RUBLE COST COMPARISON OF US AND SOVIET DEFENSE ACTIVITIES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83M00914R000300040016-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 5
• Document Creation Date: December 20, 2016
• Document Release Date: July 12, 2007
• Sequence Number: 16
• Publication Date: July 1, 1982
• Content Type: REPORT

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1 July 1982
MEMORANDUM FOR: Deputy Director for Intelligence
FROM:, Director of Central Intelligence
SUBJECT: PFIA3 Meeting - 8 July 1982
For the PFIAB meeting I would like to be updated on the two
estimate judgments which seem to raise the most questions, namely,
the level of Soviet military expenditures and Soviet oil prospects.
I have your paper of 28 June a:^,i' concur in the idea of postponing the.
Community estimate of the Soviet oil prospects until the first quarter
of 1983. Meanwhile, I would like to get a comparison of the prevailing
estimates, ours, DIA's and the key private estimates circulated. On
that score I would like to know the result of briefing of and consultation
with Senator Schmitt in response to his offer to provide Soviet oil estimates
which he claims have been closer to actual experience than ours.
William J. Casey
STAT
STAT
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A Ruble Cost Comparison
of US and Soviet
Defense Activities
Comparison of US and Soviet defense activities when
both are measured in rubles shows that the Soviet
total exceeded US outlays by 30 percent in 1979,
whereas the difference is 50 percent when the meas-
urement is made in dollar terms. Thus, whatever the
currency used to measure defense activities, the Soviet
resource commitment to defense is substantially larg-
er than that of the United States.
The Index-Number Problem
Because dollars are the natural basis for discussion by
US policymakers, CIA comparisons of the overall size
of the Soviet and US defense activities have tradition-
ally been made in dollar terms. The Agency derives its
estimates of the dollar costs of Soviet defense activi-
ties by applying US prices to detailed estimates of
Soviet military activities. To state one country's ac-
tivities in terms of another country's currency will
exaggerate somewhat the size of the first country's
effort. This phenomenon-called the "index-number
problem"-has been the basis of some criticism of
CIA attempts to compare Soviet and US defense
costs.
The index-number problem refers to the inevitable
difficulty in comparing economic activity in any two
countries. To make such a comparison, the activities
must be measured in common terms-specifically,
they must be stated in a single currency. Since either
currency can legitimately be used, the comparison can
be done in two ways-which lead to different results.
The essence of the index-number problem is that no
unique result is possible in such an economic compari-
son among countries
The prospects for making meaningful economic com-
parisons are not quite as bleak as this might suggest,
however. The direction of the index-number bias in
any single comparison is easy to identify, and the two
complementary comparisons provide a logical
within which a meaningful difference lies.
25X1 25XI
As a result of differences in resource endowments,
dollar comparisons of US and Soviet defense activities
tend to inflate the size of Soviet costs relative to those
of the United States. Manpower is relatively expen-
sive in the United States, and the relatively high
dollar wages somewhat exaggerate the size of Soviet
defense activities, which are more manpower-inten-
sive than those of the United States. Of course,
comparisons can also be made in ruble terms, using
Soviet price and wage data to cost US defense 25X1
activities. Such ruble comparisons inherently exagger-
ate the level of US activities relative to the Soviet
level-the reverse of the distortion that occurs itl
dollar comparisons.
' A country may be more spendthrift (pay less attention to relative
The direction of bias is associated with differences in
relative resource costs. In producing any collection of
goods and services, such as defense, a country tends to
use more of resources that are relatively cheap and
less of those that are relatively expensive. The choice
will differ in another country with a different resource
endowment.' If the defense activities of a country with
abundant supplies of cheap labor are priced in the 25X1
currency of another country where labor is more
scarce and expensive, that pricing will overstate the
manpower resources devoted to the first country's
defense establishment. If the defense activities of a
country with relatively limited and expensive supplies
of capital goods are priced in the currency of another
country where capital is relatively abundant and less
expensive, the pricing will understate the hardware
resources devoted to the first country's defense estab-
lishment. Leaders of the first country, with cheap
labor and expensive capital, will naturally choose a
mix of defense resources that emphasizes manpower,
and the result of using the second country's currency
in a comparison is to exaggerate the size of the first
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Neither way of comparing US and Soviet defense
activities-dollar costs or ruble costs-can avoid dis-
tortions totally, but the picture they provide together
gives a reliable indication of relative sizes of defense
activities in the two countries. The true size of the
Soviet resource commitment to defense relative to
that of the United States is likely to be no less than
the ratio shown by ruble cost comparisons and no
larger than the ratio shown by dollar costs
Analytical Approach
A ruble estimate of US defense activities measures
what it would cost, in constant 1970 rubles, for the
Soviets to produce and man a military force of the
same size and with the same inventory as that of the
United States and to operate that force as this country
does. To maintain consistency with the dollar esti-
An "account" such as aircraft procurement for the
Air Force can include a diverse group of weapons and
weapon components-all types of aircraft, air-to-air
missiles, and major spare parts.
Ratios. Ruble-dollar ratios (developed originally to .
convert Soviet defense activities from dollars to rubles
in those cases where we were not able to derive ruble
values directly) were used to convert US dollar outlays
to rubles. The original ratios applied to specific Soviet
product groups-aircraft, electronics, missiles-that
did not necessarily correspond to the US resource
"accounts." To solve this problem we constructed new
composite ruble-dollar ratios. These are weighted
averages of the basic product group ratios, the weights
representing the share of total costs of each product
group in the particular resource account.
mates, we have used the same definition of national
----
security activities that we used in dollar estimates
Procurement. Procurement presented a special prob-
lem. There are some items in the US weapons inven-
For practical reasons, in calculating the cost of US
defense activities in rubles we did not use the direct
costing methods we use in calculating Soviet activities
in dollars.' Instead, we developed the substitute meth-
odology described below.
Resource Categories. Ruble costs for US defense
activities were calculated by major resource categor-
ies-research and development (R&D), procurement,
construction, operation and maintenance (O&M), and
personnel. Personnel costs were derived by a direct-
costing methodology because Soviet pay and
allowance data were available. The other four cate-
gories were derived by multiplying the US dollar
resource accounts (called resource identification codes
or RICs by the Department of Defense) by appropri-
ate ruble-dollar ratios.
The Defense Department organizes US defense costs
into more than 80 separate RICs. These RICs cover
each kind of activity (for example, personnel, O&M,
or procurement of tracked vehicles) and each service
(including the guards, reserves, and defense agencies).
For the dollar estimate, we ask appropriate US manufacturers
what it would cost them to produce a given Soviet weapon. For the
ruble estimate, the practical limitations are obvious: direct costing
would require us, for example, to ask a Soviet aircraft manufactur-
tgry-the F-15, for example-that the Soviet defense
industry could produce only at extremely high cost
because the quality or technology of the system is
beyond present Soviet capabilities. To bring the ruble
price for these items up to an appropriate level, we
either adopted the ruble-dollar ratio appropriate to a
Soviet weapon system of a later generation (which is
higher) or increased the basic product group ratio by
20 percent. (The 20-percent differential is derived
from a study of merchant ships.') This adjustment was
applied to an entire procurement account if there was
in that account at least one weapon system in which
the United States has such an advantage. Thus, this
increase in ruble price tended to overstate the costs to
produce, man, and operate the US force in rubles.
Personnel. Ruble personnel costs were calculated by a
direct cost methodology. We distributed US service-
men into the four active services and into 21 ranks
A sample of US and Soviet merchant ships costed in both dollars
and rubles found that the ruble-dollar ratio for US ships was
approximately 20 percent higher than the ratio found for Soviet
ships. The 20 percent is believed to reflect the more sophisticated
technology embodied in US ships-which if produced under Soviet
conditions would be relatively more expensive. The technology in
merchant ships is fairly simple, however, and the 20-percent
differential may be low when applied to advanced technologies.
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Soviet Defense Costs as a Percent of US Defense Costs in 1979
1979 Dollars
1970 Rubles
ranging from general to private. The manpower in
each rank was multiplied by appropriate ruble rates of
pay and ruble allowances for clothing, food, and
medical care. Guards and reserves were turned into
full-time equivalents based on the hours of paid drill
and then multiplied by the average rates of pay for
Soviet officers or enlisted men (we have no detailed
rank structure for US reserve forces).
Ruble Cost Comparisons
Whether measured in dollars or in rubles, Soviet
defense costs exceeded US spending by a considerable
margin in the late 1970s (see graph). Total Soviet
defense costs in rubles were 30 percent greater than
those of the United States in 1979; measured in
dollars they were 50 percent greater. That is, the
Soviet "lead" in total defense costs measured in
dollars is 1.15 times the lead measured in rubles.' This
spread between the ruble and the dollar comparisons
for defense is much narrower than similar calculations
for other sectors of the economies of the two countries.
For instance, in the case of production of consumer
durables, the US advantage measured in rubles is
almost twice the US advantage measured in dollars.'
The spread between costs measured in rubles and
dollars is narrower for defense than for consumer
durables because of the relatively greater degree of
similarity between the mix of defense outlays for the
two countries. In particular, the two armed forces
operate with similar equipment-manpower ratios. The
USSR has much more manpower, but it also acquires
much more equipment each year than the United
States does. The basic similarity in structure of the
two forces is dictated more by military consider-
ations-they are preparing to confront each other-
than by economic considerations. With such a basic 25X1
similarity, relative defense costs measured in dollars
will differ little from those measured in rubles.
Franklyn Holzman, International Security Review, Spring 1980,
25X1
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The difference between the dollar and the ruble
estimates was greatest for procurement-Soviet costs
exceeded US costs by 60 percent in dollars and 25
percent in rubles. It was least for personnel-Soviet
costs exceeded US costs by 85 percent, whether
calculated in dollars or in rubles. The larger range in
procurement reflects the USSR's relative disadvan-
tage in producing the high-quality, technologically
advanced US equipment. The lack of difference in
personnel costs means that differences in the distribu-
tion of the ranks between the two forces are offset by
differences in the relative rates of pay among the
ranks. Soviet resource costs measured in either dollars
or rubles exceed comparable US costs for every
resource category except operations and maintenance.
Here, the United States pulls ahead, reflecting the
high cost of US petroleum, oil, and lubricants, the
large US civilian payroll in defense, and high mainte-
nance costs
A Test of the Method
The assumptions made about the degree of the US
lead in technology and quality were necessarily sub-
jective. Therefore, a sensitivity test was made to
analyze the effect of these assumptions on the total
comparison. For this test the ruble-dollar ratios ap-
plied to the RDT&E accounts and selected procure-
ment accounts were raised by another 25 percent."
Even with this large change, the ruble cost of Soviet
defense activities was still 15 percent above that of the
United States in 1979.
Not all procurement accounts were affected, since in 1979 the
United States had a clear quality and technology advantage for
only certain weapon systems. In those accounts that were affected,
however, the procedure required that the additional US advantage
be applied to all systems in that account even though this country is
not necessarily superior in all of them. For instance, the whole
procurement account for Air Force aircraft was raised-not just
the ruble costs of F-15s but also those of simpler aircraft such as F-
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