THE SOVIET BLOC HARD CURRENCY PROBLEM AND THE IMPACT OF WESTERN CREDIT RESTRICTIONS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00176R001300070001-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 15
• Document Creation Date: December 20, 2016
• Document Release Date: March 30, 2007
• Sequence Number: 1
• Publication Date: March 1, 1982
• Content Type: REPORT

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National Secret
Intelligence
Council
The Soviet Bloc Hard Currency
Problem and the Impact of
Western Credit Restrictions (u)
National Intelligence Council
Memorandum
Secret
NIC M 82-10002
March 1982
Copy 17 6
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STAT
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National Secret
Intelligence
Council
The Soviet Bloc Hard Currency
Problem and the Impact of
Western Credit Restrictions (u)
National Intelligence Council
Memorandum
Information available as of 2 March 1982
has been used in the preparation of this report.
This Memorandum was coordinated within the
National Intelligence Council and the Directorate
of Intelligence. Comments are welcome and may be
addressed to its author, Maurice Ernst, National
Intelligence Officer for Economics (telephone
351-4128). (u)
Secret
NIC M 82-10002
March 1982
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The Soviet Bloc Hard Currency
Problem and the Impact of
Western Credit Restrictions (u)
This paper assesses the potential impact of Western financial measures
against Soviet Bloc countries on the capacity of the USSR to import from
the West. It examines the hard currency problem of the USSR, that of the
East European countries, and the manner in which their problems affect
the USSR. It analyzes the role of government-financed and guaranteed
credits in the overall flow of Western capital to the Soviet Bloc and the fac-
tors affecting the direct and indirect impact of official restrictions on this
flow. Attitudes of US allies concerning financial sanctions are treated
briefly. The last section deals with some policy implications of the
foregoing analysis.
The paper does not evaluate in detail the impact of reductions in hard
currency imports on the Soviet economy. This important topic is treated in
other studies. Nor does it address possible Soviet Bloc reactions to Western
sanctions.
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The Soviet Bloc Hard Currency
Problem and the Impact of
Western Credit Restrictions (u)
Key Judgments The private financial community has turned very negative about lending to
the Soviet Bloc. Private sources of long-term credit to the Bloc have largely
dried up.
Western government restrictions on credits to Soviet Bloc countries, if
maintained for a period of years, could:
? Moderately reduce the USSR's capacity for hard currency imports in the
next few years.
? Force a fall in such imports in the long term, thereby further tightening
the resource constraints on the USSR and the difficulty of coping with its
defense burden.
The US allies are already in a mood to restrict government-guaranteed
credits to the Soviet Bloc for economic reasons; they may be willing to put
a ceiling on such credits but not to cut them off or severely curtail them.
The most powerful government instrument for restricting credit to the
Soviet Bloc would be placing quantitative limits on government-financed
and guaranteed credits. Establishing such limits, even if they involved no
absolute decline in the rate of new credits, would be viewed as a negative
signal in capital markets, intensifying their disinclination to lend to the
Soviet Bloc.
Eastern Europe is in far worse shape than the USSR: this means that
Moscow would probably have to share at least a small part of the cost im-
posed on Eastern Europe by Western restrictions, but could expect no
reciprocal help from its Bloc allies if the restrictions were imposed only on
the USSR. The USSR could obtain new long-term credit from non-NATO
non-Japanese sources only on stringent terms. Most East European
countries could receive no such credits.
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The Soviet Bloc Hard Currency
Problem and the Impact of
Western Credit Restrictions (u)
Introduction
A fundamental reassessment of the risk of lending to
Soviet Bloc countries has curtailed those countries'
access to Western private credit and made some of the
remaining credit flows vulnerable to new negative
developments. The Soviet hard currency position has
worsened greatly in recent months. The USSR is in
the midst of a short-term liquidity problem, due partly
to bad crops and the Western recession. With large
assets (gold reserves of 1,825 tons worth some $20
billion at a price of $350 an ounce) and small fixed
obligations (long- and medium-term debt service re-
quirements of $2-2.25 billion a year, or less than 10
percent of merchandise and arms exports), Moscow
has the flexibility to cope with this problem. But a
fundamental long-term problem will remain-the
USSR's hard currency exports are likely to stagnate
or fall, with the result that hard currency imports will
also stagnate or decline unless the West is prepared to
provide substantially more credit than in the past.
Eastern Europe's hard currency position is far worse
than the USSR's. Most East European countries
either cannot meet their hard currency obligations or
must make severe economic adjustments to do so.
The severe deterioration of the Soviet and European
hard currency positions has been due to the following
factors:
? Increasingly evident systemic deficiencies, resulting
in declining growth of productivity.
? The logical implications of the rapid accumulation
of hard currency debt in past years-a process
which obviously could not continue unless hard
currency earnings were also growing rapidly, which
they are not.
? The Polish political crisis and economic collapse and
its fallout.
? The general worsening of East-West relations, espe-
cially in the past year.
Western government policies played a role in encour-
aging the accumulation of Soviet and East European
debt by providing credit on easy terms during the
1970s. Without Western government encouragement,
private bank exposure would not have increased to the
extent that it did. In the past few months, the
possibility that Western governments might restrict or
discourage credit to Eastern Europe has created add-
ed uncertainty in financial markets and has further
discouraged bank lending.
The Crisis of 1981-82
Following two years of soaring foreign exchange
earnings as a result of the 1979-80 oil price rise and
continued increases in arms sales, Moscow suddenly
encountered a severe hard currency bind in the latter
part of 1981. The Soviets probably expected some
worsening in their hard currency position during the
year, but the speed of the turnaround appears to have
caught them by surprise. The following appears to be
a plausible reconstruction of events:
? In the first quarter, Moscow gave Poland nearly $1
billion in emergency hard currency aid.
? Oil prices unexpectedly began to fall so that Mos-
cow had to revise downward its expected earnings
from oil exports.
? A third successive bad grain crop forced Moscow to
buy even more grain, meat, and soybeans than had
been planned.
? The weakening of the Western economies after the
first part of the year reduced the demand for Soviet
exports.
? In the Soviet case, and to a much lesser extent the
East European countries, events outside their con-
trol (Western recession, bad crops, lower oil and
gold prices).
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These unexpected expenditures and shortfalls were
probably responsible for the precipitous decline in
Moscow's hard currency assets in foreign banks from
$8.6 billion at the beginning of 1981 to only about
$3.5 billion six months later. The mid-1981 level
appears to be the lowest for at least 10 years relative
to Soviet hard currency imports, being equivalent to
only about one month's imports. Moscow must have
concluded that a severe liquidity problem had devel-
oped and had to take some drastic action immedi-
ately.
The Soviet Policy Reaction
During the final quarter of last year, Moscow took the
following steps to quickly improve its hard currency
position:
? Selling large amounts of gold, despite a weakening
market. After largely staying out of the market for
the first three quarters of 1981, Moscow sold an
estimated 200 tons between August and the end of
1981 (twice the amount sold in all of 1980) and at
least 50 tons through mid-February 1982.
? Increasing its use of short-term credit.
? Severely rationing expenditures for hard currency
imports other than food, by requiring additional
authorization and controls throughout the Soviet
economic decision structure.
Moscow has not entered the Eurodollar market for
mid- or long-term nonguaranteed bank credits as it
did in 1975 when faced with a similar foreign ex-
change crunch. One can only speculate as to the
reasons. Many Western bankers have been reluctant
to make new large Eurodollar syndications to the
USSR. Even so, Moscow probably could obtain Euro-
dollar credits, but on less favorable terms. That it did
not do so may be due to a desire to avoid the
widespread publicity that such a step would have
stimulated in view of the situation in Poland and the
tense state of East-West relations generally. There
would have been speculation in the Western press that
the Soviets were borrowing money to pay off Polish
debts; others would have pointed to the borrowing as a
sign of Soviet economic weakness and vulnerability to
Western government pressures. In recent months, the
Soviets have been investigating borrowing possibilities
in Arab banks, apparently with little success as yet.
Short-Term Prospects
The emergency measures adopted late last year al-
most certainly enabled the Soviets to return their
liquid hard currency assets to more normal levels, but
did not eliminate the need for various other forms of
extraordinary financing to meet expenditures in 1982.
Forces beyond Moscow's control are even less favor-
able to Moscow's hard currency situation this year
than they were last year:
? Oil prices are continuing to fall.
? Demand and prices for Soviet exports are probably
also falling.
? Moscow's food import bill will probably be a billion
dollars or so higher than last year.
Since other major balance-of-payments items-arms
sales, service receipts and payments, and so forth-
are unlikely to change much, this means that unless
nonfood imports are cut very sharply indeed, Moscow
will have to sell substantially more gold or borrow
more short-term capital than last year.
It is impossible to know what combination of import
cuts, short-term borrowing, and gold sales Moscow
will select. For example, if the Soviets cut their
nonfood imports by 10 percent in volume (which,
given higher prices, would mean little change in
value), with exports down and food imports up, their
trade and current account deficits would be some $2
billion larger than last year. By selling their net
annual gold production of 275 tons, worth a little
more than $3 billion at $350 an ounce, they would
still have to borrow about $3 billion in short-term
credits to cover the deficit. This is by no means
infeasible, although the interest cost would be high.
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Short-term borrowing is a reasonable means of filling
a financial gap for a year or so, but obviously not over
much longer periods. Import cuts, too, would be
viewed differently as a means of coping with a brief
foreign exchange shortfall than as part of a longer
term problem. The USSR, like most bureaucracies,
tends to spread short-term cuts fairly evenly among
users, except for a few priority areas like food. Over a
longer period, priorities among different types of
imports and their uses would have to be much more
carefully worked out.
Moscow probably believes that the foreign exchange
bind is partly a temporary phenomenon. There is a
reasonable basis for Moscow to hope that Soviet grain
crops will return to normal or better, which would
make some reduction in food imports possible. In
addition, the likely cyclical upswing of the Western
economies during 1983-84 should increase both the
price of and the demand for Soviet exports. These
factors alone could add several billion dollars to meet
Moscow's other hard currency needs.
The Long-Term Bind
Even with some likely improvement in the hard
currency position during the next year or two, the
USSR faces a scarcity of hard currency through the
1980s. The chances are that the volume of Soviet hard
currency exports will stagnate or decline during the
coming decade. Specifically:
? The volume of Soviet crude oil exports has been
declining for three years and, with domestic oil
production likely to be at best constant, and at worst
in steady decline, it will be extremely difficult to
prevent a further drop, and eventually perhaps a
complete cessation, of oil exports for hard currency.
? Gas exports will continue to increase-but not on a
large scale until the Yamal Pipeline can be complet-
ed-which will probably not be before the latter
part of the decade. Even then the increase in gas
exports will probably less than offset the decline in
oil exports.
? Arms exports for hard currency appear to have
leveled off for lack of large new clients. Even
current large customers, such as Libya, may have to
pare purchases if oil export revenues continue to
decline.
? Other Soviet exports (wood, metals, manufactures)
are likely to stagnate because of supply limitations
and Soviet inability to adapt to Western market
needs.
Without the Yamal pipeline a sizable decline in
exports would be inevitable, even if Moscow redirect-
ed some of the gas to its own and Eastern Europe's
use in order to free some oil for export to the West.
With the pipeline and some good luck in oil develop-
ment, the volume of hard currency exports may be
held about constant.
Moscow's main hope for sizable increases in hard
currency earnings would be another large jump in the
prices of oil, gas, and gold-in the case of oil, an event
that appears unlikely in the next two or three years,
but increasingly likely during the second half of the
1980s.
If Soviet hard currency earnings are stable or declin-
ing in the long term, Moscow will need to increase its
new borrowing from the West to avoid a decline in its
hard currency import capacity. Soviet debt service
payments will slowly increase, reflecting the past
growth of new credits; consequently, if drawings on
Western long- and medium-term credits remained
constant, the net inflow of long-term Western capital
would slowly decline, and import capacity would fall.
A constant or declining hard currency import capacity
would pose serious problems for Moscow. In the 1980s
slower economic growth will present the Soviet leader-
ship with increasingly tough and politically painful
choices in resource allocation and economic manage-
ment. Annual increments to national output will be
too small to simultaneously meet mounting invest-
ment requirements, maintain growth in defense
spending at the rates of the past, and raise the
standard of living. Simply stated, something will have
to give. The Soviet need for Western goods and
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technology will therefore increase greatly. Imports
can relieve some economic problems by raising the
technological level of key Soviet industries and by
reducing shortages of grain and such important indus-
trial materials as steel. Western equipment and know-
how will be particularly important to raising produc-
tivity in the critical machine-building and energy
industries. The Soviets must continue importing large
amounts of agricultural products and will probably
expand their purchases of steel and some other indus-
trial materials.
The East European Hard Currency Problem
East European countries' hard currency problem is
far more severe than the USSR's. Their gold and
foreign exchange assets are minimal and their debt
service obligations are enormous. Leaving aside Po-
land, which is in a class by itself, East Germany has a
debt service ratio above 60 percent, and the rest,
except Czechoslovakia, are all above 30 percent.
These ratios put the East European countries in the
same class as Brazil, Mexico, and Chile, countries
with far more flexible economies and generally rapid-
ly increasing export earnings.
Poland aside, the fact is that Romania cannot meet its
obligations, and that East Germany could not achieve
any substantial reduction in its indebtedness without
wrenching economic adjustments. Hungary, too,
would have great difficulty reducing its debt. Even if
existing debt were just rolled over, the East European
economies would at best limp along with little or no
economic growth for the next several years. It is
important to keep in mind that Western credits played
an important role in financing a large increase in
investment in nearly all East European countries
during the 1970s, and that this investment was an
important factor in sustaining tolerable, if generally
slow, growth rates. This important prop for inefficient
economies has disappeared.
The Soviet-East European Connection
Soviet-East European economic relations rarely in-
volve transfers of hard currency. Last year's Soviet
hard currency aid to Poland was clearly viewed as an
exceptional step, outside the normal framework of
economic cooperation and aid. Some trade is paid in
hard currency, but the net flows are probably small.
More basically, Soviet trade with Eastern Europe
helps to knit the Soviet empire together, but at
substantial cost to Moscow. By denying East Europe-
an countries the possibility of developing economies
and economic systems that could be reoriented mainly
toward-the West, Moscow has little choice but to
provide some direct and indirect forms of aid. The
direct aid is in the form of credits on bilateral
account. The indirect aid takes the form of delivery of
undervalued Soviet raw materials and foods in return
for overvalued East European manufactured goods.
Many of the Soviet exports are sold on the world
market and some of them, notably oil, are sold to
Eastern Europe far below world market price. Most of
the East European exports can be sold on world
markets only at severe discounts, if at all, but the
Soviets pay world market prices for them.
A worsening of the East European hard currency and
economic situation is bound to impose additional
burdens on the USSR. Moscow simply cannot afford
to let the East European countries go begging to the
West by themselves, or alternatively to let their
economies deteriorate to the point that serious politi-
cal consequences could follow. Additional Soviet as-
sistance to Eastern Europe may or may not take the
form of hard currency, but even if it did not, there
would be indirectly an unfavorable impact on the
Soviet hard currency position.
The Role of Western Governments
Western governments have encouraged an accumula-
tion of Soviet Bloc hard currency debt to over $80
billion by providing credits and credit guarantees,
often at subsidized interest rates, and, indirectly, by
helping to create an atmosphere of East-West rela-
tions which fostered the confidence of private lenders.
Credits financed or guaranteed by Western govern-
ments make up about one-third of the Soviet Bloc's
total hard currency debt-with Poland, the USSR,
and East Germany having relied the most on such
credits. Being generally long term, these credits ac-
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Soviet Bloc Dependency on Western Government-Backed Credits in 1981
Government-backed debt
29,225
As a percent of total debt
34
Flows
Gross hard currency borrowing
40,024
Gross borrowing from
government-backed credits
9,215
As a percent of gross
borrowing
23
As a percent of imports
Net change in stock of
government-backed debt
East Czecho-
Romania Germany Hungary slovakia Bulgaria
5,300
10,000
4,274
6,600
4,310
1,930
910
1,800
5,750
360
700
100
265
140
34
58
8
11
2
14
15
6
88
5
10
2
6
6
+300
+50
+50
+35
count for a much smaller part of the current gross
inflow of Western capital than of indebtedness-2 to
15 percent, except in Poland and the USSR (see
table). Except in Poland, they are financing only 2 to
10 percent of hard currency imports.
As things now stand, no Soviet Bloc country has
received any mid- or long-term unguaranteed bank
credit for almost a year. Shorter term credit is
available, except to Poland and Romania, but on less
favorable terms than in the past.
Impact of Western Financial Measures
Western countries can influence the flow of capital to
Soviet Bloc countries both directly, by regulating the
volume and terms of government-guaranteed credits,
and indirectly, by affecting the willingness of the
private sector to lend at their own risk. To date, credit
restrictions have come entirely from the private sec-
tor, and not from any specific Western government
action.
Some of the specific actions Western governments
might take to curtail the flow of capital to the Soviet
Bloc are:
? Tightening the terms on long-term government-
guaranteed credits.
? Limiting or reducing government-guaranteed cred-
its by putting a ceiling on new loans.
? Stopping completely the issuance of any new gov-
ernment-guaranteed credits.
? Also halting drawings on existing government-guar-
anteed credit packages for orders in train and
existing lines for future orders.
? Refusing to reschedule existing credits (for example,
to Poland and Romania).
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The direct impact of some such measures would not
be severely disruptive. For example:
? A 3-percent increase in interest rates charged on the
new government-guaranteed credits-roughly the
recent increase in OECD Consensus rates for the
USSR-provided at the 1981 annual level would
gradually increase interest payments for the USSR
by roughly $60 million a year, assuming a five-year
repayment schedule and no grace period in repay-
ments. The cumulative effect of such a policy over a
10-year period, for example, would result in a total
increase of interest payments of some $1.5 billion.
For the Bloc as a whole (excluding Poland) the total
cumulative impact over 10 years might reach $2-2.5
billion. The aggregate numbers still pale, however,
in face of an East Bloc financing requirement of
hundreds of billions of dollars for all of the 1980s.
? A moratorium on new government-guaranteed cred-
its to Soviet Bloc countries would reduce the net
flow of Western capital by amounts equal to no
more than 5 to 6 percent of the 1981 level of hard
currency imports. Moreover, the effects would take
some three to five years to be fully felt as the
government-guaranteed credits in the pipeline were
drawn down.
? Refusal to reschedule Polish or Romanian hard
currency delinquencies could force those countries
into a default. They would presumably stop all
interest payments but their hard currency trade
would be temporarily disrupted. The net impact on
the current account balance would be small. Private
lenders would view such a step as a negative signal.
The greatest potential impact of Western government
credit restrictions are of an indirect nature. It would
come from the political signal such restrictions would
convey to private lenders. It is highly unlikely that
Western banks would be willing to resume unguaran-
teed long- and medium-term lending if Western gov-
ernments were imposing politically motivated limits
on government-guaranteed credits. Short-term lend-
ing might also contract, depending partly on the
credit worthiness of the individual countries.
Western attempts to differentiate between the USSR
and Eastern Europe or among East European coun-
tries in the application of credit restrictions would
have to consider the following:
? The East European countries are in such bad shape
that if credit restrictions were aimed at the USSR
alone, Moscow could not recoup its losses at the
expense of its satellites. By the same token, restric-
tions aimed also at Eastern Europe would probably
force an extra burden on the USSR.
? The imposition of official credit controls against any
Soviet Bloc countries would have some negative
effects on private willingness to lend to the other
countries as well. Hungary is particularly vulnerable
to cuts in private lending. Outside the Soviet Bloc,
Yugoslavia would be hurt by the fallout.
? A general worsening in the atmosphere for private
lending might be offset for selected countries by
specific new Western assistance-for example, IMF
membership for Hungary.
The impact of restrictions by NATO countries and
Japan on credits to the Soviet Bloc could be weakened
by increased lending from various capital suppliers-
European neutrals, OPEC countries, and so forth.
Nearly all alternative sources of credit, however,
would be available only on stringent terms, if at all.
Most East European countries probably could not get
any medium- or long-term credits from private
sources. Moscow probably could get some loans, but
would be forgoing the interest rate subsidies now
being provided by many NATO countries, and, in
addition, would be paying large interest premiums to
cover political and economic risk. With the worsening
of East-West relations and the development of the
Polish crisis, Western government credit guarantees
have become important for political risk insurance.
Few countries are willing to provide such insurance.
Allied Views on Financial Sanctions
West European governments will be receptive to US
initiatives for moderate restrictions on credits to the
Eastern Bloc countries if such proposals are justified
primarily in economic terms. The Europeans are most
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likely to be receptive to sound economic arguments
pointing to the alarmingly large Soviet Bloc hard
currency debts, the weakened economic position of
most East Bloc countries, the likelihood of a worsen-
ing balance-of-payments situation for the USSR, and
the high cost of Western government subsidies. The
current payments problems in Poland and Romania-
and the high potential cost of honoring export credit
guarantees-certainly reinforce such arguments and
serve to give a sense of urgency to the situation. There
is a reasonable chance of agreement on holding
government-guaranteed credits to or below some re-
cent base level.
The degree to which the Allies would be willing to
curb lending to the East, cut subsidies, raise interest
rates, or shorten maturities is tempered by domestic
economic, political, and strategic considerations. The
Allies' East-West trade is small relative to total trade
but is important for specific industries in each coun-
try. In the long term, the Allies still hope to increase
their exports to the Soviet Bloc and almost certainly
would not be willing to commit themselves to a long-
term restrictive credit policy that prevented such an
expansion.
Policy Implications
The foreign financial bind facing the Soviets and
their East European allies this decade provides an
unusual opportunity to use economic means to influ-
ence Moscow's behavior. As with most other such
leverage possibilities, the impact will be subtle and
undramatic, and it could take years before these
modest results become apparent.
Successful Western efforts to sustain or tighten the
financial bind will make even more difficult the
decisions Moscow must make among key priorities-
enhancing the military, feeding the population, im-
proving the civilian economy, sustaining its satraps
in Eastern Europe, and expanding (or maintaining)
its overseas empire. Such an effort thus could make
Moscow consider even more carefully undertaking
costly new foreign involvements and increase its in-
centive for arms control negotiations. But it could not
force the Soviet regime to take actions which it
believes run counter to its vital national interests-for
example, withdrawal from Afghanistan or allowing
Poland to slip out of its power orbit, or conceding
significant military advantages to the West. At the
same time, the Soviet Union could assume a more
aggressive stance in foreign areas to show its defiance
of Western actions. Over the long term, such policies
could also lead the USSR to adopt a more autarkic
stance.
Among the various means of crimping the foreign
exchange available to the Soviets, the most plausible
method seems to be the limitation of new loans to the
Soviet Bloc. In addition to the Soviet financial bind,
two key factors lead to this conclusion:
? Credit limitations would take advantage of already
strong and prevailing political-economic circum-
stances. The Soviet Bloc has become highly depend-
ent on foreign loans to sustain economic progress
and in some cases even to maintain the current level
of economic activity. Western governments and
especially commercial financial institutions have
become less inclined to lend large sums to the Soviet
Bloc as they see little hope that the East's economic
and financial situation will improve much, as long
as current economic policies are pursued. The likely
continuation of a Polish crackdown makes selling
the idea of credit limitations easier.
? Western cohesion-so necessary for effective eco-
nomic leverage-stands a much better chance in the
case of credit limitations than of other proposals,
such as halting the development of the Yamal gas
pipeline, greatly reducing Western purchases of
Soviet Bloc exports, pushing down the world market
prices for key Soviet exports (gold, diamonds, and
oil), or embargoing trade with the Soviet Union.
Western Europe and Japan would certainly believe
they have much less to lose from imposing credit
restrictions than from employing these other types
of economic leverage.
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Although Western nations are at present disinclined
to provide the Soviets and their allies with new
credits, it is important to put the credit restraints in
place now. After the memories of the East European
credit problems and of the Polish political repression
subside, it will be much harder to achieve credit
constraints. Action now also would send a strong
signal to Moscow as to the West's cohesion and
strength (a factor that would also help overcome the
current belief that the Atlantic Alliance is incapable
of collective decisions). Finally, it would preserve an
important bargaining chip for the future, in the sense
that the possibility of expanded credits could be
dangled before a pressed Soviet leadership, especially
in the post-Brezhnev era.
The kind of restraint on credit most feasible under
current conditions is a ceiling on the flow of new
credit that would not exceed recent levels rather than
a cutoff of all loans or a sharp curtailment of new
credits.
? It would be nearly impossible to achieve a unified
Western policy stance on the tougher approaches.
? It is not necessary to achieve the more stringent
steps to make the financial situation worse for the
Soviet Bloc. Even the expected leakage of new
credits through third countries or by "cheating" by
the Western nations would do little to reduce the
impact of credit limitations.
? It would leave open the possibility of imposing more
stringent financial credit restrictions in the future.
The best way of achieving credit limitations seems to
be through restrictions on government-guaranteed
credit.
? Control over government lending is centralized; it
would be difficult to regulate the flow of private
lending.
? Limits on government-guaranteed credits would
curtail private lending to the Soviet Bloc, as they
would be viewed as a negative signal in capital
markets, intensifying disinclination to lend to the
Soviet Bloc.
A companion element of the credit limitations could
be the elimination or reduction of the concessional
element on government loans to the USSR and its
allies. In the past, competitive pressure for export
business has induced Western countries to provide
loans to the Soviet Bloc at much less than market
rates, forcing the taxpayer to pay the difference.
Given their budgetary problems, the governments of
Europe and Japan might find this a particularly good
time to forgo these subsidies.
Finally, establishment of a Western system for limit-
ing credits to the Soviet Bloc would provide a con-
tinuing basis for linking East-West economic rela-
tions to Soviet political behavior. To make such a
system work on a sustained basis, however, would
require broad agreement among the major Western
powers on basic goals concerning relations with the
USSR.
In sum, the key points here are.
? The limiting of new credits to the Eastern Bloc at
near recent levels would significantly constrain So-
viet policy choices.
? Such credit restraint is all that is politically feasible
in terms of the US allies' view of their long-term
interests vis-a-vis the Soviet Bloc.
? More stringent credit restraints would be harder to
achieve but would have proportionately greater and
more immediate consequences for the USSR.
Approved For Release 2007/04/02 : CIA-RDP85TO01 76RO01 300070001-5
 Approved For Release 2007/04/02 : CIA-RDP85TOO176R001300070001-5
Approved For Release 2007/04/02 : CIA-RDP85TOO176R001300070001-5