ARTICLES ON POLAND AND SOVIET UNION

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EXECUTIVE SECRETARIAT
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,
Remarks:
SUSPENSE
D/ Executive Secretary
12 Jan 82
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I,,VIVV lUGIY I iML L/j/..{..
MEMORANDUM FOR: Deputy Director for Intelligence
FROM: Director of Central Intelligence
Articles on Poland and Soviet Union
1. Here is the Wall Street Journal editorial and Nagorski op-ed
article on Poland. We need a study, as we discussed this morning, on how
the milking of Poland squares with the cost of empire. We also need a
study on how the debt can be applied to alter the prospects for the pipe-
line.
2. The story from Sunday's Washington Post by Dusko Doder attracted
my interest by spelling out:
-- How the Soviets cut their capital spending by $42 billion
over five years.
-- How the Soviets had to put 27% of the investment into agriculture.
-- How the Soviets will have to make an energy investment of $170
billion over four years.
-- How the Soviets have increasing consumer subsidies and $460 billion
annual budget.
-- Needs of Eastern European countries related to Soviet industry.
3. has a line on the economist at Indiana University in
Bloomington, Indiana, who has devoted years to studying economic relationships
between the Eastern European countries and the Soviet Union. He believes that
the cost of empire has been overstated because it fails to reflect the manufactured
goods which the Soviets pull out of the Eastern European countries at a below
market price. His perception on our $22 billion cost of empire calculation
might be worth having and you might usefully illuminate the degree of dependence
of the Soviet economy on getting components from other Eastern European countries.
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4. Admiral Inman was telling me this morning how the Polish telephone
system may be fouled up for a long time by the thorough job the Pols did
of cutting off communication when they imposed martial law, and someone here
told me today that the Soviets have been getting a large part of their
telephone equipment from Poland and that this may foul up their internal
communications.
William J. Casey
Attachments:
3 articles
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11- -LL J 1 /\LL 1 UUURIYHL
8 January 1982
The Consequences of Polish-Soviet Trade
By ZYGMUNT NAGOS,SKI
Reports from the military junta In War-
saw indicate that trials soon will be held of
former high Communist Party officials re-
sponsible for the country's economic disas-
ter; many will be charged with corruption,
others with incompetence. But the trials
will almost certainly spare from public ac-
cusation the main culprit - the Soviet
Union.
Among the luxury items the Solidarity
period in Poland brought to that unhappy
country was freedom of disclosure. There
were so many disclosures of public docu-
ments revealing the manner in which pre-,
vious governments had run Poland that l
some important information went unnot- 1
iced. One such disclosure suggested the ex- ~
tent to which the Soviet Union carried the,
principal blame for the gradual decline of
Poland's economic welfare and for the dra-
matic growth of Polish indebtedness to the
West. At a relatively minor gathering of
provincial party officials last spring, a doc-
ument was presented by a party member
describing the economic consequences of
the trade policies the Soviets imposed on
Poland over the last five years.
In 1976, according to the document, Rus-
scan leaders convinced their Polish coun-
terparts that it would be in their mutual in-
terest to transact trade in a specially. cre-
ated accounting system and that the Rus-
sians should be permitted, and even
encouraged, to purchase from Poland fin-
ished and semi-finished products in ex-
change for raw materials.
Limited-Use Ruble
The trade agreement's unit of exchange
was described as a transferrable ruble,
which is the term often used to describe
the unit used to settle.. trade accounts
among the Comecon partners. But this sys?
tem seems to have been uniquely devel-
oped between Poland and the Soviet Union.
Poland's debts to other members of the So-
viet bloc could not be paid in this monetary
unit, nor could it be used to accumulate
monetary reserves. In short, in spite of its
official label, the new unit of payment in-
troduced as the only permissible one in
1976 was neither transferrable nor liquid.
It allowed the Soviet Union to bypass
the problem of hard currency. Using hard
currency received in loans from the West,
Poland would purchase licenses, some-raw
materials, semi-finished products and food
from Western suppliers. Poland was then
asked to sell a wide range of finished prod-
ucts to the Soviet Union.
For bookkeeping purposes, the value of
a dollar for these transactions was set at
67 kopecks, and later 62 kopecks, even be-
low the official level of the regular Soviet.
ruble. The Poles calculated in the party
meeting document that the Soviet Union
was making a clear profit of about 300 on
each dollar transacted. Poland, which paid
in dollars to the West, was the loser.
During the party meeting at which the , ter 'a huge order was placed by the visiting
disclosure of this agreement was made, Soviet minister of health. The most damag-
one speaker drew a daring conclusion: Po- "? ing of these visits was that of the man in
land's high indebtedness to the West was in charge of the Soviet agricultural sector.
direct proportion to the volume of Poland's From then on, Poland became an active
trade with the Soviet Union. ? exporter of grains and meat to the Soviet
To check on the validity of that assump- Union.- , -
tion, it is necessary to look back. The new ?~ ? Even without official visits, the docu-
system was introduced roughly five years ment says, the Soviet Union increased its
ago. Until 1976, Poland's indebtedness to role as a trading partner of Poland in a
the West amounted to $3.8 billion, in spite number of other sectors. Moscow'became
of the fact that the first five years of the the largest Importer of Polish power sta-
decade saw tremendous industrial growth tions and high voltage equipment; it tri-
and a high level of investments in heavy pled its purchases of mining machinery; it
industry. Today's debts amount to over $27 ~ increased considerably imports of railroad
billion. J cars and locomotives. Today, the USSR is
Poland's trade balance with the Soviet I the largest importer of Polish telephones
Union was on the positive side and on an r and communication equipment. Five mil-
average, Poles were able to accumulate lion units of telephone receivers were ex-
around $3 billion annually in their hard ported from Poland to the Soviet Union in
currency reserves. They also had at that 1978 alone. Altogether, according to the of-
time a fairly solid credit rating 'in the ficial Polish statistics in 1978, exports of in-
West. Until then, all the Soviet-Polish trade dustrial machines and equipment in-
was conducted through clearings. Goods " creased by over 30% from the preceding
sold to Russia were calculated on the cur- year. The list, presented at the provincial
rent value of the dollar; the same principle party meeting, is far from complete.
was applied to Soviet goods sold to Poland Airplane engines, computers, shipbuild-
and then the entire transaction was recal:: ? ling machinery and armament factories
culated in rubles. Poles were losing a little ;,have also been listed as heavily oriented
due to the inflated value of the ruble but it' toward Soviet export markets. All these
was the least they could expect. Once the finished goods called for heavy injections
system was changed in 1976, the entire pic- of high technology, spare parts and other
ture of trade with the Soviet Union I items obtainable in the West only for hard
changed.
"The reasons for the present crisis,"
the party meeting document states, "are
rooted in-the unjust and unfair conditions
of our foreign trade; conditions which can
be described as robbing Poland of its hard
currency reserves." In addition to depriv-
I currency.
The document also cites the remarks of
a top Polish government official on the
high level of industrial activity needed to
fulfill Soviet requirements: "According to
the declaration of Minister Marian Krzak
(currently minister of finance), published
ing Poland of its hard-won currency and in Dziennik Baltycki (The Baltic Daily, No.
forcing it into further debt to the West, the 75, 1981), in order to secure the necessary
system made the Polish market an ex- production to fulfill export needs it would
tremely attractive hunting ground for offi- have been necessary in 1981 to secure an
ciaf Soviet buyers. additional loan from the West of $11 bil-
Scores visited Poland from 1976 onward...'
lion." '
Inhabitants of Warsaw recalled endless An indirect reference'to that state of So-
television coverage about arrivals and de-
partures of Soviet dignitaries: ministers,
directors of industrial sectors from Soviet
Asiatic republics and others. Shortly there-
after, a connection was observed between
sudden 'shortages of goods and products
and the direct, professional interests of the
departed visitors.
After the Soviet minister of energy left,
coal was' not readily available on the mar-
ket; power plants began receiving lower
quality coal, reducing productivity by 15%
to 17%. A visit by the minister of chemical
industry resulted in a shortage of chemical
'fertilizers. Drugs were in short supply af-
1
viet-Polish trade appeared in a statement
two days ago from Moscow and reported
over Warsaw radio regarding new Soviet
loans to be granted to Poland. There will
be a decline in exports of capital goods
from the Soviet Union and considerably
lower exports from Poland to Russia due
to economic conditions in Poland. The an-
nouncement also added that the USSR, due
to a lack of hard currency in Poland, will
assume the role of sole supplier of oil, nat-
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Ural gas, pig iron and saw timber. It is
worth remembering that in the past the So-
viet Union exported to Poland about 9 mil-
lion tons of iron ore and 13 million tons of
oil annually. -
The attractiveness of the Polish trade to
the Soviet Union under the new arrange-
ments is clearly illustrated by the degree i
that Soviet-Polish trade grew over the'a
years. The last three five-year plans be- t
tween the two countries can be taken as in-
dicative. According to statistics cited in the
party meeting document during the first of
these, 1966-70, the volume of trade grew by
8.2%; during the second, 1971-75, still oper-
ating on the principle of clearances,' the
growth amounted to 17%. In the last five-
year period, 1976-80, the increase was 22%.
Considering that Polish 'productivity in-
- creased' during that last'period by 5.8%,
the gap between productivity and export
requirements can be easily understood.
The Roots of Solidarity
That gap also explains shortages in Po-
land of food and industrial goods. In 1980,
only 4% of -industrial production was ear-
marked for the agricultural sector and
even that meager share was not delivered.
Exports to the Soviet Union drained do-
mestic Polish markets, contributed heavily ,
to the Polish indebtedness to the West and
indirectly must have been responsible for ,j
the initial economic upheavals among Pol- -i
ish workers. These upheavals led eventu- I
ally to the birth, success and ultimate tem-
porary demise of the Solidarity movement.
The Polish economic crisis cannot be
fully attributed to the Soviet export exploi-
tation. But judging from the facts' and fig-
ures as they emerged during the liberaliza-
tion period in Poland,. and never chal
lenged by either Soviet or Polish officials.
it was a considerable factor. Conventional',]
wisdom often voiced in the West that the- 1
Soviet Union has a vested interest in seeing ' -
Poland afloat is only partly correct. Po-
land,
as it emerged from the above analy-
sis, has been an excellent conduit of goods
and services that the Soviet Union would
have had to buy outside the Eastern bloc
for hard currency. Instead, Poland paid
the bill. It was Poland that earned itself a
`poor credit rating, and It was Poland that
attempted to free itself from. both export
requirements and other forms of Soviet di-
rect and indirect. pressures and paid the ul-
timate. price:
It has been reported that the Soviet
Union has "helped" Poland in paying part
of its interest due to the West. The Soviet'-
Union should also seriously consider con-
tributingLa major part of the principal of
inanistic Studies.
Mr. Nagorski is director of executive
seminars at the Aspen 'Institute for Hu-
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THE WALL STREET JOURNAL
8 January 1982
JR&EEVWW & OUTLOOK
The Issue in Poland '
Yesterday our Seth Lipsky dis-
closed documents showing that in the
wake of the Polish crackdown, the
State Department's first instinct was
to urge the banks to go easy in their
negotiations on debt ,rescheduling.
While State's economic wizards later
thought better of such lunacy, it re-
mains clear that no one in charge'has
picked up a clue that in Poland the
debts are the issue.
We do not mean to denigrate the
human rights implications of the Pol-
ish tragedy, nor the political lesson of
yet another demonstration of the ina-
bility of communism to either tolerate
or totally suppress freedom and diver-
sity. But from the standpoint of U.S.
national interests, the Polish economic
crisis and its impact on Western debts
has an even more portentous aspect.
It is the first eruption of an issue tran-
scending Poland and going to the
heart of Soviet-American relations. To
put the issue in its most dramatic
form, it is this: Are we going to con-
tinue to allow and .even encourage
Western banks to finance the Soviet
military machine?
How does this come` about? For
starters, it is useful to think of Poland
the way Leonid Brezhnev thinks of Po-,
Soviet Bloc Debt
(Net hard-currency debt to the West
in billion current U.S. dollars)
1970
1980
1985-f
Bulgaria
0.7 .
2.7
4-5
Czechoslovakia
0.6
3.4
5-6
East Germany
1.4
11.8
18-20
Hungary
0.6
7.0
10-11
Poland
1.1
21.9
31-35
Romania
1.6'
9.0 ,
19-21
USSR
1.0
9.6
30-35
Comecon Banks
0.3
4.1
6-7
Soviet Bloc Total
7.3
69.5
123-140
Source: Wharton Econometric Fore.
casting Associates.
,f-Wharton forecast.
land-and indeed all other members
of Comecon-as a Soviet vassal state. t
As Mr. Nagorski reveals elsewhere on '
this page today. the Soviet Union in
1976 created a "transferrable ruble"
to,,in effect, obtain a highly favorable
exchange rate from its Comecon part-
ners and thus buy manufactured '
goods cheaply. To provide these
goods, the satellites were encouraged
to borrow heavily in the West to buy
maehinery, raw materials and semi-
finished manufactures. Western bank-
ers -and businessmen were thrilled
with the new "vitality" in the East, an
illusion that caused them to allow the
hard currency debts of the East Euro-
peans to rise out of all proportion to
their ability to repay (see tables)..
`In simplest terms; .the' Soviet Union
exploited its Comecon partners as a
conduit to obtain Western goods on the
cuff. As the Wharton tables show, So-
viet.hard currency debt has itself ex-
panded sharply and is expected to rise
further in the years ahead, but it is not
yet nearly as far out of line with any
prudent measure of repayment ability
as the debts of Poland, Hungary and
East Germany. The 'Russians got the
TV. sets and Wartburgs and the Poles,
East Gerrrians. and Hungarians re-
ceived the bills.
The Soviets got by with this by lit-
erally holding guns to the heads of sat-
ellite party leaders; Soviet troops and
tanks ring Prague and Budapest,
heavily occupy East Germany and
surround'Poland:,What the Russians
didn't foresee was that East European
workers, first- of all the Poles, would
grow tired of having the fruits of their
labors purloined. Without doubt, the
absence of goods to buy with zlotys
contributed to the Polish uprising.
The Soviet exploitation of Western
credit markets and East European
workers has had the primary purpose
of enabling the Soviets to build and
maintain a vast, military establish-
ment. The primary role of that estab-
lishment is to intimidate the Western
European suppliers of goods and
credit and absolutely control the East-
ern European suppliers of labor. To
this end the Soviets spend some 15176
of their total GNP for military pur-
poses, more than twice the percentage
for the U.S. They have. some 3.7 mil- ,
lion troops in uniform,'. 3,300 combat
aircraft, 55,000 tanks and a grand ar-
ray of other lethal equipment. The of-
ficers of this force,are part. of the So- ,
viet elite, highly pampered in a soci=-
ety where ordinary people suffer se-
vere deprivation.
In short, the economies of Eastern
Europe are organized to support the
economy of the Soviet Union, and the
economy of the Soviet Union is organ-
ized to support its military machine.
Into this process the Western banks
have pumped some $60 billion in the
last decade. If the forecasts by Whar-
ton Econometrics prove true, they will
pump almost-this amount .again into
the same process over.the years of the
Reagan administration.
Indeed, with the. breakdown of the
Comecon credit pipeline and another
big failure down on the collective
farms, the Soviet Union has had to go
directly to the West. for money. The
Bank for International Settlements es-
timates . that the , Soviets borrowed
over $15 billion in hard currency last
year. Reports from Europe yesterday
suggest this borrowing is continuing
(see page 2 of the Journal). And So-
viet gold sales in the West more than
tripled to 250 metric tons in 1981, ac-
cording. to London market ?estimates.
Despite. all these circumstances,
Western politicians are in their usual
dither, insisting that there Js nothing
much they can do about the Russians'
ham-fisted crackdown on the Polish
workers. Quite clearly there is a great
deal to do, And it is in ' the interest of
the West to do it.'
Ironically, the simplest thing the
U.S. government could do would be to
ask the banks to face the real risks of
these loans. A significant, modest and
entirely justified step would be for the
Comptroller of the Currency to sug-
gest banks take a, 50% write-down on
loans to Poland, and perhaps Hungary
and East Germany. Bank' regulatory
officials in other Western countries.
could be encouraged to take parallel
action. This would 'immediately raise
the.cost ,of credit to the whole Soviet
bloc'-
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The credit-worthiness of the Soviet ;
Union itself is endangered by the Co-
mecon debts, for its own economy is
dependent on theirs In many ways. If
it undertakes to provide the umbrella
the banks have hoped for, its own re-
sources will be stretched. Wharton
Econometrics has not calculated a
debt service ratio for the bloc as a
- whole; an analyst there captures the
attitude of the banks by saying they
would find such a figure "mean-
ingless." But the OECD, which uses a
more stringent debt-ratio calculation,
puts the bloc at 0.4,' including -the So-
viet Union. Some umbrella.
Beyond that, there is the definite.'
risk that over the next few years the
i Soviet workforce itself will go Polish.
The Soviet Union's resources are be-
coming ever more strained. Its ineffi-
cient use of manpower, a product of
central. planning and regimentation,
coupled with a low birth rate, has se-
verely stretched the manpower sup-
ply. Productivity and morale are low,
owing in part to the fact that Soviet
workers fare no better than the Poles
Debt Service Ratios
(0.2 or higher regarded as a danger
signal in international lending)
1970
1975
1981=f
Bulgaria
0.30.
0.44
0.29
Czechoslovakia
0.09
0.11
0.25
_
N
East Germany
: 0.14.
?0.26 ?
0.43
:
Hungary
0.16
.'0.24.
. 0.57
Poland
0.19
.0.32
0.87
'
Romania
0.36
.0.21
0.32
'.USSR. '
0.07
0.13.
0.07
Source: Wharton Econometric Fore-
casting Associates:
Debt Service ratio'?is , the ratio ' of
debt service (interest plus repay-
ments) to sum of hard currency export
balance and net balance in .invisibles.
f-Wharton Forecast.
at the hands of the Communist elite.
Alcoholism is epidemic. The Red Ar-
my's inability to subdue Afghanistan
is requiring larger infusions of troops.
policy .opportunity. The future of the
I' access to the Western banking system.
Instead of encouraging the banks to
roll over debt in the wake of Poland,
the government ought to be making
clear that this access depends on a
modicum of. Soviet good behavior. By
any realistic risk assessment, indeed,
it is. military spending and repression
of Eastern Europe that call its credit
standing into doubt. To price the Sovi-
ets out of the credit markets, what the
government chiefly has to do is bring
the lenders face to face with economic
reality.
In this lies the West's great foreign
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10 January 1981
S/iviets Plagued With Shortages,
Inflation
V By Dusko Doder
Washington Post Foreign Service
MOSCOW-The Soviet economy,
the world's largest. state-run enter-
prise, is entering the new year amid
clear signs of crisis.
Food shortages and soaring infla-
tion have been created by three suc-
cessive bad harvests, the strain of
military competition with the United
States, and the overall costs involved
in, maintaining an empire ranging
from Cuba to Vietnam to Afghan-
istan to Poland.
But there are growing indications
of asic structural weakness that the
centrally planned system is imposing
on'the Soviet economy, which today
is:second in size, complexity and
stngth only to America's.
;While 'the rule by decree may
hove: been effective in previous de-
cades in laying the infrastructure for
industrialization of a young Soviet
state, the system now appears in.
danger of choking itself in its own
cumbersomeness.
There are two additional and
long-term factors that are only be-
ginning to affect the economy.
One is the harsh fact that the So-
viet Union is no longer a producer of
low-cost energy conveniently located
in European Russia. - Rather, it is
becoming a high-cost producer and
poorly efficient consumer of abun-
dant resources located in distant Si-
beria and becoming increasingly
costly.
The other is posed by 'an acute
demographic problem. The country's
rate of population growth has been
falling since 1960, when it was twice
the current level of 0.84 percent per
year. Economic forecasts warn that
acute labor shortages should be ex-
pected "in the most immediate fu-
ture."
The Kremlin, leaders have intro-
duced ieforms to refine the existing
system. New financial incentives and
modest decentralization steps have
been taken in an effort to raise labor
productivity. But there has been re-
sistance to these reforms at the local
level,'
There was a note of near despair
in recent speeches by President
Leonid Brezhnev when he called for
harder work, increased motivation
and new improvements. ' -
The .economic system,.. has also
come under public "attacks in. the'.
Soviet press. "We obviously have''an
abnormal situation here," the Com-
munist Party,newspaper Pravda said last week. "The planning mechanism
was supposed to have been im-
proved, yet we did not get rid of old
sins." Pravda directly attacked the
state planning commission for var-
ious economic setbacks. .
A commentary in the daily
Sovyetskaya Rosiya also minced no
words about the difficulties. Criticiz-
ing low labor productivity, the paper
said that new reforms were not being
implemented. "The labor organiza-
tion in factories is not functioning,"
it added, ""and the second misfortune
lies in. the fact that the -economic
system itself -,is not working" as it
should.
Despite growing frankness in-:theme
,'media. about the . nature of Soviet?.
economic difficulties,' there are no
new. or radical ideas on remedies to
be applied.
r The lack, of a rational pricing sys-
tem has, burdened, the $460; billion .
annual budget with the costs of .ever-
groowing,subsidies.,At.the..same time,:
Moscow had to budget a 50,p ercent
increase in ,its energy 'investment
plan-to over $170 billion, over the
neltt four years-to produce margin-
al net increments in oil, coal and
electrical energy output..
According to official figures, 27
percent of the entire investment al
locations continue ' to be channeled
into the weak agricultural sector,
while well over $6 billion. will have to. .
be spent for grain and fodder- im-
ports again this year.
The exact figures for military 'ex-
penditures are. not disclosed here.
But there are clear , signs that the
Russians felt compelled . W. divert
- some additional'' resources for de=
fense purposes in-response. to Pres-
ident Reagan's.plans =to: rebuild .U.S.
strategic strength. The Kremlin has..
reduced.its planned capital expend
itures on capital construction by.$42
billion during the current" five- ar,:
plan.
The Polish" crisis has posed addi=
tional' economic strains. Soviet raw
material, energy and food shipments
tb Poland have been extensive.-The
Poles and other Soviet allies are get-
tmg Soviet oil at 50, percent of the
, OPEC price. Meat shipments to Po-
'larehave further reduced availabil-
e=' ity'0 meat in the. Soviet'Union.
F The _Polish+ crisis ! also ' hasr pro-
duced economic dislocations within
the Soviet bloc economies. This is
taking place at a time when the cost
of supplying 10 million tons of oil to
Cuba and supporting clients: in 'Af-
rica and Asia are steadily increasing.
The economic situation with its
accumulated difficulties provide eco-
nomic evidence for'Moscow's sincer-
-ity in arms reduction talks with the
United States. - - ' to It also provides an'insight into fire
proverbial lethargy of Soviet bureau-
cracy, which has resisted changes in
the economic system.
The combination of adverse ,long-
term trends and. the -pressure to
match America's 'military spending
may create conditions here for rad-
'ical changes . in the economy. The
present leadership, however, is com-
mitted . to modest changes and .cau-
`.tious rejiggering of resources.
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