Created: 4/1/1988

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USSR: Coping With

the Decline in

Hard Currency Revenues


Method* Invoked

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USSR: Coping With

the Decline in

Hard Currency Revenues

Thb piper was prepared by

v. Office of Soviei Ajulysb. -iihons fron SOVA

Comments and Queries arc welcome aod may be directed to (beOVA


USSR: Copras Wrtfa

the Decline in

Hard Curreocy


USSR is likelypend ihe remainder of ihe decade coping with lhc impact of reduced energy revenuesepreciated US dollar on its hard currency earn ing capacity. Lower world energy prices, alone, have already cost the Soviets an8 billion in lost revenue during the past two years. Tbe Soviets' import capacity has been further eroded by tbe tower valued US dollar. While Morjcow'a oil and gas exports ere priced in dollars, most of its purchases arc made inrencies.

The Soviets have weathered the storm lo date by inaeasing foreign borrowing, gold tales, and arms exports to keep imports from falling too sharply. Moscow, nonetheless, has pared imports four consecutiveith the steepest cols coming67 imriortsillion arc downv-rceni in dollar terms3 nnd probablyercent in real terms. Two consecutive large grain crops nnd tower world grain prices, however, have allowed Moscow to hold real purchases of Western machinery and equipment constant, on average, over the past two years. Even so, the Soviets have postponed, scaled back, or canceled numerous industrial projects slated for the current five-year planning

The stepped-up borrowing that began5 and the impactepreciated dollar have pushed Soviet gross hard currency debt to anillion byompared withillionhe debt buildup, however, has not reduced Moscow's excellent credit rating. The debt service ratio stillhe same level as recorded in the taleIbe Sovieu mainuin sizable reserves of boih gold and assets on deposit in Western banks

The Soviet leadership docs not appear ready to deviate much from the course it has steered in recent years. We believe that Moscow plans toconstraining imports in the near lerm, not only to slow the rise tn debt, but also to assess tbe progress (or lack thereof) of Gorbachev's domestic modernization program.trategy should help Moscow maintain an acceptable hard currency position at leastspecially if dollar depreciation has bottoened out and oil exports can be maintained. Even if oil exports to the West begin to falter over the next three years, as we believe is likely, Moscow may still be able to hold gross indebtedness toillion byid on imports

Moscowhard currency position will bccornc more difficult to manage should the Soviet leadership decide thai atarleedly more imports from the VVeM are rrccded.hange in direction could come aa early as this year. Gorbachev's pertsi'oykalready creating problems in induitry and slowing growth because of produclion bottlenecks, bureau-era lie confusion, and lagging consumer welfare. But even should Moscow tarn markedly more to tbc West, we believe that near-term constraints "would comeoviet leadership fearful of looebt buildup and not from bankers, who arc willing to finance Moscowuch greater degree.

If Moscow optsargw Western role in its mcd era (ration program, It could provoke greater economic tensions in the Western alliance. While the West might benefit from Moscow's pursuitore benign iMerWiorsal environment to foster economicoviet Union more actively seeking Wesicm help would also make it more difficult for the West to maintain currentreach newcontrolling trade and financial flows lo the Soviet Bloc


("oa teats



Scope Note

Battered Energy Trade

Seeking Alternative Hard Currency Earners

iIT- r& Financial Markets


Little Help From Foreign Trade Initiatives

Near-Term Outlook: Slaying Use Course

An Eventual Turn to tile

Implications for tbe United States

Scot*paper provides nn analysis of the USSR's trade and liruiocial activity

in the wake of the sharp reduction in world oil prices. It focuses onhas juggled revenues and expenditures over the pactyearssome semblance of balance in its hard currency position. Itaddress the effect of falling hard currency revenues on variousthe domestic economy. These issues have been treated id severalduring the past

The debt and baiancc-of-iaymcnU numbers presented in this paper are basedecently completed study that bas rcestimated Soviet hard currency debt. Thus, some of the numbers in the tables cannoted to previously published scries. '

IntettigcrKC Assessment SOV

it Soviet Steel industry: What lies Ahead,


USSR: Coping Wilh

the Decline ia

Hard Currency Rerenac5

energy earningsepreciated US dollar haveore difficult for the USSRalancev tourers and uses over lb* pan three yean (tee figure IV Tab tarn of cveirueriod of ret*live calm for Moscow's hard currency posriion ia theuable trade surpluse* enabled Moscow to hold cross dent roughly constant atdlion aad evenut net debt by SI billion tounderillion. But the Soviets hate seen their (toss debt rise more thanercenind only favorable circtinut*largeecovery In oil production, and high goldprevented the debt from climbing higher.

Bartered txwawj Trawl*

The crstUpsr in world oil price* inhe See It of red need Sonet oil production and exports iaundermined Mcuoow'i ability lo earn bard currency. Oil earnadfrom an averageiflioBg4 to juit J7 billion orercent of lotal hint currency export* by* (seehe recovery in Soviet oil production at well at somewhat higher world oil price* helped boost oil earningsut estimated oil revenue* of just overillion were still well below peak revenue* Moreover, low world oil price* alsooiloviet hard currency gat earning* by bctoang gas revenue* under theillion markpercent hike ia export volume.

Moscow'i problemi were compounded by theof the US dollar. The purchasing power of Soviet energy revenue* has eroded sharply been ate oil and gas sales are priced in dollars, while most Soviet purchases lie made with itorsdrtilar currencies in West European and Japanese markets. The OCTWtal dollar -ruble exchange rate, set by ibe Soviet aula bank. Gosbank. is basedeighted basket of currcneae* and therefore servesough prosy for ciehangc rate movements. This rate increasedes ruble4er ruble by7 (see Inset)

Seeking Alternative Hard Carrrwcy Earner*

Reacting to the drop in energy revenues, the Soviet leadershiponcerted effort during the past two years to increase sales of nonenergyreas sale* to the Third Wortd grew sharply and. Iixdecd. were largely responsible for Moscow's ability lolimbic hard currency surpluses despite loal oil earning! (sec figure 2J. The value of arms tales rampedn annual average ofiDroa; it9 billion' Continued tensions ia ihe Middle East and ongoing struggles between Soviet client slates and insurgency movements have kept demand high for Soviet aims: munitions, support equipment, and spare parts bave accounted for the bulk ef Increased sales. In addition. Indentedfrom Westernacme newly industrialised countriesspurredemonstrate more flexibility ia setting prices' and arranging fiaaoeiageep ow curtcmer* or attract new on aa.

The immediate foreign exchange benefits to the USSR from these higher arms sale* arc suspect, however. The Soviets have had to fins nee much of tbc arms late* growth via credit extensions to tbe leu developed countrieshus earning hardonly on paper. Indeed, current tales arcbringing in3 billion in cash per year. We estimatehe snare of annual hard currency arms sales to Ih* LDCs on credit bas risea ia recent year* aad now ia at least two-thirds

Moscow's drive to push rooenergy. aonarsnscapons achieved less satisfactory results These sales were upillion dollarsbc increase was due mostly to oaks of traditional Soviei export*iamonds, precioui and strategic

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nickel, and limber. But on ibe basis of prdlminary partner country daU and Westernesjorting. sale* of *ome of these items appeared to hare tapered oft* last year. The Soviets have been unable to fenerale increased machinery andexports to Ihe Wesi. with thii category holding steady atercent of total hard currencyexports

The SovieU have benefited from substantiallygold sales. The USSRecord volume of gold to the Westetricincreased gold earnings to S4 billion. Gold sales volume? is estimated lo have fallenerceni to ISO tons, but earnings remained high ai5 billion because of higher world prices

(seehe USSRf jjscld aboutgold through iheTm ICLmoothsof theto sell

substantial quantities during ibe last two months of the year and inS to help finance purchases of Western agricultural commodities. Recent Wesiern press reason* indicate that such sales have taken place. The Sovieu are also showing greater inleresi in Western gold sales practice*utures trading, cetions, and swaps, as well as In more direct sales in smaller lou to hide ihe level of tales and reduce market reaction* (sec Inset)


Soritt Foreign Trade: sXnble Venm Dollar

Although ihe rublrar Sovtfu report their trade flows with hard currency caumrUs Im rubier.atter of convention, bower-tr. wt report Soviet trade 1st dollar term, converting from ike ruble to ike dollar at iht rait tet bp the Soviet ttatt bonk. Gosbank. Tklt can create tome problems in try inn lo Interpret Soviet trade flaunt.the fluctuation of the US dollar during ihe IPSOt. Far example, the "dollarvalut of Soviet Importi af machinery and equipment from hard currency eountrltt rate SS percenin contrail. ihese Import* Increased onlyercent In rubles and showed no growih at all In Wen Crrman maris. The exchange rate effects can be even more proetounted on Soviei trade flaws ttnct the bmlh of Soviet exports to the West foil and gas] are priced in US dollars while Soviei Imporu art priced largely In nondollar currencies inch as the mark, franc, or yen. Trade flows In this paper are usually presented In dollars, with an occasional reference to 'real"or exports In which adjustment! art madt to account for exchange rale and price movementi.

Tapping Mra-cial Market*

The Soviet hard currency problem bu alioeturn lo Wei tern capital mirketi ia recent yean. Ioereued Soviei borrowing helped path groat debt at year7 to an cttirnated2 billion (tee tableubstantial tbarr of the Increase la dollar-deacaainated ir-iebtedrcM wai attributable to the depreciation of the US dollar relative to othercunenaet bccauie about one-half ol debt ir bead tn other cunenaet tiera pagendeed, act new borrowing wgi much lower last year due, in part, to renewed oil earning! We abo believe lhat the USSRortion of ill new loam to refinance older, costlier bard currency debt, ihui improving iu payments position in the near lerm and helping lo hold down interest rosit


USSR: Hard Oureacv7


Io trmUftloa aC-Xnei Wm



Soviei net debt grew to an2 billion7illionltera on deposit la Western banks were estimated to be roughly SIS billion by yeaompared wilhillions with the growth in liabilities, more than one-half of tbe asset change was the result of dollar deprectatioji. Tbe growth in assets was somewhat surprising given Moscow's financial straits, but may haveesire by the leadership to maintainsufficient stockpile of fundi in lhc face of uncertain oil and credit markets



USSR: [United Hart!ebt to tbe West




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TheVU hawr traditionallyxmmrrm-Itvt marketing strategy ond aridhard currency waiwell-establiihrdIn london and Zurich. Oeer the past teveral years, however. Moscow hoiare sophlstl-eated player,umber of Heps lo improve

tilling practices and to market gold outside Its normal channels:

It has Increased lis pretence In gold spot markett. becoming more active In Hong Kong. Tokyo, and Singapore. In addition. Soviet gold traders have Increased direct tales to buyers and hart contacted dealers in the United Slates. France. WestItaly, and tbe Mlddtt Fast to establish mew trading links.

lu traders art aggrtulvtly selling gold options to earn revenue and to hedgerice drop.

ontinuing togold to receive hard currency premiums. In ihU case. Moscow's higher pwiiy gold it traded for another country't vault gold of lesser quality, and the difference Islo iheccountestern bank

the USSR Is seriously considering using some of ihe newest techniques In the gold market to borrow hard currency at less-tkenmartrl rates For example. Mateerw maygold from an agent who sells ihe gold on the spot markeremits tht proceeds io the USSR. The Sovieu repay the "borrowed goldater dale with gold plus an Interest rateercent. {The agent wilt profit If tht price of goldnother schemeparticipation dtol" or "mlni-

maxl" Inest err. partner loans hard currtn-

cy to the USSR Iptesumably an lavtttmentthe money Is umicd) and In returntht right lauantity ofal bclow-mmrket prices. If the market pricerilestipulated maximum price,share iht profit. The Sorieis havedepositing gold In major banks as collat-

eral for

Reeem Soviet Initiatives art likely to gcneralt Mgher earnings and to make It more difficult to track sales. Moreover, ihe Increased sophistication and mart astute liming of sales wilt enable Moscow to sell larger quonllllft of gold without seriously depressing wortd gold price I.

of (be debt growth wis accounted for by Moscow'i indented reliance on commercial credit* at falling ccmmerctal ioiereoby UBOR. the lortdoa Interbank Offeredthese lotct more attractive than tbc cootemet rate prescribed by the Orgioiratioa for Ictsrtomicion end Development (OECD) for official lenders (tee figurehe ihare of Soviet groti debtof commercial obligations rote fromercent0 toercent7 But there were tome tains last year of renewed interest in govrinatcnt-bocled. protectoe ei ample, major credit, eitcrtdcd to the Soviets listonly partially drawn-0 rrtillio*

be constructionotymici complex,0 million in pro/eel-related ereditiC J

0 raillion each

from France and Italy- The pendulum might be twinging back, not only because of lower interest rates from jmernmeots. but alto becauseesire by Moscow to lessen lis dependence onend-ieg while its credil rating remains strong

Although dill relying largely on iraduional trade oed'is and syndicated loans,SSR bai begun to broaden the scope of ill bninciil dealings with then ihe summer* the Soviet* invested in



in in tenia ticnnl bond issue for the first lime, and ai the bem'ruling8 Ibey issued thai own irjvcrcign bond. Is addition, Soviet or Soviet-owned banks in tbe West increased their use of acccsjcance fadntiet and Mher nonbank financing (see insetore detailed discussion of new financial Initiatives)


las poetseads*

Moscow also reacted to tbe fall in energy earnings with substantial cuts la imports. Imports averaging roughly SI3 billioa67 wereercent below those5 andercent below thennual average In dollar terms and probablyoercent less in real terms

DeeisMr* on which imports to cut woe madeeasier by two consecutive large grain crops.*ioi harvest6 enabled the USSRthe volume of grain Imports byrom the United Slate* and Artcolirs*tbe moat. Tbe lower volume, coupledlower world grain prices, reducedcurrTCrtcy grain eipeodittire*6illion less Ihaavalue of grain purchase* probablylthough Moscowrain cropmillion tons that year, law volute ofrose aaercent. Theof Iha IM7result of unusuallydaring lb* harvesting spurredhe higher volume, however, wa*lower world prices aad sabaidned sale* from-

Tbe tower outlays for grain only partially cased the pressure on Moscow lo oat sharply Into other hard currency purchases On the one hand, noemnal isn-poru of Western sssachiracry and equipment increased byercent6 tn an5 billioa. After discounting for inflation and Ibe depreciation of the dollar, real growih acnounted to an estimatedercent; purchase* of equipment for metal processing, iteelmaking. and road building accounted for rnost of ihe rise. The plunge In world oil prices alrompted Moscow lo cancel, postpone, or icaleumber of major projects dated forive-Year Plan. These actions, we believe, ledpercent drop la real Irnports of machinery aad eouipment

little Help From Korcfga Trade laltliraves

Mores to lestucture the foreign trade sector that look effect at the beginning7 were too new and loo

em* pat f'.t. ,*.

to have aided Moscow's trade tad financial ptcture but year. Tbe centerpiece ol* tbe reforms greeting direct foreign trade rsrrnlegesaWt-trioi aad TT eotapraa was to have laatwoved trade b, breakmg the Ministry ofg- Trade. (MIT, -rooopoi, and removing tbe Mieisiryumber som* irdddlemari ia forego tradeYet tbe MFT retained controlubstantialI*f hard currency trade because trade in raw materials and food and roughlyercent of machinery im-porta remained in its charge

For those organizations granted direct trading rights, the reforms, to some extent, probablyampen ing effect on trade in the short run. Soviet trade

officials haveedged lhat trade with Western eouatrie* -as disrupted by coo/uswcaiyst,

rr!nr>-ises were ul ecjeipped to handle thee srsernslbiuuea; the majx craaptaintack of personnel knowledgeable in trade affair.

The devtlopmeai of joint ventures with Western arms on Soviei soil abo did not meet, initial Soviet expect* -tlons. Despite an agjpessive cainpaign that retailed in over JOO proposals from tbe West, Moscow condadrd only aboul IS deals byestern firms sbled away from signing deals largely because of

Expanding Financial fieri cons

r 1

oviet Bank fort tconorrt-If Affair*tht Batik for Foreign Trade (VTB)-andSoviet-ownedbanks totaled In the West have expanded their use af Inlernatlonmlmarkets mud txtwrirettntednew Instrument. These IMllali-ra are bring pursuedew brctd af Soviet banker, our who is ycmngrr. better rdueatrd in Westernud more willing lo take risks Ikon hts petdetrssor. In most easts, the new One other aspectinancial twrukomt'ts options that ihese bankers artaddition to ubitant tallr Increased effort to expand etmtmeis. In being more tost effective andnot be general, with International bankers and organlta-reported In Western banking siailsiles. thereby pot en- tloas: llatly disguising tht level af ike USSR's debt;

Inst tunxmer, the USSR sent Ittfiritto ihe annual meeting of the AsianBank,oviet ecorttsmlsleeting wiih Intersuiilonal Monetary Fundiscuss ihe USSR's role In ihe world monetary gytltm.

Sovtet bankers have stepped up iheir aiiendance at numerous world banking seminars and hotted Western bankers to dlscusi new trade and financial instruments.

Soviet bankers have metumber of Wrsiem bank representatives to establish arrangements lo help finance Joint ventures on Soviet sail.


Update on Joint Vrultrtl

hat recently shoum Dwreased flexibility rr-

tardtng tht fortnotLnnl ventures In on effort IO

moke such projecti more ot met Ire to Westernicree pubUiked In early7 tfres lhc Western partner more cemtroi over tain In the Soviet market. stmpUfiel the procedure for JaiM-venlurr approval, and darifirs some tai

'new tnrtr^o

itemsost af problems'such as currency regulations, customi. and taxis have already been written and art being prepared for rtttait.

The Soviets are also allowing barter and other arrangements to enable Western firms to earn hard currency for profii repatriation wit boat having to retort to direct sales of the vemure's out put. Far example.

recoup lis

investment by receiving Soviet petrochenukallo sell In Ihe RIhe USSR Council of Ministers can nowike use af state funds for profii rryot rial Ion Ifoutput can subsiitutr for hard

Despite then efforts, we expectimitedof Joint ventures will be in operation within the next year or two. and they will probably have little Impact on Soviet hard currency earnings or the quality of domestic production during the remainder of ihe current five-year soon.oviet officials have claimed that onlyo SO agreements will be concluded during tke first two years, aad thai Moscow will thenemporary moratorium on tignings. Mosi af the deals concluded to date or those close to signing appear to be relatively small endeavors that Involve ilmple production processes, low level technology, and lUtU foreignew large projecti art under negotiation, bul. even If agreements art reached sometime this year. It will be teveral yteri before these projects begin full opera-lion. Over the longer term. Moscow stands to reap tome benefits frommall number of joint ventures. These projects could help Improve thefomsnet of certain Industries. Increase skills iff -selected personnel, and provide access lo some new foreign markets.

about profit repjtnalion and management control. Al wiih ihc trade reforms, the push (or joint vcrlur'i mai even bare born soenewbat coaaterpro-ductivc because Soviet officials probably overlooked lorne traditional trade dcati while they were tearchlng Tor joint-venture lerangerrtents (tee inset for ancm Joint vrstluresk

Near-Terui Oatlooaj SUjtng taw Course Although Moscow's bard currency poutrco hasfas recent years, the Soviets do not yet Cad themselveserious financial bind. Their debt service ratio baa climbed to an estimatedercent, batot much higher thaa levels recorded ia theseeoreover. Moscow retains gold reserves well in excess ofons: these add

further support to the sltable assets held In Western banks. Thus, the Soviets have euiotiined their audit rating throughout thus difficult period snd stillelatively easy access to Western fundi

Moscow coulduch tougher road ahead in maintaiaiag its bard cai nney positron Ongoingtoports of manufactured goods will result in only marginal gainsew selected products. The volume of gas sales will continue lout Moscow will be bard pressed lo repeat last year's near-record volume of oil sales. And, in any event, depressed wnrW oil and gas pricca will slill keep

Figure 5

USSR: Debt Service7 "

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midotto* replaced iht Ministry of Foreign Trade and iht Slate Committee forEconomicbody ihateconotniea tingle Ministry ofEconomic Relations. C- ,

^ the Sortrti have not yet determined the exact structure and functions ef ihe new mliuslry. but there are several indications of what the Sewiets may haueundnd:

The *poim*urnt of Kcmitamln Kalurhev. ihechairman of thr State Committer for Foreign Ectmonmc Relation* whose sWsVivusW Is tn rocsutt-Ist tputrnmrm relations, suggests lhal Ihe new ministry will main responsibility for foreignmd:

Moscow may grant additional mlntstrlei andihe right lo engage In fcrrlgn trade itnce Stag cat from the twoercent C be reassigned to new trade drpatlmtnU at these entities. The lack of trade experts at tht ministry and enterprise level haserious probtimfor Moscow In Us atlrmptl to drcmtrallti foreign trade decision-maklng.

energy revenue* far below peak earnings.may be able to keep up its arms exports as loog as it extends credits, but this policy does not provide significant bard currency receipts

Tbe Soviets will move ahead with their foretfaInitiatives, but these, too, will reap few short-term dividends. Indeed, the farther revamping of their foreign trade apparatus at tbc beginning of the year will add to already existing confusion in the short run ansong both Soviet aod Western traders (teeoreover, the ultimate success of reforms in the foreign trade arena is linked heavily to the pace of domestic reform, which we believe will proceedILiToets to open new markets to Soviet goods, either

The USSR Chamber of Commerce and Industry Is also likely toreater role In foreign trade policy under the current reshuffling; Its newVladislav Malxevich. former First Deputy Minister of Foreign Tradt, hat considerablewith Western bvdneumen. inoviet edfidal reported ihat this organisation will now tcrveontact point for Western firms Interested Injolnt-vtnlure discussions.

through direct Wlaieral lies ororgonUn-lions such a* the General Agreement on Tariffs aod Trade (OATTJ, are *iw long term ursaesukiag. wiih uncertain


Craaa Pea* CrowrS, St tssaalaa

limitedspeca for bce-tiag hard curreocy raurdhgs, Moscow ts likely lo see Iu debt continue lo -row for tbe Deal few years. By how macfa arsd ho- qnickly expend largelySoviet poms to apand imports to aid the modernization effort or,esser intent, to boost eoosomer welfare. At present, it appears the Soviet leadership is pot planning to deviate fromlkies. Tbe roost clefimtrve statement to date has been by Viktor Gerashchcnko, vice president of the Soviet Bank for Foreign Ecrmom-ic Affairs, who slated In the Western press that hard currency sources would accountercent of future tores (meet needs. This amounts to rouahry So billion per year, given current annualillion rubles. Soviet purchase* ofmachinery and oauiptneat averaged almost S6 billion the past threeuggesting little change is anticipated.'

Statement* from other Soviet officials suggest the same cautious policy. Gorbachev, while notnrSdrettirig tbe blue, ha*fforts to rely oa import* because of their high cost* and poor paybacks. Indeed, the thrust of ptrriiroyka to date has been to mr>Jernrxc from within, with foreign trade Initiatives designed. In part, to improve tbe assimilation of those goods imported, but not necessarily to Irrrpott more. Most Soviet bankingwith lhc ultimate poster of the parsealso playing down any heavy borrowing plana at the moment, C

If Moscow manages to hold the line oo trnrajrta, we do not foresee any financial bind by tbe end of the decade. Indeed, under very favorablentaintalnlog current real exports and gold sales is well as 'i pea iencsfig no farther dollarpursuitery conservative import strategy would actually allow it to reduce its gross debt by tbe end of ihe current five-year plan (sece

airvc Solln hrvtt cqnir-naw fwetasa

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cor-cud is(race rubles ind then lo oflflari



project that Moscow would be able to use ha large trade surplus and profits from gold salea to reduce rjorrowlng and thus cut gross debt toliioo. Similarly, net debt -cold drop toillion, and the debt service ratio would fall toercent.

More likely, however, Moscow wfJI face some prob-lerns in major* inlng iu current level of hard currency earnings. Oil eaporU will probably be tbe biggest problem; and the volume of sale* lo hard csrrrcsscy countries I* likely to drop over Use next several years unless tbe SovieU arecontinue pumping ersormou* Insestmcol fund* into production. Otber potential earnings problems could arise because




weak fold or anna markeu. But, ever, with difbcul-lies that elecrease real cxporu br roughlyercent from cunent levels, we project lhai Moscow could keep grow debt under SSO billiongain assuming no real import growth or further dollar derjreclation.ebt level would iiill be imall in comparison with the ilze of the Soviet economy and would present few coece.ns to most Western bankers.

aaihe Writ*

While we believe that Moscow's trade and borrow!ag plaets arc unlikely to change markedly In lhc near term, weralereater rate for the West la fact. Gorbachev's trscderniulion drive couldritical juncture by tbe end of this year as Moscow impicrncnts disruptive measures designed to change the way workers, factory managers, and centraloperate. Since the beginning of the year,directors have had lo cootead with newinancing" and "fail ccoaccaic accoorsUbusty" regulations, the expansion of an already jolting quau-ty control system, ongoing plant retooling, and ihe phasing in of untried supply and planning reforms.

J. 'be chaages have already

begun to create chaos In industry. If this situation continues, lhc Sovieu couldecline inproduct toe, increased worker retliveoess, aadsupply shortages and jotUenecks, ah of which would heighten their perception thatalling and thai they are falling even furl her behind the West technologically.

sra of events could proeocX Gorbachevtep ssp the lafasaOR of foreign inputscale mack larger Ihaa currently envisioned. He is likely so give Ihe nod first to countries in the Council for Mutual Economic Assistanceiven the Intceulvc campaign under way to expand CBMA's role In Soviei economic development- Bul because cf Eastern Furore's already weak response to Soviet demands, the Soviei leadership may look asactthe West as lo iu CEMA allies. The economic troubles being eapctienced by some of Iu Easl European neighbors may snake Moscow uneasy about adding to their stiains. In addition. Eastern

I:urope atay sunply be unable lounder Soviettypes and ouahty of goods the. ScrvicU vnfl be leaking far la revive growth, -ase J

la contrast. Moscow would probably find willing sapplieri ia the West. Western butincssascri have been geared ap tinee Ibe atari of the curreai five-yearncrease sales to tbe USSR, oaly to aad tAdr expectations dashed. Yet Moscow's increased activity la the puttonths to eajaod its role ia (be wcatd economy has rekindled Western interests "*

Steered-op imrxxts would also pick ap tbe pace of debi growth. Modest nominal Import growth oa Ibe orderear would present few. if stay, pruMerru. la fact, lock Import growth under aearnings scenario would oaly raise Soviet debteonxted levelalboa0orrcsssoadsag debt service ratio ia tbef roughlys stow. Should the SorieUerccat Import growth ruder conditions cf falling hard currency earnings, their debt would climbillioa level by Ihe end of Ibe decade,onesspoodirtg debt service ratio of naughty JJ percent la Ihe

We believe Moscow could embark oa aa even mora serious import binge aad ftnll cttcouater few fiaaacsag problems. For example, nominal import growth ofearaiih falling bardSovtet debt to justillionebt service ratio of arounderoral la the. Most Western bankers would probutty be wdl;ag to underwrite sack aa increase, given tbe tire of lhc Sorict economy aad Moscow't reserves of gold. oil. gas, aad other natural resources- Indeed, iirrdcrcertario theclimate in the USSR would still look quite atutctive corapared with tha debt problems of many of tht world's aaajor debtors. The objections would more likely comeoviet lestdership that wouldilling to go that far for fear of the potential rrersnossstc leverage il would be giving to Western



JCermnenis and bankers. Moreover, ihe Sovicuihai plana for any dcbi buildup can go awry should Moscow oocspcctcdlyartherof the dollarad harvest or two,

Imtfiathm for Ckew&nvea'vc Sorter. <cos^kokcqfetwsa Vrmrnwc^pro^USpcAY^wiArisuy^ inienrnional ecrmosnk ermrooment thai cuflen witte from what they now face. The Soviet leadership win most likdy continue wilh its deliberate pace to expand its rote In ihe worlducking on those fronts where success is probable or the rewardslarge, and pulling back In areas where it has Utile to gain:

Soviet hard currency trade will continue to be deminated by West Europeans and Japanese.will press for improved Soviei-US economic tics, but hugely with the intent or opening US marketse either directly closed to Soviet products or effectively closed because of high tariffs. US sales will continue to hinge on Soviet grain purchases, and even then the Soviets will exploit glutted grain markets to drive for better terms.

Moscow will continue to tap new sources of finance, seeking out both new lenders and new financial instruments. Dabbling in new markets is apt to be

'small, huwever, with additional bond offerings likely to see the most growth given the ursoualifted success of the first Soviet bond issue. For the most part, the Sovieu will etill look largely io syndicated loans and trade credits tf borrowing remains on the lean side.

Tbc Soviets will also maintain their steady pursuit of membership io key, international economic orga-nkaiions. focusing efforts on those bodies perceived as rnost likely to enable ihem to gain increased access to foreign markets, thus, organizations like GATT and arrangements such as the Multi-Fiber Accord (MFA) will remain high on Moscow's, list, while the IMF and World Bank will be largely ignored.

Addilional piecemeal moves to decentralize ibc foreign trade sector will continue, but truly radical measures are not likely soon. For example, Moscow recently stated that it does not envision aruble" until lhc second half of.

Greater opportunities and/or concerns would arise for tbe United States should Moscow opt to allow thereater stake io Soviet economic devesopment. Inase wc would expect to see continued it tempts loenign internationalet cnettwK<(ewinch aw ass, however, me would atao, espem. ui sec en irttcoitcicaucio of Soviet tore/go. economic WtistWet, irrdvdiafc increased oooccavons. to Western firms to conclude jotoi-venturea stepped *op campaign for OATT membership and MFA participation, and the possible release of trade and financial data to fadlitaie borrowing.

Sales by US companies should increase If Moscow expands economic ties to the United Stales to help pave the way for iu overall political and economic agenda. But substantially larger sales may not be in the cards.ime when the USSR is willing to increase iu dependence on the West, it probably would remain leery of the reliability of USoscow would probably still took largely to the West Europeans and the Japanese, believing thatImposed US embargoes are still possible

Tbe risk to ibc United Sutes of such Soviet overtures Is that other Western govern menu might Increase their trade and financial concessions In hopes that their firms would gain the upper hand in Uppiog Soviet domestic markets. Of partictuar concent could be Increased pressures to pare further the list of controlled irchnoJogies specified by the Ccordinating Committee for Multilateral Export Controlsuch pressure would make it more dint-cult for the Wen tonified stance onewconcerntng trade and financial flows to the Soviet Bloc

Original document.

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