 million.
The Soviet Response
We expect total Communist financing to reach
$370 million this year, compared with $270 million
in 1983. Moscow and its allies have increased their
support substantially this year, in part to help
compensate for the decline from other sources.
Moscow's decision to make up entirely for the
decline in Mexican oil deliveries is the major factor
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in the increase. We estimate that Soviet oil deliver-
ies will total $85 million this year, up from just $2
million in 1983. In a marked departure from usual
Soviet policy, we believe that Moscow is requiring
little or no immediate payment for the petroleum.
It seems most unlikely that Managua will repay
any substantial part of its debts to the USSR over
the next several years. We expect disbursements of
nonoil economic assistance from the Communist
countries to reach $135 million this year, down
slightly from about $165 million in 1983. This
consists mainly of supplier credits for manufac-
tured goods, but also includes substantial technical
assistance and some donations of foodstuffs and
fertilizers. In addition, we have noted a few in-
stances of loans or donations of hard currency from
Cuba, but believe that these remain relatively
small. We estimate that Communist financial assis-
tance for military purchases will top. $150 million.
In general, however, Communist help is a poor
substitute for Western assistance. A shipment of
Soviet aviation fuel, for instance, was
of such poor quality that it
damaged airplane engines.
persistent problems with the quality of
Communist-origin goods. The quality of technical
assistance also appears to be inferior.
Uncertain Support From the Middle East
Although three Middle Eastern nations have pro-
vided economic support in the past, we do not
believe that any of them will be reliable in the
future. In 1983, Algeria agreed to pay preferential
prices for Nicaraguan sugar after the United States
slashed Managua's sugar quota.
We doubt that Algeria will provide
substantial new aid in the future.
In both 1982 and 1983, Iran lent Nicaragua rough-
ly $27 million by allowing Nicaragua to resell a
tanker load of Iranian crude and deferring payment
until 1985 and 1986.
Secret
5 October 1984
Implications
On balance, we doubt that Communist aid will
fully compensate for the decline in aid from other
sources. These trends will markedly affect both
living standards in the short run and the country's
industrial base over the longer term.
Discontent over worsening living standards erupted
in work stoppages in August and September, short-
ly after the regime restored the right to strike. The
Sandinistas have taken a hard line, however,
threatening to declare one strike illegal and refus-
ing to. negotiate on several others until workers
returned to work. Rather than again revoking the
right to strike after the elections, and incurring
additional international disapproval, we expect the
regime to continue with the less visible, but still
hardline, tactics it has used recently. The Sandinis-
tas are likely to attempt a strategy of dividing the
workers by providing substantial pay raises to
nonstrikers. As living conditions continue to wors-
en, however, and most wage hikes are wiped out by
inflation that will approach 90 percent this year, we
expect more labor unrest, and open opposition from
small business.
These problems will be aggravated by the Sandinis-
tas' unwillingness, or inability, to revive the econo-
my. We foresee little if any change in domestic
policies that have consistently increased the govern-
ment's role in business and claimed additional
sectors of commerce and industry as the exclusive
preserve of the state.
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Israel: Growing
Union Militancy
The new Israeli Government cannot carry out any
effective austerity program without the cooperation
of the Histadrut, the powerful trade union organi-
zation. Histadrut leaders acknowledge the need for
emergency measures to deal with Israel's rapidly
declining foreign exchange reserves and 400-
percent inflation rate. Histadrut leaders are coming
under growing pressure, however, from younger
union militants demanding more aggressive protec-
tion of worker interests. Increasing militancy with-
in individual unions belonging to the Histadrut was
most recently demonstrated in July, when the
engineers and the academics won the right to
negotiate separate wage agreements with the gov-
ernment. Histadrut Secretary General Kessar faces
a Histadrut reelection campaign early next year
and, as a result, probably will be reluctant to
support government proposals on economic auster-
ity that could spark major Histadrut divisions.
Prime Minister Peres's new national unity govern-
ment has approved in principle spending cuts of $1
billion and wants to negotiate an agreement with
the Histadrut to restrain wages. Talks are likely to
focus on real wage cuts, reducing the cost-of-living
adjustment formula, and unemployment. Histadrut
leaders are already expressing concern about in-
creasing unemployment, up from 5 percent at the .
end of 1983 to 5.9 percent at the end of June.F-
Disagreement within the Histadrut over the issues
of high unemployment or lower real wages will
make it even harder to reach a "package deal" with
the new government on wages, prices, and taxes.
Histadrut Secretary General Kessar recently told a
US Embassy officer that he was committed to
working out such an arrangement. He has indicat-
ed that workers would be prepared to accept a
sacrifice in real income, perhaps in the 7-percent
range. Another Histadrut official, however, has
said that the price labor would be willing to pay as
its part of a "social contract" would be to forgo
additional real wage gains. He said that higher
unemployment and lower real wages are not ac-
ceptable.
The militants sense that Histadrut has the upper
hand in wage negotiations because they believe the
new government will give way in the face of
threatened widespread labor unrest. This percep-
tion was recently reinforced when, to dampen
Israel's spiraling inflation, former Finance Minister
Cohen-Orgad announced in mid-August that he
would not adjust tax brackets when cost-of-living
increases were paid on 1 September, but he backed
down in the face of threatened strikes. The Hista-
drut traditionally has had a strong bargaining
position, enabling it to win real wage increases
averaging 6.9 percent annually since 1976. Hista-
drut represents about 90 percent of the civilian
labor force and has benefited from a tight labor
market-the average unemployment rate since
1968 has been slightly less than 4 percent.
Signs of the Times
Histadrut's control over its member unions is being
challenged. In recent years, several unions have
engaged in strikes and other work actions in defi-
ance of the Histadrut leadership, including:
? Strikes by teachers calling for implementation of
a 1979 government-commissioned report that rec-
ommended salary hikes of 30 to 60 percent.
? Stoning of Histadrut headquarters in December
1981 by diamond workers because the Histadrut
leadership did not support union demands for a
70-percent wage increase.
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Real Wagesa
Index: 1980=100
1980 1981 1982 1983
a Quarterly data.
b Estimated.
Unemployment Rate
Percent
Work Days Lost to Strikes
Million days
? Wildcat, work-to-rules action in late 1983 for
higher wages by Haifa and Ashdod longshore-
men, who ignored Histadrut requests that they go
back to work.
Wildcat strikes in September 1982 by workers at El
Al, the national airline, caught Histadrut leaders in
a no-win situation, according to reporting from the
US Embassy. Histadrut leaders felt obliged to
support the El Al workers, but at the same time
they recognized that their demands were unreason-
able. After several months of labor chaos, the
government took over the airline, leaving the Hista-
drut with the task of negotiating the terms of
layoffs and severance pay from a position of weak-
ness.
The Histadrut opposed the long doctors' strike in
1983 that included hunger!strikes. Histadrut offi-
cials did not want the doctors to receive a pay hike
in excess of the 22 percent given to other public-
sector workers. In a departure from previous policy,
Secret
5 October 1984
the Histadrut called for binding arbitration. The
arbitrators awarded the doctors a pay hike of 60
percent.
In July, unions representing engineers and academ-
ics won the right to negotiate separately a new
wage scale with the Finance Ministry after threat-
ening to withdraw from the Histadrut. Traditional-
ly, wage scales are linked so no group of workers
obtains an "unfair" salary advantage over others.
Union militants believe that Histadrut's.senior
leadership should more aggressively protect and
even expand worker benefits. These younger lead-,
ers, particularly in government-sector unions that
would be the most directly affected by an austerity
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Secret
program, will resist Histadrut acquiescence to any
agreement that would lead to loss of jobs or
purchasing power. An additional complicating fac-
tor is that many of the militants are Sephardis,
Jews of Middle East and north African origin, who
.resent the dominant role of Ashkenazi Jews of
European ancestry in the Histadrut. Kessar, who
took office in May and is himself a Sephardi, will
be especially sensitive to charges that Sephardi
workers are bearing the brunt of economic re-
trenchment.
Histadrut leaders have not been completely insensi-
tive to growing union militancy, but their response
has been inadequate. In 1981, for example, Kes-
sar's predecessor attempted to appease the rank
and file by.granting discounts to members patroniz-
ing Histadrut business enterprises.This response
did little to address union militants' demands.
The agreement allowing the academics and engi-
neers to negotiate their own wage scales presents an
additional challenge to Histadrut leaders. If these
unions successfully negotiate large pay hikes, other
unions whose wages are linked to the academics or
engineers will demand similar increases. The Hista-
drut either will have to acquiesce to these demands
or risk playing a substantially reduced role in wage
bargaining.
Kessar's priorities in dealings with the government
are to ensure that:
? A high level of employment is maintained.
? The burdens of austerity are shared equitably by
all segments of society.
? The government carries through on all parts of
the agreement.
Reaching an agreement with Finance Minister
Modai will be difficult for Kessar. Most of the
economic portfolios, including finance, are in the
hands of the Likud bloc, and Kessar has long
suspected that Likud is out to destroy the Labor
Party-dominated Histadrut.
The risk of provoking further union alienation-
particularly with the Histadrut election approach-
ing-will constrain Kessar's room for maneuvering
in negotiations with Modai and other government
leaders. In response to the 16.5-percent increase in
the consumer price index in August, Kesser made
clear that he opposes any tampering with Israel's
pervasive system of indexing wages to the country's
galloping 400-percent inflation rate. This is a key
structural problem at the heart of Israel's economic
crisis, and without progress in this area, the govern-
ment's austerity program is unlikely to succeed.
Unless Kessar adopts the militants' agenda as his
own, the Histadrut could become a more fragment-
ed institution over the long term. Kessar has a good
reputation within the Histadrut as a trade union
negotiator; indeed, many officials had been urging
his predecessor to step aside in favor of Kessar for a
number of years. But his popularity could quickly
erode if the rank and file comes to believe he is not
protecting worker interests. Nevertheless, the His-
tadrut survived seven years of Likud-led govern-
ments as well as colorless, inept leadership by
Kessar's predecessor. Histadrut's pervasive influ-
ence throughout the Israeli economy probably will
give the institution a central role to play for some
time to come.
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USSR: Dependence
on Western Equipment
for Oil and
Gas Development
Although the USSR has relied largely on domestic
equipment in the production of crude oil and
natural gas, it has turned to the West for selected
high-quality and state-of-the-art equipment and
technology to obtain higher operating performance
and more reliable service. During the remainder of
the 1980s, however, Soviet oil and gas development
will depend increasingly on imports of Western
equipment and know-how. Especially important
will be advanced equipment for exploration, .deep
drilling, fluid lift, 'development of sour gas deposits,
oil refining, and offshore operations. Any embargo
of technology by the developed West would raise
Soviet costs and entail delays of 18 to 36 months
before alternative supplies emerge.
drilling meterage with no increase in the number of
rigs. Such an increase in drilling meterage could
raise oil output 70,000 to 90,000 b/d higher than if
conventional Soviet-made bits were used.
Production Equipment. Approximately 1,200 high-
capacity submersible pumps were purchased from
US firms during the 1970s. Most of these pumps
probably were installed in wells where the water
cut-that is, the water content of each barrel of
fluid produced-was about 50 percent.' At the best
fields, these pumps were being operated for three to
six months before a major overhaul was required.
We estimate these US pumps could have accounted
for 500,000 to 1 million b/d of oil production
annually during the latter half of the 1970s. This is
roughly the amount of oil exported to hard curren-
Impact of Western Oil and Gas Equipment
During the 1970s, the USSR purchased $5 billion
of Western oil and gas equipment. The-impact of
these imports was important because the imported
equipment was used to cover shortages or to cope
with difficult technical problems.
Drilling Equipment. High-quality drill pipe, tool
joints, and bits for deep drilling have been increas-
ingly vital. Purchases of such equipment from US,
Japanese, and West European firms in recent years
have allowed the USSR to drill deep wells that now
account for 5 to 10 percent of its oil production and
roughly 20: percent of natural gas output.
In 1978 the Soviets purchased a turnkey drill-bit
plant from a US firm. Soviet bits are usually one-
fourth or less as efficient as Western bits of
comparable design. The US-designed bits should
operate for substantially longer periods at the high
rotational speed of Soviet turbo-drills. We estimate
that improved service life provided by the US-
designed bits could permit a 5-percent increase in
cy countries during this period.
In 1978 the Soviets undertook to expand gas-lift
operations in West Siberia. A French firm con-
tracted to install an array of Western production
equipment-gas compressors, manifolds, valves,
and controls-for 1,800 wells at the USSR's larg-
est field, Samotlor. Similar equipment was pur-
chased for 600 wells at the USSR's second-largest
field, Fedorovo. The Samotlor project is at least
three years behind schedule because of construction
delays. The Fedorovo project is nearing completion
but is experiencing operating problems. If installed
on schedule, the gas-lift equipment could have
provided 200,000 to 300,000 b/d of additional 'oil
output beyond that otherwise expected from these
fields. But, because of the delay, the window of
opportunity for the most effective use of this equip-
ment may have been missed: the water cut at
Samotlor exceeded 50 percent in 1983 and is now
higher than optimal for maximum oil recovery.?
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Offshore Equipment and Technology. Most of the
modern equipment and technology employed in
Soviet offshore oil and gas exploration and produc-
tion has been either purchased from the West
(largely US design) or reproduced from technology
supplied by Western firms. The Soviets have built
five jack-up rigs copied from a Western-built unit
imported in 1967. Their first semisubmersible rig
was built in Finland, incorporating technology and
components supplied by US firms. It was complet-
ed in 1980 and placed in operation in the Caspian
Sea early in 1982. Three additional semisubmersi-
ble rigs of this type have been built at a French-
equipped assembly yard at Astrakhan and are now
operating in the Caspian Sea. 0
A joint agreement is being sought with Western
firms for development of Barents Sea petroleum
deposits. Large-scale development could be a multi-
billion-dollar undertaking involving massive infu-
sions of Western technology and equipment.
Pipeline Construction and Equipment. As the So-
viets expanded their large-diameter gas pipeline
network, domestic capacity to produce suitable gas
turbines was inadequate. As a result, the USSR
relied on US and West European firms to supply
gas turbines and spare parts for a substantial
number of compressor stations. During the 1970s,
the West supplied approximately 300 gas turbines
with capacities from 10 to 25 megawatts (MW).
These imports accounted for about 15 percent of
the aggregate power installed on gas transmission
pipelines of all sizes during 1971-80.
On the recently built Siberia-to-Western Europe
gas export pipeline, the USSR originally contracted
with Western firms to supply 120 25-MW and five
10-MW heavy-duty industrial gas turbines of US
design. Because of the US embargo, however, the
USSR decided to equip some of the compressor
stations with Soviet turbines.
Alternative Western Suppliers
As US sales of petroleum equipment and technol-
ogy to the USSR plummeted in recent years,
suppliers in Western Europe, Japan, and Canada
Secret
5 October 1984
have aggressively taken up the slack. Available
statistics show that Soviet contracts for Western oil
and gas equipment peaked sharply in 1981, when
large orders were signed for the Siberia-to-West-
ern Europe gas pipeline. Since then the.value of
new orders has tumbled from $4.3 billion in 1981 to
$1.3 billion in 1982 to only $825 million for 1983.
The Role of Technology Transfer Through 1990
The USSR will encounter much more complex
geologic conditions as it seeks to discover and
develop deeper oil and gas deposits. The difficult
operating environment will pose a challenge to the
Soviet equipment manufacturing already unable to
provide advanced high-quality equipment.
We believe future purchases will cluster into sever-
al broad categories:
? Deep-drilling equipment and technology.
? Fluid-lift and oil-treatment equipment.
? Offshore equipment.
? Computers and automated-control technology.
? Specialized corrosion-resistant drilling and pro-
duction equipment for high-pressure, high-tem-
perature service.
? Gas pipeline equipment.
? Secondary oil-refining equipment.
? Gas-processing equipment.
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The denial of Western equipment would require the
Soviets to allocate more investment to industries
manufacturing oil and gas equipment and would
make energy production more difficult and costly.
The completion of the gas export pipeline ahead of
schedule is one indication of Soviet willingness to
devote resources to what Moscow considers high-
priority projects. Moreover, the capabilities of not
only Soviet industry but also of other potential new
suppliers of oil and gas equipment such as Argenti-
na, Mexico, Brazil, and Singapore are improving
rapidly. In the event of a future US embargo of oil
and gas equipment and technology to the USSR-
or even a multilateral embargo by the United
States and other developed Western countries-the
impact is likely to be limited to 18 to 36 months
before new production capacity emerges elsewhere.
23 Secret
5 October 1984
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India: Defense
and Development
India has undertaken a massive modernization of
its armed forces-the fourth largest in the world-
without unduly straining its economy or hampering
its development programs. New Delhi's reliance on
less expensive Soviet weaponry and an increased
use of domestically produced arms have resulted in
only a slow rise in real defense spending in recent
years. An increasing flow of more sophisticated and
costly weapons from the Soviet Union and Western
suppliers, however, is likely to aggravate India's
foreign payments problems late in the 1980s.
Security Environment
Perceived threats from traditional foes such as
Pakistan and China, as well as increased superpow-
er presence in the region, have led India to increase
the size of its forces, speed up its modernization
program, and expand domestic defense production.
We believe that New Delhi-by far the strongest
power in South Asia-envisages a greater military
role for itself in the Indian Ocean. They also are
increasing military ties-largely assistance and
training-with various Middle Eastern, African,
and Southeast Asian nations.
Moderate Defense Expenditure
Since FY 1980 (April-March), India's defense ex-
penditures in real terms have risen at an average
annual rate of only 3 percent, reaching an estimat-
ed $6 billion in FY 1983, according to official data.
Defense expenditures have averaged about 3.5 per-
cent of GNP, and about 1
government expenditures.
Official budget data under the "defense" heading,
however, probably understate actual defense costs.
For example, they do not include loans and grants
to India's defense industries and research institutes,
or maintenance expenses for the large paramilitary
forces. actual
aggregate defense outlays could be as much as 20
percent higher than official spending estimates.
Although the million-man Indian Army continues
to receive the largest portion of the budget, an
increasing share of India's defense outlays have
gone to the Air Force and Navy. New Delhi has
25X1
purchased large numbers of modern aircraft and 25X1
naval combatants over the last 10 years to extend
force capabilities in the region. The Army's share
of the defense budget declined from about 73
percent in FY 1974 to an estimated 65 percent in
FY 1983.
Foreign Buying Spree
India has embarked on a major effort to procure
foreign arms. Purchases largely from the Soviet
Union, but also from West European suppliers,
include sophisticated aircraft, missile systems, ar-
mored vehicles, naval combatants, and electronic
warfare systems, 25X1
We estimate New Delhi's imports of weap- 25X1 1X1
ons over the past five years have been at least $10
billion-placing India among the world's largest
arms purchasers. 25X1
About 75 percent of the value of these weapons
purchase agreements have been with Moscow. In
our view, the Indians consider the Soviets a reliable
supplier. They also find that Soviet weapons are
cheaper-with low-cost financing-and that Soviet
technology is more suitable than Western equip-
ment to Indian production and maintenance capa- 25X1
bilities.
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DI JEEW 84-040
5 October 1984
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India: Defense Budget Outlays, 1974-84a India: Major Weapons Purchase
Agreements, 1976-84
Defense Budgetb
Billion US $
Defense as a
Share of Central
Government
Expenditures
Percent
1976
a Through 30 June.
Domestic Industry
India has developed one of the largest arms indus-
13 tries in the Third World. This helps to limit its
12 1974 75 1 80 84c dependence on imports. The domestic military-
Defense as a
Share of
Real GNP
Percent
1\_
3.6
3.5
3.4
industrial complex is composed of nine large pub-
lic-sector firms and 33 ordnance factories, which
produced nearly $2 billion of goods and services in
FY 1982 and provided employment for over
270,000 workers. Since FY 1980, real output in the
. nine public-sector companies has expanded three
times faster than output in manufacturing-37
percent versus 12 percent-according to official
rinta
25X1
3.0 1974 75 . 80 84c
a Fiscal years beginning April of the stated year.
b Includes current and capital outlays.
c Projected.
India's defense industries produce equipment rang-
ing from advanced fighter aircraft, tanks, and
naval combatants to small arms. Bureaucratic red-
tape, poor quality control, and technological short-
comings continue to plague the arms industries,
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5 October 1984
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and the
25X1
25X1
industry relies on foreign technology and licensing
arrangements.
Despite some studies to the contrary, defense
spending has not noticeably affected economic
growth or development spending. Since FY 1980,
combined annual state and central government
spending on development activities-agriculture,
industry, public health, and education-grew about
30 percent faster than defense allocations. More-
over, since FY 1980, the overall impact of military
spending on development has been reduced by easy
terms from Soviet suppliers.
Defense industries produce some nondefense goods,
and provide employment and training opportuni-
ties, but their contribution is small relative to the
large amount of capital invested. Moreover, accord-
ing to academic studies, spinoffs from Indian de-
fense research and production are minimal because
of secrecy and a lack of public- and private-sector
communication.
Public Support
The growth in defense spending and the military
buildup since 1980 appear to have broad popular
support. Parliamentary debates on defense spend-
ing are usually bereft of rancor. Indeed, the US
Embassy reports that the opposition parties often
chide the government to increase rather than re-
duce defense outlays. India has one of Asia's freest
presses, yet journalists seldom criticize defense
spending or its impact on economic development.
We believe the military has maintained a favorable
public image because it has remained apolitical and
a symbol of national unity. According to the press,
the public generally views the military moderniza-
tion program as necessary to counter the US
arming of Pakistan and the growing US-Chinese
military relationship.
If India continues its large-scale purchase of so-
phisticated arms, as we believe it will, military
payments could further erode New Delhi's fragile
foreign payments situation in the late 1980s. Large
commercial and IMF loans will also come due in
the next five years. Payments for both Soviet and
West European weapons could well exceed $1
billion per year by late in the decade. We believe
India will try to step up exports or reduce petro-
leum imports from Moscow to ease the bilateral
trade imbalance.
We expect India will continue to rely on the Soviet
Union for most of its arms while selectively pur-
chasing US and Western defense technology and 25X1
equipment. Most Indian defense industries have
developed around Soviet technology and are not
likely to adapt quickly to more sophisticated West-
ern methods without substantial costs and produc-
tion disruptions.
If, as expected by the Indians and most Western
observers, concessional economic aid diminishes
over the coming years, India's development pro-
grams will require an increasing share of domestic
resources. Should military spending grow beyond
its traditional share of the budget, we believe
defense spending could become a more contentious
political issue. 25X1
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5 October 1984
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Vietnam: The Empty Foreign
Exchange Till
Rapidly growing obligations on its $1.5 billion
hard-currency foreign debt, combined with a dis-
mal export performance, have produced Vietnam's
worst foreign exchange shortage since the formal
reunification of the country in 1976. As a result,
Hanoi has virtually stopped making debt payments
to non-Communist creditors and was $428 million
in arrears at the end of last year. A multilateral
debt rescheduling remains unlikely as long as Ha-
noi refuses to adopt an IMF-supported austerity
program and move ahead with economic reforms.
Moreover, supply limitations, low-quality products,
and lack of expertise in international trade prac-
tices will make it difficult for Vietnam to expand
export earnings to service even a much-reduced
level of debt. Despite roughly $1 billion a year in
Soviet economic assistance, we believe these exter-
nal financial problems will limit the economy to
only marginal growth for the remainder of the
1980s.
Vietnam: Growth of Foreign Debt,
1979-83a
a IMF estimates. Includes obligations to the IMF and
and short-term credits.
Growing Debt Problems
Although Vietnam at present has only limited
economic contacts with non-Communist countries,
its earlier economic flirtation with the West left it
with a burdensome $1.5 billion hard-currency debt.
Most of this debt stems from borrowings in the late
1970s to finance oil imports and to fund ambitious
development projects. Roughly $1 billion is owed to
official creditors, $300 million to private creditors,
and about $150 million to international organiza-
tions. No US institutions are directly involved
because Hanoi in 1975 repudiated most of the
debts incurred by the South Vietnamese Govern-
ment.
imports from the West.
Vietnam's foreign debt obligations, moreover, have
accelerated since 1980 because of rising interest
rates and the expiration of grace periods on most of
its borrowings. The rapid increase in debt service
coincided with a 50-percent drop in official foreign
exchange receipts. Western loans and grants, which
peaked at nearly $500 million in 1978, fell sharply
in response to Hanoi's invasion of Kampuchea in
December 1978. Hard-currency export earnings
have also proved disappointing. In 1983, exports to
non-Communist countries totaled only $178 mil-
lion, just enough to pay for two-thirds of Vietnam's
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The growing debt-service burden virtually exhaust-
ed Vietnam's reserves of hard currency by the end
of 1981 and Hanoi largely stopped making pay-
ments on its foreign debt. Arrearages jumped to
$251 million in 1982 and reached $428 million last
year. Hanoi currently has less than $16 million of
foreign exchange, according to IMF statistics.'
There is little indication that the situation has
improved in recent months. Vietnamese press re-
ports indicate that export growth continues to lag
this year after increasing only 10 percent last
year-far less than the 60 percent called for in
Hanoi's economic plan. As a result, Hanoi has
probably fallen behind-in its debt payments by at
least another $150 million so far this year.
More troublesome for Hanoi's foreign exchange
managers is the prospect of large rice imports this
year. In the north, the spring rice harvest was down
about 10 percent from that of the previous year,
and bad weather and insects have damaged the
current crop. Although prospects for the rice crop
in the south-which produces nearly 60 percent of
the country's rice-are fairly good, Hanoi has
already bought more than 100,000 tons of rice from
Thailand and Burma
]More bad "weather could force Hanoi
back into the international market, preempting
hard currency intended for other -uses..
Hanoi has also run afoul of the IMF, reducing its
prospects for new loans. Since February, Hanoi has
missed all scheduled payments on IMF loans to
which it has been automatically entitled as an IMF
member and by midyear was $15 million in arrears.
The IMF, which considers such repayments essen-
tial to a member's good standing, is debating the
.country's access to further funds. Hanoi has. pro-
posed using some of Vietnam's bank accounts in
the United States, blocked since 1975, to repay the
Z Vietnam's official reserves also include 735,000 ounces of gold,
half of which is pledged as collateral for a $102 million loan. Hanoi
maintains it is reserving the remainder of its gold stock for a future
Secret
5 October 1984
IMF. The United States refuses to discuss releasing
these funds, which once belonged to the South
Vietnamese Government and total roughly $100
million, as long as Vietnam maintains troops in
Kampuchea.
Hanoi's Response
Maintaining that it has no intention of repudiating
its debts to the West, Hanoi has sought to stretch
out repayment of both principal and interest. None-
theless, the Paris Club has refused to sponsor a
multilateral debt-rescheduling package unless Viet-
nam implements an IMF-supported reform pro-
gram. And Hanoi has had only limited success in
bilateral efforts to reschedule its hard-currency.
debt. Tentative agreement was reached a few
months ago for the refinancing of $170 million in
arrears to private Japanese banks that would delay
payment until 1986-92. Hanoi is currently negoti-
ating the rescheduling of another $400 million with
Algeria, Libya, and India. If all these talks are
successful-which we believe unlikely-Vietnam
will be granted $290 million of debt relief .in 1984
but will remain nearly $400 million in arrears.
Moreover, Hanoi's efforts to expand its foreign
exchange earnings have been only marginally suc-
cessful. The introduction of export incentives and a
70-percent devaluation in 1981 led to a 35-percent
increase in export earnings in 1982, and remit-
tances from overseas Vietnamese jumped to about
$50 million. This success was short lived, however,
as Marxist hardliners in the Politburo renewed
efforts to bring the reinvigorated private sector
under control last year by sharply increasing taxes
on private businesses, stiffening restrictions on cur-
rency transfers from overseas, and reinstituting
central control over the activities of foreign trade
companies. As a result, the growth of export earn-
ings slowed markedly in 1.983 and overseas remit-
tances fell by about 20 percent
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Vietnam: Projected Hard Currency Debt Service
Ratios and Debt Arrearages a
Million US $
Total debt service payments b
185.9
216.5
270.7
292.5
298.3
290.6
224.0
96.9
128.0
177.2
182.5
169.8
149.0
73.6
89.0
88.5
93.5
110.0
128.5
141.6
150.4
Low growth
88.0
100.0
114.0
116.0
104.0
92.0
65.0
Moderate growth
88.0
92.0
96.0
89.0
73.0
60.0
38.0
High growth
88.0
85.0
82.0
70.0
53.0
40.0
23.0
Million US $
Low growth
356
536
745
975
1,178
1,344
1,380
Moderate growth
356
530
735
954
1,142
1,271
1,271
High growth
356
495
639
762
809
739
228
a On loans taken out before 1 January 1984.
b Assuming bilateral rescheduling negotiations under way in mid-
1984 are completed. .
Includes imputed interest on arrearages.
d Low growth = 10 percent annually; moderate growth = 20
percent annually; and high growth = 30 percent annually.
Prospects for a spurt in hard-currency exports are
poor. A large share of Hanoi's commodity exports
The key to easing Hanoi's foreign exchange crunch
in the near term is a multilateral rescheduling of
hard-currency debt which-on present terms-will
require payments averaging $260 million annually
during 1985-87. Even with bilateral debt relief and
moderately optimistic assumptions for export
growth, overdue payments are likely to increase
sharply as debt service approaches $300 million
annually by 1987. Without a multilateral debt
rescheduling, we estimate Hanoi's accumulated
arrearages probably will total $1 billion by 1987.
are committed to the USSR.
070 to 80 percent of Vietnam's future exports
may already be mortgaged to Moscow as part of
the price of continued Soviet economic assistance.
Expansion of exports to the West is also hindered
by poor port facilities, lack of marketing skills, and
. low-quality goods.
Secret
5 October 1984
25X1
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We expect Vietnam's severe foreign exchange
problems to persist at least for the rest of this
decade. Chances for a multilateral debt reschedul-
ing hinge on reaching accommodation with the
IMF on arrearages and economic reform. These
reforms probably would include:
? Another large currency devaluation. The 1981
devaluation has been more than offset by rapid
domestic price increases, especially in key export
industries such as seafood.
? Slowed growth of credit and government spend-
ing, including military spending, to limit
inflation.
? Sharp reductions in consumer subsidies, especial-
ly the rice subsidy to government workers.
The current leadership is unlikely to implement
these reforms because-in its view-they would
reverse the country's progress toward a socialist
economy and also require insupportable austerity
measures. Nor is Hanoi likely in the near term to
take the steps necessary to stimulate exports or to
attract foreign capital from non-Communist coun-
tries. Although the government probably could
increase the inflow of remittances from overseas
Vietnamese by assuring them that their families at
home had use of the funds, even a doubling of
remittances from abroad would have little impact
in reducing overdue debts.
External financial problems will continue to severe-
ly hamper Hanoi's efforts to boost real growth
beyond the annual average of 3 percent registered
since 1979. Soviet Bloc economic aid at $1 billion
annually will be insufficient to move .the Vietnam-
ese economy forward at more than a snail's pace:
? UN experts estimate that, without a sharp in-
crease in the application of improved seeds and
fertilizer, future food production may lag popula-.
tion growth-at 2.4 percent annually one of the
highest rates in East Asia.
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5 October 1984
? Hanoi's inability to purchase petroleum supplies
beyond the 36,000 b/d provided by Moscow last
year will perpetuate the severe power shortages
that force the industrial sector to operate at less
than 50 percent of capacity and limit operation of
irrigation pumps.
? Financial constraints seem certain to slow devel-
opment of petroleum resources. Over the past few
months, Hanoi-which is engaged in a joint oil
drilling venture with the USSR in the South
China Sea-has been desperately searching for
drilling equipment to supplement that provided
by Moscow, but has been unable to complete the
financial arrangements.
? Hanoi's inability to increase imports of raw mate-
rials, machinery, and spare parts from the West
slows the revival of the Western-built manufac-
turing sector in the south.
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