INTELLIGENCE MEMORANDUM EASTERN EUROPE: ECONOMIC ASSESSMENT 1975-75

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T00608R000500180005-4
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 21
• Document Creation Date: December 9, 2016
• Document Release Date: March 5, 1999
• Sequence Number: 5
• Publication Date: March 1, 1975
• Content Type: IM

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aar 11 I' \ --.~ - I !, ? - \~ / ,:-~ r V.-~ ~~ -.:.. ~ _ ' I _ ,...
ern ~,~~rc~~~: co~nonlic`Assessm~~nt~ 1974--7
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c~~~~u~~~~~~~~
Intelligence eorand.
Eastern Europe Economic .~$..rrcrrnacnt, 1974-75
ConfidentOal
ER IM 75-5
March 1975
~~PY N ~ S iJ
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NATIONAL SECURITY INFORMATION
Unauthorized Disclosure Subject to Criminal Sanctions
Classlfiod by 015919
Exempf from Gonoral Doclassificalion schodul?
of E.O. 1163 exompllan caloporyt
? 50(1` (2!, and (9)
Aulomatica y oclassl (od ons
dafo impossyblo fo dofermino
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Eastern Europe:
Economic Assessment,
1974-75
? Tl~e East Europeans economies advanced at a vigorous pace in 1974 in
spite of higher prices charged by Western suppliers and weakening demand
by Western customers. Growth of gross national product (GNP) hit
G?Jo-7%, with grain production almost matching the 1973 peak and
industrial production expanding by G%v (Czechoslovakia) to 15%,
(Romania).
? Satisfactory economic growth in 1974 was made possible by stable CEMA
trade prices and a trade deficit with the West, wllich nearly doubled
to US $~.5 billion.
? Growth in 1975 is likely to fall somewhat short of the 1974 pace. The
recent jump in Soviet prices for oil and other raw materials, wllich came
sooner than expected, will add $1.5 billion to import costs for crude
oil alone and will be only partly offset by concessions from the USSR.
Agriculture is off to an inauspicious start. Finally, Eastern Europe must
take measures to slow down import growth from the West.
? Beyond 1975, likely further increases in thy; prices charged by the USSR,
along with increased imports ofhigh-priced Western materials, foreshadow
a slowdown in economic growth in Eastern Europe and especially in the
rate of improvement of living conditions. Reliance on Soviet concessions
to prevent a severe economic slump will lead to closer economic and
political ties with Moscow.
1. Bulgaria, (~echoslovakia, East Germany, Hungary, Poland, and Romania.
Note: Comments and queries regarding this memorandum are welcomed. They may
be directed to f
0
h
Research, Code 143, Extension 4121.
t
e Office of Economic
Confidentiol
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Impact of Economic Devc~lopmenfs in the West
1. In 1974, Eastern Europe was confronted by deepF,ning secession in its
Western markets and higher prices for its Western raw materials. These developments
came at a time when dependence on non-Communist trading partners was greater
than ever (see Table 1). To sustain economic momentum, Eastern Europe requires
Eastern Europe: Imports from the Non-Communist Countricsl
Percent of Total Imports
Percent of GNP
1965
1970
1973
1974
1965
1970
1973
1974
Eastern Europe
30
32
38
44
3
4
6
7
Bulgaria
26
24
21
27
4
4
4
6
Czechoslovakia
27
31
32
36
3
3
S
G
East Germany
27
31
36
38
3
4
5
6
Hungatiy
33
34
37
43
5
5
7
10
Poland
34
31
48
56
3
2
6
8
Romania
39
.46
53
60
3
4
5
7
1. Unclassified.
not only larger injections of Western machinery and high-quality industrial inputs -
such as special steels, .chemicals, and plastics -but also additional Western (mainly
OPEC) oil. By 1974 the .',West was supplying 19% of Eastern Europe's crude oil
imports, up from 13% 'n 1970 (see Table 2).
2.. Spiraling world prices for oil, steel, cotton, grain, soybean meal, fertilizers,
plastics, and other chemicals resulted in a sharp rise in the cost of East Eturopean
purchases from the West in 1974. The bill for Western oil reached 2tt estimated
S 1.2 billion, or 7% of total imports from the West, compared with 4% in 197.';
and 2?lo in 1972, although the volume of oil imports apparently did not increa.~,a
much above the ;240,000 barrels per day (b/d) of 1973. The East Europe~ins, wt.o
rely. on high-priced Western oil for only 15% of their oil. consumption, fared mu+,h
better im 1974 than the West Europeans. For France,.Italy, the United )E-ingdom,
and West Germany, the net rise in the oil bill came to $25.1 billion, or nearly
13% of their `"total imports. Excluding Romania, a net. exporter of 4i1, the net
CONf:IDENTIAi.
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Eastrrn Europe: Crude Oll Supply ~
.1970
1973
19742
19753
Total supply
1,110
1,380
1,680
1,750.1,850
P:~ductlon
33(?
340
34A
35U
Imports
790
1,23L'
1,340
:,400.1,500
From the USSR
690
990
1,080
1,1G0
From non?Communist
~ountrlos
100
240
'l60
240-340
Exp~yrts
lU
Negl.
Negl.
Negl.
1. Bocauso of rounding, compononts may not add to tho totals shown.
2. Cstima~od.
3. Proiccted.
rise in Eastern Europe's bill for Western oil was only about $0.3 billion, or only
2% of imports from the West.
3. In the case of Hungary -the o-;ly East European country publishing
detailed data on foreign trade prices - a~~rerage prices of imports from the West
rose nearly 17% in 1973 compared with 1: X72. and 44?Io in January-September 1974
compared with January-September 1973. Tite sharpest price increases in 1974 were
for imports of fuels and other raw materials. Prices of imported foodstu:'f~ -largely
grain and feedstuffs for animals -also increased substantially. Altogether, p*ice
increases accounted for 75% of the rise in Hungarian imports from the West.
4. East European export prices to the Wtrst rose much less than import
prices. The resulting worsening of the terms of trade varied it intensity from one
country to another, depending largely on export compc!sition. Czechoslovakia, East
Germany, Bu:garia, and Hungary, which export mainly manufactures, were hardest
hit, Hungary's terms of trade, for example, declined 14% in the first'':~lne months
of 1974, as export prices rose at only half .the rate of import .prices. Romania
and Poland were better off. Romania realized.a gain of about.$0.5 billion from
the increased price fore exports of petroleum products as against a $0.3 billion
:additional bill for its imports of.crude. And Poland benefited greatly. from the
near doubling of the w~~rld market price of ? hard coal, .while at the same time
boosting the volume of coal exports to the West an estimated .25%. Poland's terms
of trade with the West reportedly. improved by 8% Ln i 974.- ~ .'~
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5. /1t the same time that most of Eastern Europe was facinb a worsening
of its trrms of trade with the West, it was experiencing a slump in demand i'or
some of its exports. One factor was the EC ban on beef imports. Another was
the deeper~!ing Western recession. Romania achieved a growth of perhaps 10?h in
export volume and Poland of about 5%, thanks to supplies of products in str~*ng
demand, especiBelly oil and coal, but the other countries realized little, if ;fny,
increase.
6. Prices in CEMA trade remained nearly stable in 1974, as they had for
years. 'fhe Soviet Union accounted for about 30% of %a;;tern Europe's imports
in 1974 and supplied the bulk of imported crude oil, pig iron, iron ore, and lumber
at bargain prices. For example, the USSR provided 80% of Eastern Europe's oii
imports in 1974 at about $3.00 a barrel. The contrast between CEMA and Western
foreign trade price trends is illustrated by Hungarian data in 'fable 3.
::ungary: Foreign Trade Price Indexes i
1965 = 100
Imports ~
Exports
Ex~~oa~ts/Imports
~
- Non-
Non-
Non-
Communist2
Communist
l;ommunisti
Communist
Comntuttistz
Communist
1966
96.0
101.1
96.9
97.4
101.,0
96.4
1967
93.7
95.9
94.6
95.7
101.1)
~>.8
1968
93.7
94.3
94.9
93.0
101.4
98.6
1969
94.0
97.0
95.3
99.7
101.4
102.6
1970
94.9
102.7
96.0
108.8
101.2
106.1
1971
96.3
104.9
95.8
1.10.4
99.5
105.3
1972
98.4
108.0
96.1
115.5
97.6
107.0
1973.
98.6
125.9
96.5
131.3
97.9
104.4
Jan-Sep
1974/ ~ 973
99.5
181.8
97.8
160.6
98.3
88.4
1. Unclassified.
2. CEMA trade makes up more than 9596 of trade with Communist countries.
7. Still conscious of the Polish riots in 1970 over higher prices, the 1/ast
Curopean governments decided to make extensive use of budget sul*sidies in 1974
to insulate their domestic economies from the impact of Western inflation. Most
retail prices were stable in .1974, although 'the desire to conserve oil prompted
s
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the East Europeans to raise domestic fuel pr'aes. Like the USSR; Eastern Iiuropc
is affected by deterioration in tho quality of foods and the disappearance of chcripcr
varieties from the shelves.
Recent Economic Performance
8. The East European economies grew at an above-average pace in 1974
in spite of the deepening world recession but at the cost of a record trade deficit
with the West. GNP increased by an estimated 6.7% in 1974, paced by rapid
increases in industrial production ranging from 6% in Czechoslovakia to 15?~, in
Romania (see Table 4 and the chart).2 Agricultural production rrcorded its second
good year in a row, with grain production nearly matching the record 73 mi.~ion
tons of 1973. The consumer benefited from discernible increases in real incomes.
Eastern Europe and the USSR: Estimated GNPI
Billion 1973 US $
Percent increase
1973
1974
1974/1973
Eastern Europe 2
229.8
245.2
6.7
Bulgaria
16.5
17.6
6.5
Czechoslovakia
41.6
43.6
4,7
East Germany
51.4
54.3
5.7
Hungary
20.2
21.3
S,a
Poland
54.2
G9.1
'1.6
Romania
35.9
3g,3
~ S
USSR
697.1
719.4
3.2
i. Unclassified.
2. Because of rounding, components may not add to the totals shown.
9. Trade with the USSR remained on track with a 13% increase; trade with
the West boomed by 43%, largely because of the substantial price rises (see tllc
Appendix). Growth i~t imports from the West exceeded growth in exports largely
because of the sharp decline in terms of trade and difficulties in expanding sales
Z GNP estimates in this momorandum aro c'dculated according to Western concepts; trade data and
agricultural and industrial growth figures aro taken almost enUtefv from East European official reports.
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EASTERN EUROPE: Econlamlc Gr01NXh Averepe Annuallncreaso in Percent
REAL GROSS NATIONAL PRODUCT
0ulgeria Czechoslovakia East Germany Hungary
7,8 1.D
81-72 73 34
Poland
11,8 12.2
1.4
7.0
B3-72 73 74 81-72 73 74
Bulgaria Czechoslovakia East Germany Hungary Poland
8.D
AGRICULTURAL PRODUCTION
? _ 3.9
81-7'.' 73 74
Poland
1981-72 73 '14 81-72 73 74 81-72 73 74 61-72 73 7a
Bulgaria Czechoslovakia Eaat Germany ~ Hungary
605131 2.76
81-72 73 74
Romania
18.0
61.72 73 74
Romania
81-72 73 74
Romania
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to recession-lut Western customers. Thy trade deficit with the West soared from
$2.3 billion in 1973 to an estimated $4.~ billion in 1974, of which Poland
accounted for nearly half (see Table 5).
Eastern Europe: Estimated Trade with the Non-Communist Countries)
1974
Imports
Exports
Balance
Eastern Europe
18,613
14,155
-4,458
Bulgaria
1,124
918
-20G
Czechoslovakia
2,815
2,540
-275
East?Gcrmany
3,425
2,600
-825
Hungary
2,390
1,687
-703
Poland
5,834
3,695
-2,139
Romania
3,025
2,715
?310
1. Unclassified.
10. Eurodollar credits loomed large in financing the deficit, and government-
guaranteed credits from NATO countries continued to be important for all of the
countries except Hungary. The East Europeans also drew on Japanese gover-~ment-
guaranteed credits. In addition, Poland lienefited from a large French line extenoad
in 1972 and raised to $458 million in 1973. Some oil money -probably mostly
short term -may well have found its way into East European coffers. The only
announced OPEC loan was the $40 million Hungarian bond issue taken up in
December 1974 by~ the Kuwait International Investment Company. The bonds were
issued at 10-1/2% and are redeemable in .eight years.
11. Eastern Europe's net liabilities on the London Eurocurrency market
increased sharply in 1974 (see Table 6). Eastern Europe's net liabilities on the
Eurodollar market as a whole are estimated to have come to at least $3 billion
by the end of Septernber 1974. A large part of the. borrowing consisted of
syndicated bank loans with repayment periods n~nning up to 12 years and interest
set at 0.5-1.0 percentage points above the 6-month Eurodollar interbank rate.
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Eastern Europe: Net Liabilities on the London Eurocurrency Market t
Million US
End
1971
End
1972
End
1973
End
September
1974
Total
518
671
1,450
2,088
Bulgaria
105
182
257
343
Czechoslovakia
-24
-76
.14
.41
East Germany
137
118
361
584
Hungary
197
271
327
3G8
Poland
-18
79
405
G07
Romania
121
97
114
227
i~. Trade with the United States in 1974 boomed 50% to $1.4 billion, 4%
of total trade with the West:
Imports from the
United States
GOS
g 19
Exports to the
United States
299
540
Much of the 35% increase in East European imports from the Unified Sta~es resulted
from a sharp rise in Romanian and Polish purchases on credit of machinery and
equipment. Purchases of US agricultural products -- mainly soybean meal and
grain -rose only 7% to $528 million. The 81% boost in East European exports
was featured by increased sales of Romanian petroleum products, Polish
metallurgical products, and Hungarian gold coins.
?bade .with `the West
13. Ailthough thfr East Europeans will''try t,;~ cut back on the growth of
imports from .the West in 1975; they will run another large deficit. Attempts to
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increase exports will continue to be thwarted by Wcstcrn recession. The Easl
Europeans have, for example, already been lut by the drop in the world market
for cotton textiles. At the same time, though, this enables them t,~ cut back on
imports of cotton.
14. Much of the financing of the prospective 1975 deficit has already been
obtained in the form of government-guaranteed credits from NATO countries and,
more important, syndicated Eurodollar loans. Poland, for example, has been granted
a $70 million seven-year credit by a consortium headed by Barclays Batik
International. The interest is set at 0.625 percentage points above tlic London
bank rate for the first three years and at 0.75 percentage points above for the
last four. In late 1974 the.French government added another $458 million to the
credit line initially 'extended to Poland in 1972 to cover imports of F*encli
machinery through 1975. Romania, the only East European country that has joined
the IMF, has been granted credits of about $290 million by tl-e World Bank. In
addition, the East Europeans are seeking more OPEC money.
15. Beyond 1975, the extent to which Eastern Europe can expand its exports
to the West and its ability to find new sources of long-term financing will determine
its ability to continue to increase imports from the West. Some of the best bard
currency earners -such as processed foods and low-sulfur Polish coal -may have
to be diverted partly to the Soviet market. Although Eastern Europe should be
able to obtain much of its financing in the Eurodollar market, it will also require
large injections of Arab oil money. Without enough barter or credit deals, the
East Europeans will have to cut back sharply on plans for imports from the West.
Trade with the USSR
16. The East Europeans had expected the USSR to maintain the prices of
its oil and other raw materials until the end of the current five-year planning period,
that is, through 1975. The Soviets, however, have boosted the price for most oil
deliveries in 1975 from $3.00 per barrel to at least $6.50 per barrel -still far
below the international price of $10?$11 per barrel. This will increase Eastern
Europe's bill for Soviet crude oil by $1.5 billion, an amount equal to 12% of
total exports to the USSR in 1974. In addition, the Soviets are raising prices on
a wide spectrum of other raw materials shipped to Eastern Europe. A4ost of these
prices also will be well below world market levels. It is not yet clear whether
prices on all raw materials are being raised.
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17. The Soviets arc permitting smaller price increases for machinery and
manufactures, which make up the bulk of their purchases from EaSt~rn Europe.
The resultinb worscn.ing cf Eastern Europe's terms of trade with the USSR will
vary with each country, according to its dependence on imports of Soviet raw
materials.
18. The official Hungarian party organ, Nepszabad5a~, reports that more than
half of the goods traded between the USSIc and Hungary will undergo some price
increase. Prices of Soviet basic materials and furls are to increase 52% and of
machinery only 3"~0. In return, the Hungarians will receive price increases ranging
from an average of i 5% for machinery to an average of 28% for agricultural
products. Budapest has admitted that its terms of trade with the USSR will sharply
deteriorate.
19. Besides the obvious reluctance to continue to supply oil at about
one-fourth of the world price, the Soviet Union's decision to raise prices a year
early is based in part on unhappiness over trading relationships with Eastern Europe.
Revisions in CEMA trading prices in 1965-66 and 1971-72 did not correct the
overvaluation of machinery products, which are often priced at the level of superior
Western modals. The East Europeans themselves are careful in trade with one
another to exchange undervalued raw materials and other products that can be
sold for hard currency only for similar goods. On the other hand, the USSR supplies
raw materials to Eastern Europe in return for overvalued East European machinery.
In an attempt to offset its disadvantage, the USSR had insisted since the mid-1960s
that the East Europeans (a) purchase more Soviet machinery, (b) bt~y more oil
in the 'Nest, and (c) invest in Soviet raw material projects as a guarantee for future
deliveries. Despite adjustments stemming from these demands. the Soviet Union
still considered itself at a disadvantage in trade with. Eastern Europe; it was unwilling
to increase this disadvantage by continuin; ?o supply oil and other raw materials
at unchanged prices when the world prices had risen spectacularly.
20. Mescow probably will grant concessions to those hardest lit -
Czechoslovakia, East Germany, Bulgaria, and Hungary - in order to prevent severe
strains on their economies. The Soviets will probably be especially generous in
1975, since the East Europeans have already drawn up their plans on the assumption
the old prices would hold. The Hungarians have already been promised l0-year
credits. In addition, Moscow will make deliveries against Hungarian investment in
Soviet raw material projects instead of deferring repayment as previously planned.
The Soviets also have agreed to help reduce the Hungarian bill for high-priced
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Western raw materials by shipping above-plan amounts of crttdc oil, timber, natural
Mis, fertilizers, and other chemicals. Moscow may not be as forthcoming to Poland
and Romania, which rely less on Soviet raw materials.
21. Concessions by the USSR not only will prevent major economic
disruptions f'or its junior partners but also will serve Moscow's political ends. On
the ono hand, the Soviets cannot :;1'ford to drive the East Europeans closer to
the West by exacting all of the economic leverage at its command. On the other
hand, concessions in return for closer East European ties to the USSR clearly would
promote Soviet policy toward CEMA integration and CEMA/EC ties.
22. Despite these concessions, East European terms of trade with the USSR
will continue to worsen during the next few years. According to Polish Premier
Jaroszewicz, intra-CEMA prices arc to be recalculated annually on the basis of
the previous five-year average world prices. Even if world prices fc;r raw materials
level off or decline slightly, CEMA prices will continue to rise for several ye;irs
as low-priced years are dropped from the formula. Assuming a moderate rise in
world prices, the East Europeans could be paying $12 a barrel for Soviet crude
by 1980. This would bring the total bill for Soviet oil to $7 billion, or one-fourth
of total projected imports from the USSR.
23. Growth in 1975 is likely to fall somewhat short of the 1974 pace. Soviet
concessions will only parity balance the higher prices for Soviet raw materials.
Once again the East Europeans will be able to forestall most of the impact of
]sigh world prices by heavy borrowing in the West. Domestic Pndowntent of raw
materials will favor Poland and Romania, which are planning to boost industrial
production by more than 10%. But the Hungarians and Bulgarians are cutting back
growth plans, and real income per worker in Hungary will show little growth. All
the countries are counting heavily on a good year in agriculture to meet t}teir
tarl~ets. So far the outlook is inauspicious -late autumn rains Delayed and in some
cases prevented planting of winter wheat.
24. Beyond 1975, further increases in ~. ,7ces for Soviet oil, gas, timber, grain,
and cotton - on top of the need to import a growing share of raw materials from
high-priced sourcQs in the West -will force the East Europeans to reevaluate their
long-range economic goals. Long term planning itself will become more difficult
as the prices for all imports -and exports -will change each year.
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25. The sectors hardest hit by higher costs or any cutbacks in I'ucl supplir~;
would be chemicals, metallurgy, agriculture, .Ind food processing. '1'hcsc ace the
inditstrles relying most on imports oi' Western equiprncnt and basic materials, which
also may be trimmed. Consumer industries such as textiles, leather, food, and paper
may require more investment and output to satisfy Moscow's desire for additional
consumer goods from Eastern Europe.
26. The requirement to boost exports to both the Wcst and the East will
leave fewer goods for domestic consumption. Planners will have to slow down the.
growth of real income and increase some retail prices. Already the Hungarians in
January 1975 and the Poles in February 1975 have raised retail prices for some
goods that incorporate lugh-pt~ced Western materials, and the others arc likely to
follow. In addition, domestic fodder shortages coupled with the high cost of
imported fodder forced a reduction of hog numbers in the last quarter of 1974
in at least one country -Poland. By March, the decline in meat supplies had
led to disturbances in several Polish cities and a succession of apologetic speeches
by worried leaders. The age of the consumer in Eastern Lurope, which began in
1971, may thus be short-lived.
27. Poland is in the strongest economic position in Eastern Europe because
of its coal, sulfur, copper, and zinc. The Poles estimate that in 1974 their terms
of trade with the West improved by R%, with export prices rising about 40% and
import prices growing less than 30?l0. Second only to the United States in coal
exports, Poland has estimated reserves .in excess of 100 billion tons. Coal supplies
about 80% of energy needs, with oil -mostly from the USSR -supplying 10~?.
Coal accounted for 20% of total exports to the West in 1974; the increase in
the price of hard coal, which rose from about $2rJ a ton in 1973 to about $35 iai
1974, accounted for one-third of the 4610 increase in the value of Poland's exports
to the West,
28. The Poles have been using coal as a bargaining tool in negotiations with
Western countries. For example, Poland received a large credit from Sweden in
1974 in return for deliveries of coal in 1975-79 and leas demanded a $300 million
credit from Finland for guaranteed coal deliveries. In January 1975, France signed
a preliminary agreement to supply credits, coal mining equipment, and technical
11
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coNrlul:rnlnt.
assisL?ntcc ~n cxcl~ant~c for increased coal ;;I;il>ntcnts dnrint~ I')75-7'). /11so, becaus~?
of Ih~? c;;pcctc,l itihhcr price of its coal deiiverics to the IIStiIZ, Poland will be
Ic;;s affected than other I?asl I~,uropcan countries by the rise in the price of~ ~oviel
of I.
2'). lintholdened by its raw nuilerial Ircasure and its low debt service ratio,
Poland conlinuctl to spcncl sizable sums on Wcslcrn niachincry in I')74. Much of
the machinery is bcint; installed in export industries, such as meal processing, for
sales to the Well. In 197~t the trade clcficit with the Wesl antounled to `~2.1 billion,
contparcd with X1.3 billion incurrctl in 1973. l1 large hart of this clcficit was
financccl by credits for purchases of machinery and equipntcnl, which account for
alntosl one-third of total imports front the Wesl. Recent large orders for nwchinery
indicate that trade with the Well will increase still further this year. 'I'hc Poles,
for example, Irtve yet to lalce delivery of $180 million of? US nrichinery financccl
in part by tltc 1~xporl-Import 13an1