CIA HISTORICAL REVIEW PROGRAM RELEASE AS SANITIZED
The Soviet Gas Pipeline in Perspective
THE SOVIET GAS PIPELINE IN PERSPECTIVE
*"ni; daatssoK has been approvedelease through thoV1EW PKOGPAM of thentelligence Agency.
THIS ESTIMATE IS ISSUED BY THE DIRECTOR OF CENTRAL INTEUIGENCE.
THE NATIONAL FOREJGN INTELLIGENCE BOARD CONCURS.
The following inteUigence organizations participated in the preparation of tltc Estimate:
The Cenlrol Inteetgence Agency, thu Defense tnteligence Agency, lhe Notional Security Agnncy, and lhe intelligence organization! of the Department* of Stole, the Treasury, ond Energy.
The Assistant Chief of Stalf InteUigence. Deportmenl of the Army The Director of Naval Intelligence, Oepartment ol the Novy Ihe Assistant Chief ol Stall. Intelligence. Department ol the Ait Force The Direc'oi of Inlelligence, Heocfqoorters. Marine Corps
I. THE SOVIET ECONOMY: THE TIME OF
II THE ROLF OF EAST-WEST
0 Profile of Soviet
* oviet Calm From
D. Consequences for Soviel Miliiary
E The Hard Currency
AND CAS: FUTURE KEY TO
A The Soviet Energy
B Imporlaiice ol lhe Eapoi
C. Alternative Energy
D Soviel Dependence on Western Oil
FOR WESTERN GOVERNMENT
on thc Gas
D Impact on Future Cas Eaport
E Impact on the Soviet Economy and Military
A Altitudes on East-West Trade and Trade
ft The Pipeline Deal in Wcvl Euiopean
C Possible Ateas of .
ANNEX SOVIET DEPENDENCE ON US AND WESTERN OIL AND CAS
This Special National Intelligence Estimate reviews tbe dexree lo which Western trade, lechrvology. and energy reUtionships havecan in ibe futureUSSR to increase its military slrenglh and imitosc unwanted burdens on the Western nations The Eslimale also assesses the potential impacl on the USSR nf the following courses of action:
A strengthening of COCOM to assure that militarily sensitive lechnology is withheld from the Soviels.
Avoidance of gas imports by the Europeans beyond the imports already agreed Io as pari of the Soviet export pipeline project.
An embargo on some energy equipment and technology.
An end to subsidized credits.
USSR has used imports (rom the Wesl to enhancecaisabi lilies -
By obtaining goods and technology, legally and illegally, lhat contribute directly to the production and technical sophislica-lion o( weapon systems.
By expanding lhe base of industries of particular importance to
more generally, by easing economic problems, (hereby reducing the burden of defense.
Tlic rapid increase in Soviet imports From the West tnas made possible by large windfall gains in export earnings due to the surge in oil prices and the willingness of Western countries to provide large credits, most of which were governmeni guaranteed The USSR is eiicotinterinK growing economic difficulties, which will malte it more difficult for Moscow lo increase its imports from the West in lhc fuiure. The outlook for most Soviet exports, including oil. is not favorable, and Western banks arc unwilling to extend new long letm credits without government guarantees
Only the increase in gas exports though the Sibcria-to-Western Europe pipeline willarked decline in Sovicl hard currency imports inhe USSR almost certainly will bc able lo meet scheduled deliveries of gas through the pipeline without diverting Soviel equipment from domestic uses. Enough equipment has already been delivered, or soon will be. to enable lhe USSR lo meel likely West European demand for gas unlil thc. By then, Moscow will probably be able to produce enough modern lurbincs and compressors to bring the line lo full capacity, or will have found new sources of equipment (or any it may have lostesult of US actions. Meeting gas delivery commitments and becoming self sufficient in lurbincs ond compressors will impose costs on the Soviets in inefficiencies and shifts in resources and effort.
While gas exports are the most promising future source of hard currency, oil exports still account for someercent of Soviet export earnings, and il is important for Moscow to minimize their future
decline. The USSH depends on lhc Wesl for specialized oil exploration, drilling, pumping, and processing equipment- As ils deposits of high-quality, accessible oil are ilepleted. tlie Soviets are turning to more remote ml and gas fields and more costly exploitation techniques II it ihey lag badly Ix-hind lhe West in the necessary technology. Without any access to Western equipment, the adverse impact on Soviet oil production could be as high asercent of output
5est hope of improving its strained hard currency position in thc longer run is lo secure the cooperation ofn building large new pipelines for the delivery of additional natural gas in lher inith enormous gas reservesowerful incentive to earn more hard currency. Moscow is prepared lo sell as much gas as lite West Europeans will accept. There is poteniial uncovered gas demnnd in Western Europe to fill noi only lhe Siberia-to-Western Europe pipeline now being built, bulecond and third strand duringevelopment of these large gas projects currently requires Western pipe, equipment, and credit and markets as pariackage deal, allhough Soviel need for litest Western products will diminish as Moscow develops ils domestic gas equipment industry. Alternative sources of gas exist, notably in the Norwegian secior of the North Sea and in North Africa, although they arc in general relatively cosily and some are considered insecure.
G. It will be difficult lo enlist Allied cooperation in restricting trade with the USSR. Beyond economic incentives, there arc political considerations lhat fuel lhe West Europeans* reluctance to accept reslnctions on trade and credits to lhe USSR These include:
heiiir-in Europe ind lo avoid exacerbating East-West strains
Their desire to maintain access lo Eastern Europe
Their belief that economic and other lies wiih tlie USSR willSoviet behavior
These political considerations, combined with tbe economic incentive, continue to limil West European coopeiation with the United States In restricting East-West Irade
he crux of the problem lies in developing with the West Europeanommon understanding of the strategic im plica tions of East-West trade. Such an understanding has been notably absent, but the chances of achieving it may be belter now thai thc West Europeans arc becoming more aware of llie issues and the depth of US
concern. Allied leaders have asserted ihai thev will nul conducl economic warfare against tlie Soviet Union. But adequate analysis and discussion can leadommon conclusion.
deficiencies in security policies among the Western Allies have resulted in Soviel acquisition of militarily important technology, financial subsidies, and, potentially, an important role in Western Europe's energy supply.
taking steps lo withhold these benefits is merely prudent security policy which Allies owe lo each other, and can be seen as self-protect ion rather than economic warfare.
S. Accordingly. Western countries might be willing to cooperate
Developing and implementing broader and tighter COCOM rcslrictions.
Agreeing to slricter limits on the terms and volume ofcredits.
Developing other energy sources as an alternative to additional Soviet pipelines.
Making Weslerntary-related technology, subsidized credit, and loeked-in gas markets available helps the Soviet military buildup. Western governments would then be under increased pressure to raise defenseove that requires heavy taxes, sometimes leads to deficit spending, and contributes to inflation and high interest rates The United Stales is now commiilingercent of its economicand tbe European Alliesercent of theirs lo defendoviet military threat thai consumesercent or more of iheir CNP. Al lhe same time Western leaders are asking llieir citizens toeavy defense burden thev are pursuing policies that help the Soviclshreal thai adds lo this burden.
This Estimate includes analysis of the potential impact of Western actions, including actions by Western Europe and Japan, on Soviet economic and military programs:
reduced availability of hard currency and energy would make more difficult the decisions Moscow must make among key priorities in thegrowth in military programs, feeding the population, modernizing the civilian economy, supporting ils East European clients, and expanding (oi maintaining) its overseas involvements.
While lhc cumulative impact of Western actions would clearly increase pressures on Soviet decisionmakers, we cannot judge how they would choose to spread such losses throughout the economy
Because economic growth will be slow through, annual additions to national output will be too small tomeet the incremental demands lhat planners areon thc domestic economy. Even now, stagnation in thc production of key industrial materials is retarding growth in machinery oulputifve source of military hardware, investment goods, and consumer durables.
Shortfalls in Soviet hard currency earnings due to Western actions probably would force further cuts in imports ofand equipment. Moscow fears [hat reductions in food imports would cause popular unrcsl and wanls to avoid the bottlenecks that would be caused by cutting imports ofmaterials, such as steel.
In thc longer term, cuts in machinery imports would retard progress inumber of industrialmachine building, oil refining, robotics, microelectronics,and constructiona time whenis countingtrategy of limited investment growth and relying instead on productivity growth
Placing controls on energy-related equipment and technology would aggravate civilian industrial bottlenecks and, therefore, might cause civilian encroachment on defense production, sucheallocation of some military-oriented metallurgical and machine-building facilities lo produce the embargoed oil and gas cquipmenl
The combination of enhanced COCOM controls and foreign exchange shortfalls would raise the cost of Soviel military modernization while at the same time weakening the industrial base for miliiary production
he relative impact of Western economic measures on the USSR can be estimated only as general orders of magnitude, as follows:
Eschewing futureear in
Denying all oil equipmentear for several years but then declining.
In Ihe long "in. lighter COCOM restrictions on militarily sensiti technology (including technology and equipment that indirectlyto significant improvements in weapon systems) would perhaps bc the most valuable action for lhc West. Such action would retard minor improvements in Soviel weaponry, which the West would be forced to counter. While the dollar value of such action is difficult tothe savings in terms of Western spending for defense annually would probably come to billions oj dollars.
oscow has the means lo react lo Western pressure by giving defense needs an even greater priority ihan at present and byore truculent foreign policy. The Soviets meet their fundamental military requirements from their own large industrial base. Miliiary programs, moreover, have great momentum and political support; they would not easily bc scaled back, allhough thc rate of modernization
u l i . uuernizaiion
ild be slowed. Even so. Moscow could not escape the reality that its basic choices between miliiary and economic programs would become more difficultimehange in leadership might also make those choices less predictable.
IHE SOVIET ECONOMY: THE TIME OE TROUBLES
I Tin* USSli is encountering increasingly severe and fundamental economic difficulties Ils rate of economic Crowth has slowed lo lessercent and the chances of any substamial improvement are slim. The causes of this slowdown are basically home-grown Some ofdrastic reduction in the growth o! population of working age and the Increasingof calf act ing and transporting energy and Otherinevitable. Other causes of thchowever, appear to have theii roots In the Soviet bureaucratic, command-type system, which seems to encounter great difficulty in coping with the increasingly sophisticated problemsodernand in the negative reaction of Soviet workers lo what (heyeakening of their standard of living and inadequate rewards lor hard work and initiative within thc system.
2 Although maroi systemic reforms could improve Soviet economic performance, at least in lhe long term, none are in the offing because Soviel leaders and party functionaries are unwilling to take any chances wtth an erosion of their political power and bureau-critic control Events in Poland have reinforced this feai. Reform attempts have basically taken thr form of bureaucratic rrorganizatiorts lhal put new clot hrs on old problems Any substantial political change afler Brezhnev it more likely to be in lhc direction of tightening controls and labor discipline than toward liberalization.
lse slowdown in Soviet economic growth has been characterizedramatic decline in the productivity of investmentuch slower growth of bbor productivity Moreover, with sorrte important sectors and industries, notably steel and grain, actually experiencing an absolute decline in output, miior shorlages have developed. Given an unwillingness to undertake maior economic reforms, thc Soviethas used imports from the Weil lo ease its problems and will continue to do so
II. THE ROIE OF EAST WEST TRADE
A. (oil-West Economic Interaction
4 Throughout its history the USSR has exploited economic interaction with (he West both legally and illegally lo expand its economic base, raise lhelevel of its industry, relieve industrialincrease domett ic lood supplies, improve ils military capability, and lessen lhe burden of defense Tliis exploitation reached Its zenith ins Soviet postwar productivity gains slowed and Moscow increasingly turned to the West for equipment and technology lo spur in industry, and for grain to oflset shortfalb in its inefficient farm sector. For ib part, the West encouraged expansion of East-West trade bv loosening export controls and expanding theof credil, often at subsidirrd interest ralesIbe Soviets supplemented legal trade acquisitions of Western goodsell-organized and centrally directed Clandestine acquisitions program. The Soviet intelligence services and their East European surro gatesaior role in acquiring US and other Western military technology, embargoednd manufacturing technology for Soviet militaiy and defense industrial needs.1
B Profile of Soviet Trrade
b Duringhe value of Soviet hardimports from the West increased mote Ihan ninefold In current price* (see (Jgurend more ihan tripled in constant prices Although still small in relBtion to gross national product (lessercent ofoviet bard currencyesuecialiy machinery, ferrous metals, andhaveritical role In many high-priority industrial, agricultural, and military programs,lliose for raising energy production and meat
' Fmat thaiiS iu oamWi-aff la Sonetat WtamNl IIM tXtCCOS, Dm naaTaatfcgai Ai^uumoon latelttcrw Serum lone
slo sustain growing import* olcapital goods and foodstuffs was boosted sharply ihe runup in prices (or oil and sold- two key imirco ol foreign exchange (see figurea burgeoning markel in the Third World (or Soviet jtniv. theighest quality manufactured goods.bv overture* Irom Weslern businessrnenlo tell equipment and technology fromcapital goods industries. Moscow successfullyeries of buyback deals svilh llie West, involving purchases of Weslern plant and equipment linanccd at lavorablc rates and long-term maturities. As payment for thc equipment. Moscow was to sell rasv materials and semimanufactures at prices that generally reflected rising rales of inflation
C. Soviet Gains From Trade
6 Imports from Use West have contributedumber of important ways lo Soviet economic capabilities*
, imported chemical cquipmenl. accounting for about one-third of allmachinery purchased by the Soviets, was largely responsible fot doubling the output of ammonia, nilrogen fertilizer, and plastics and for tripling synthetic fiber production
The Soviets could never have accomplished theiryear program ofand expansion in thc motor vehicle industry without Western help The Fiat equipped VAZ plant, for example, produced one-lull of all Soviel passenger cars when it came fully on streamnd thc Kama River truck plant, which is based almost exclusively on Western equipment andnow supplies nearlyercent of Soviet output ol heavy truds
Crain imports have averagedons per year5 Withoutgrain, Soviet meat consumption would have increased less in llie, and
' Forti-xrwves- ml dsn* tains, tr* ihr
the fall in per capita consumption of meal in thcould have been tar worse
computer systems and minicomputers of Western origin have been imported in largesysiems sincebecause they (a) have eapabililies lhat'the Soviets cannot match, (b) use complexthat lhc Soviets have not developed, and (c) often arc backed up by expert training and suppori that lhe Sovieis cannoi duplicate
ol Soviet deficiencies in drill bits, pumps, and pipeline cquipmenl. lhe USSR bought aboutillion worlh of oil and gas equipment alone in, but these purchases have- now largely ceased. Sob mersible pumps purchased from the United Slates, for example, may have added as muchillionay of capacity lo Soviet oil production in recent years Similarly, the Soviet offshore exploration effort would not be nearly as far along as it is without access lo Weslern equipment and know-how Meanwhile. West Cermany and Japan have provided most of the large diameter pipe needed for gas pipeline construction
D. Ccnsecfve-sces for Soviel As*tory Power
7 Direct Benefit! lo Military Weapon Si/ilenu. Acquisition of goods and technology from the West, either by Legal or illegal means, enhances Soviet military programs in two principal ways- by making available specific technologies lhat permitin weapon and miliiary support systems and the efficioncy of rnltilary and civilian productionand by providing eeonomie gains from trade that relieve bottlenecks and improve Ihe efficiency of the economy and thereby reduce the burden of defense Soviet military power isnda mentally on the largo size and diversity of the Soviel economy and lhc breadth of the Soviel technical and scientific base, on Soviet success in acquiring sophist scaled technology in thc West, and on the longstanding preferred status of lhc military sector
8 II has only been through an caliaordinaiyol resources lo defense thai lhc Soviets have attained their present miliiary power- Soviet weapons are designed tohe requirements forin which the USSR is deficient, but Ihe Soviets have turned to legal and illegal acquisitions of Western technologies to make up for domestic shortcomings.
he Soviet armed forces are being modernized in nearly every category of weapon system Soviethardware, which was at one time distinguished for Its rugged simplicity, has been qualitativelyuntil it it in some iristances ihe technological equalnot tuperiorhardwarein the West. Without Western technology, modernization and qualitative improvement of Soviet militaiy equliunenl would have pioceededlower
the acquisitions of Westernhardware, lhe Soviets have been ablend production obiecti.es
The reduction of engineering risk bv following or copying pioven Western designs
The reductionime by several yeais through tbe use of Western desigm andand equipment
The incorporation of countermeasure* early in tbe Soviet weapon oVvrloprncnl process
In addition, the Soviets have hern able to upgrade critical industrial sectors such as computers, miciuelec-tronics. and metallurgy, as well as lo modernize Warsaw 1'acl industrial manufacturing capabilities This has also helped to limit thc rise in military production costs
Soviets commonly acquiie evenhardware under COCOM license,lor commercial purposes. FM example,acouslic signal analyzers, legallyDenmark in the, if used onown submarines, could significantlytactical passive sonar capability to detectWestern subrnarines In addition, twodrydocks purchased from tbe Weal for civilian
use have been diverted lo strategic and tactical naval shipbuilding and repair
egal purchases of Western machinery,aod manufacturing tr-cbryologies haveide range ofoviet weapons(See inset below.)
Soviet Militory Uses of legal Imports
US-oitgin gear-cutlini machines were used lo produce military trucks, -heeled armoredand components 'or missile Ir importer*
Western gear-cult In* machines were vsed in the development of thc Ulest Soviet military heavy-lift hehcoirter. the Ml th
1High-technoloeylathes, milling ma chines, and other machine tools from Sweden and Weil Cermany and Iwo large ratlins mills, one Japanese and one West Cerman. are probably used in the construction of titanium hulls forlaas rwclear altack submarine, theunt and deepen diving mbmnine
t'S oritui (rinding machines werr used in manii facturing small. hirrh-precisMn bearinas suitable for ballistic mm.I- guidance operation.
An electron beam drilling device of West Cei-man origin was used to Improve the Quality of So--ei turbine blades
AuUmrv-orvjin bet and cold roury forgesi all] were used lo produce artillery tubes andi.-mi barrels
US blind riveting and French aerospace wrWing technology equipment was uicd to produceSoviet interceptor aircraft.
Western tungsten arc welders were used to fabii-cate armor plate lor Soviet tanks
US leer-oology acquired lor the Cheboksaryplant was sued loew i2 cylinder link i
he Soviets have historically relied on clandes-line acquisitions of foreign technology to provide some of (he most critical inputs needed in the development of their weapon systems (See inset on neat page] Although ihey pay high premiums for illegal imports, the total value is small relative to total hard curi-ene? importsillion
' - I
my Uses of lllegol Imports
Information on the US rVeoesv ih.. surface-to-air missile facilitated tlie development of" tlie Cosseturing the nrntolypr con-HiswtHa ol theearmcs acowtred from Japanused penrlinc the sannequent devetnci ment ol indigenous hcaiings ol suitable quality.
In Ibehe Sovieis copied tbe Teaas0 series monolilhac integrated<IC) to pioduce the series IU (LogikaC This IC was then used to develop theoosputer. -hose design and architecture were coc-ed from the0 The0 has been used innumber of military applications.
Materials acquired on tlse US TACAN rw.igjliori irstcea were adapted lor uselhe MIC ZS Foilwl navigation system.
Data acqu'red on theransport have apparently been used tn lhe development ol the new AN>tO0 heavy transport under development at (lieesign flurcau in Kiev
14 Olher Benefits lo Military Programs.technology and equipment abo enable the Soviets to improve industries that indirectly support weapon develop men Is Even though the defense industrial ministries perform the bulk of weapons development and production, ihey rely on ibe nondefense industries to supply specific products such as missile- hand ling equipment, and lo supply most of the basic tools of weapons development and tools, sensors, and computer software Decs use most defense industries also produce for the civilianimports ol Western machinery lor the civilian Sector abo help lo prevent greater encroachment of civilian requirements on defense productionraditionally the Sovlots have lagged behind tlse West In their abilily to produce modern electronicso perhaps than in any cither area of military technoloey In particular, ihey have not been able lo produce live highly sophisticated precision equipment thev have needed in volume, and their RAD methods are too raondetous and react loo slowly to slay currentechnology that moves with expressway speed
esult, the Sovietsajor effort in theo obtain Westcin equipment lor the manufacture of integrated circuits They have now
acquired several hundred million dollars' worth of machinery lhal. if combined, would enable them to equipoedium-site production lines capable of prisducinu advanced devices, including large-scale integrated circuitry with sufficient capacity to meet all current Soviel military requirements Thisbase is known to be used to support development of military equipment such as strategic missiles, anti-ballistic missile systems, sensors and weapons forwatfare. and computers for miliiaryll isey technological capability for continued advances in Soviet military electronics
estern manufacturing technologies have helped Ihe USSR produce materials with critical mili-tatv applications, especially InS firmurnkey plant lo produce rock-drill bits that included eatensive tuncstcn-bated penvder metallurgy technology. The US equipment and expertise providednhanced the Soviets' abilily lo make thepowders needed to produce new and more lethal tungsten-alloy penetralors for ihcir kinetic-energy, antitank protect itesan. and Westalso have sold llie Soviets powder metallurgy pressing technology similar lo that used bv Western manufacturers to make tu nisi en-alloy pcoelrators. The French lirm Cteutot-Loire is helping toassive steel plant in Novolipetsk. which will produceillion tons of specially steel when operating at full capacity6 Much of the plant's output will be elcclrodag and vacuum-arc rcmell slecU ol the
kind used in submarine hulls, aitillerv tubes, and tank armor
E. Ihe Hard Currency Soveeie
IHime when Soviet economic difficulties are growing, tbc USSR's hard currency earnings areIn the past few years. Moscow has used its hard currency earnings primarily to buy lbc goods necessary lo cover mayor domestic shortagesesult of four bad grain crops in succession, food imports have risen lo about STZ billion, or aboutercent of total hard currency imports, reflecting the high priority thc Soviel Government gives to at least maintaining supplies of major foods in tlie consumer market There has aboarge eipansion of steel imports, especially large-diameter pipe and special sleels. because tlie Soviel steel Industryhe
divi-fmiv tu support ill (he majoi Sovicl economic and mllllaiv programs. These prioritv needs lot hard currency imncKls have wpjcezcd Soviet imparls. of Weiletn machinery and equipment, which Iiave (alien by aboulercent inconstant pricesith most ol lhe decline having occurred in tlse past two yean
uring ihe pastoorbs or so, lhe USSK hasevere foreign en change squeezeesultoft oil market, krw prices for other Soviet export commodities, and unexpected eapenditures on imported gram and on aid to Poland Although llie cyclical causes of this deterioration are onlyllie longci term outlookise in Soviet hard currency earnings ins poor. Unlike, when enormous oil price increases financed lhe bulk of the threefold increase in the volume of Soviet hard currency imports, the outlook for oil prices lor atleast several years Insecline in real terms, if not In nominal terms. At lhe same time, the volume of Soviet oil exports is likely to be squeeaed by al least slow growth in doinestic consumption coupled with stagnant or declining production. Marketfor most other Soviet exports do not look very promising either. In contrast lo, therefore, likely market conditions inointecline in the purchasing power of Soviet hard currency exports. (Sec inset below.)
Prospects for Major Hard Currency Exports
The increase In gas exports now in train will essentially ennilitufe an offset to the likely de-dine in oil
Thef oil re-emieidle flail producers mcb as Libra retakes it unlikely that some maaor Soviet arms client!be ante Ic continue paying in hard currency
Eapoiti of timber and wood products arc iqueered between riling domestic eonuimption and Ihe rising com of cploillng limber in in crraiimlv remote areas
Export!oi rninerali (platinum (roup melili.copper, aluminum, chro-Ttite. maneineie.vli ktad. and amcjlaedtome Ircn-linrf up. other)down.
of Soviel ma nuf act inert arc not findinc readr acceptance in- Western markets, andhat not made lhe large investment required in quality eontiol and marketing lo nuke rapid progless
Pole of Western Credit. Western credits lo the USSR, often governmeni guaranleed. have been an important (actor in the rise in Soviet imports Since lhe USSR began large purchases of Western leehrtolocvllie. Moscow has uved official andbacked ciedits to finance one-third of its imports of plain, equipment, and large diameter pipe from the Wesl Annual Soviet drawings on governmeni-backed credits lumped from an average5 milliono nearly S3 billionut have held'll.ion per year8 Thc volume of new commitments (elleak of nearlyillion5 tu less thanillioneflecting falling Soviet orders for Western machinery and equipment.
The combination of rising debt serviceand level drawings has steadily reduced the net resource inflow to thc USSR on official creditsaximum2 billionheremall net outflow from the USSR as debt service exceeded drawings
Suh-Udiied interest rales and lengthy maturities on most govern ment-backed credits have helpedconserve some scarce hard currency. Interest rale subsidies on new official loansecord level inthe orderOOrates in most Western countriesercentage points more than those charged on official loans Last October's increase in lhe OECD interest rate guidelinesossible reclassification of the USSR into the "rich country" category will reduce the subsidy, but only slowly
. contracts for sales of Urgc-diamrlet pipe and chemical plants were lhe primary benelicia-ries of govern ment-backed financing (secipe contracts backed by official linancing totaled at5 billion, and0 million in coniracti for other energy-related equipment also received official guarantees or credits. Officiallycredits coveredillion in contracts for complete plants; two-thirds of these commitments were lor chemical plants, with the remainder going mosllv for steelluminumnd factories lor machineryillion lagrtberj OECD data report someillion in official credit commitor machine tools and othet plant and equipmentmall amounts of credits have (inanoec1
Official Credit Com roil men Ishe USSRy Industrial Sector-
cam. and im
In any ind rqulmnciv.
Value ol rorvtracU lupoorted In official crediti -III. an oocinrl milnrttr of more ihan five yean
* fniumiNy Include* credit! lor pic eiprou
or al OKutfoalapan. Dala fot Japo* ft burd o- aaooooeeaaeoti ofaetua. wIk coao.ru
for telecommunications equipment, ships, and earthmovinc vehicles
rance and ludy probably provide more tban half of Ihe interest rate subsidiesesult oi these subsidies, live Soviets saved an0 million in interest payments to France0 million in interest payments to Italysome IS toercent of the value of tbe machinery exports of these countries to the USSR If all official debt had been contracted at commercial rates. Ihe Soviels would have had toillion more to the United Kingdom andillion more lo lapan Any West Cerman subsidy was undoubtedly quite small becauseercent of ciports to Ihe USSR have been financed through West Cermany's AKA rediscount facility When the Soviets demand interest rates below market leveb on Hermes-guarin!red credits, lheeiporter usually covers the financing cost by charging higher prices. There is. however, an Implicit subsidy involved in providing government guarantees for privatethe interest premium thc private lenders would require if there were no guarantee
ore recently, however. Moscow has had to rerogniie that it cannol countarge Increase in
Western credits to eipand ils hard currency imports Although the Soviet hard currency position is still relatively strong (the debt service ratio is only abouterccntk the prospective stagnation in export volume means that any altempt loubstantial increase in imports would quickly push up hard' currency debt lo an unacceptable level Indeed.Urge inflow of Wrstera capital would be required iust to maintain the current volume of imports, and this would resultoubling of debt5uadrupling0 The debt service ratio would approachercentevel high enough to causeercent)0
molicatiom of Hard Curreneiroderate fall in hard currency imports could greatly complicate Soviet economic problems and make allocation decisions more painful- Largeimports are essenlial lo the growth of meal consumption even in normal crop years. Expansion of gas coersumptioo and exports requites massiveof Western Urge-diameter pipe. Large imports of rnctals and chemicals are an integral part ol Soviet economic plans Orders o( Western machinery and equipment have already been sharply curtailed: fur-
cuts would certainly impinge on priority pro-gratm in Keel, transportation, agriculture, and heavy machine budding
III. OIL AND GAS:
FUTURE KEY TO IMPORTS
If Moscow is toevere squeeze on its hard Currency import capacity, with painfulin tlie economy, it must find new ways of increasing its exports to the Wesl. This meansnew capacity as well as finding new markets. By far the most promising potential for export expansion is in the massive resources of West Siberian natural gas. Proved reserves of Siberian gas are ample to cover any likely increase in total energy consumption in the USSR durings wellarge expansion in gas exports to thc West Althoughcosts arc high, production costs of Soviet gas arc low. and thc USSR is willing toow rate of return on natural gas investment, making it likely that Soviet gas can continue to be offered to Western Europe at prices lower than those of most alternative sources Moreover, while gas exports are the only promising future source of hard currency, oil exports still account for someercent of Soviet export earnings, and it is important for Moscow to minimize their future decline. An important factor affecting future oil productiou and exports will be lhe degree ol access to Western oil equipment and technology.
Tlse dispute over the pipeline has occupied much of the policy discussion of East-West interaction wilhin the Western Alliance, partly because it involves both political and strategicexport controls affect the pipeline, which lhe United Stales also opposes for "strategic" reasons. Some perspective on Soviet energy developments, problems, and prospects is necessary for anof the potential impact of Western actions
A. The Soviet Energy Problem
is encountering rapidly rising costsproduction and distribution of oil and coal:
Thc USSR isace bclsvccn declining oil production in its older fields and increasing development of new ones. Require men is for drilling and fluid lifl are rising rapidly, and the Soviets arc moving lo develop offshore
deposits and inlioduce mote sophist lea led reechniques loecline inoutput
The coal industry is suffering from mineIncreasing mine depths, reduced seam thickness, and declining heat value per unit of raw coal produced Although the USSRenormous coal reserves in Siberia, the Sovicls are ill prepared to exploitresult of neglecting the coal industry since Ihe, when Soviet policy put increasing: emphasis on development of oil Thus,of coal deposits east of thc Urals is now constrained by lack of progress on coaltechnology, unresolved technicalrelating to transmission ol electricityat mine-mouth power stations, and Lack ol sufficiently developed transportationin Ihe cast
as will be lhe largcsi single source of Soviel energy, with production atillion cubicequivalent6f oil. Reaching ihis level, however, willostly undertaking because it will require large amounts of West ern pipe and equipment The Soviets ate building an unprecedented sixmillimeter) trunklines fromeacharger undertaking lhan theodthough labor and equipment ate already stretched thin The massive outlays lor pipeline construction, and provision of neededasall-weather ports, and electric powerstrain Soviet investment resources
In contrast to lhc West, thc Soviet record on energy consumption has been abysmal. Soviet energy consumption ha* continued to grow more rapidly than gross national product (see figuref the relationship between energy consumption and CNP in the USSR had followed the trend in the "Big Seven"be USSR* annual consumption of energy would beil equivalent lower lhan It war0
why conservation gains an* difficult in the USSR is that most ol them require
USSR and Big Seven: Energy/GNP Ra(ios
I9T) Ji 16 JI 1| j9 so
-Hig Si-n- intltttfi ihrSum. <Cmnur.Hit, it,tinM*".
massive investmenls Io modernize and renovateand power-general lugprogram thai will itself consume significant quantities of fuel Soviet transport at son is already reasonably energy efficient aad does not have tbe potential for Large savings such as those achieved relalivclv rapidly in many Western countries Residential and commercial energy use is comparatively small. Thr largest energy savings, there-
fore, must come in the industrial sector. Producing and introducing energy-efficient equipment, however, will require most ol the decade.
he paltern ol energy production and use ia shown inbout one.fourth ol Soviet oil production is exported, of whichold lo the West for hard currency. Cas exports are also becoming substantial.
fl. irnportonca of the Export Pipeline
he Soviet Union has been delivering gas to Western Europe since the85 Moscow concluded eight "gas for pipe-agreements with Austria. France, Italy, and West Germany. Under ihese agreements, thc USSRwith long-term govern mentcreditsillion tons ol large-diameter pipe and other gas-related equipment To repay the loans the USSR agreed lo long-term gas delivery contracts, some of which extend lo the0
oscow began negotiating with tbe West Europeans for construction of an export gas pipelinelanned gross capacity ofillion cubic metersil equivalent) Although two pipelines were originally discussed,contracts call for only one strand Even ao, this Siberiaurope natural gas pipeline is tbe largest East-West trade project to date (see thumbnaiL description inhe pipeline could deliver nearlyillion cubic meters to West Cermany. France. Italy. Austria, and otber countries. Gas pur-
USSR; Estimated EnergyIuiislent)
Incliitlim gu condeniaie.
eat. oil^ ,nd .leaner.
Siberia-to-Wcstern Europe Natural Gas Pipeline"
Proiected Soviel Cm Deliveries io Western Europe-
lie ne- mMixn are *ebrat to in
notBtficd lhe new purcheae coot,-*
agreements wete signed in1year period with West Cerrtun and French utilities and in2 with Austria's Fern-gasortsillion cubic meters peril equivalent) are to startnd full deliveries are scheduled to begin7 88
he USSR will be able loombination of Ihe ciisting Sovux export pipeline, domestic trunk-lines, and East European transit lines lo begin initial gas deliveries on schedule. With the phasing-in of Ihe new gas eiporl pipeline, total Soviel gas deliveries lo Westernolder contracts as well as lhe new export pipelinereach aboutillion cubic meters peril equiva-rent)5 and then8 rise to as muchubic meters per yearil
Theuabie on ihe deliveries wde< tbe mml rxinwl. +rvkt. to lhe Ii-ue* des-rted aaW*aU bea rouef. ev.matc ol tkeerfaV
Eastern Europe would increase by several billion cubic meters ifercent of the projected Soviel exports are delivered to Czechoslovakia and Hungary as transit fees
lhe gas sales, lhe pipeline
purchases of large-diameter pipe (aboutillionX mostly from Wesl Cermany and Japan
oviet purchases of turbine compressors and iclaled equipmentbillion) from lhe maror West European countries.
credits (al leastillion) repayable in eight lo II yearshree-year grace period on repayment oland interest ratesercent, well below market
gas export pipeline prosed is one of iiagas pipelines that the Soviets hope to completecurrent Five-Yearwo of the five
lines have already lieen Im! In addilionhc export pipeline. Moscow hopes to lay5 three more lines Irom thc Urcngov gaslicld to the European USSR,ilometers lone The six new tiuiiklines from West Siberia account for roughly half of tlie total0 Lilomelcis of gas pipelines planned for construction.
f tlie Soviets believe they cannoi count on Western imports of pipe and compressors, they will develop their own capability more rapidly. Certainty byhey would be able to producerega watt turbines lo move gas throughpipelines, such as the export line currently being built The Soviets would prefer to continue to import some of this equipment from lhe West,because it can be paid for with gas exports and it maintains thc commercial tics between Westernand the USSR.
ecause of the weak export prospects outlined above, the pipeline is vital to Moscow'i prospects for earning sufficient hard currency bevond theoajor drop in ils import capacity. Annual revenues from the pipeline deal alone shouldi billion1 dollars) in thchen all credits are repaid, and total gas earnings (including existing contracts) could be: bUlion.
USSR abo calculates that thedependence of thc West Europeans ondeliveries will make them mine vulnerablecoetcion and willcimaueiit ladordecisionmaking on East-West issues. Thehave used the pipeline issue lo createdivisions between Western Europe andSlates In Ihe past, the Soviets have usedinterest in expanding East-West
lo undercut US sanctions, and they believe successful pipeline deals will reduce European willingness to suppori future US economic actions against the USSR.
Gathe factors thatSoviets to conclude the recentgas deal -huge gas reserves andfor hard currencyleadroposal for new exporl contractsrequire additional export pipelines If aof Ihe new export pipeline weic built, Soviet
revenues Irom gas sales would rise ino moteillion petrices) Soviet behavior in negotiating lhe first contracts suggests lhat additional gas supplies would be ofleredase price near the low end ol the market. Byelatively low price initially, lhe Soviets would be able to increase their market penetration and still secure hard currency earnings
potential demand in Weslernsupport purchases ol at least an additionalcubic metersilof Soviet gas by lhe yearforpipelines of the magnitude of the onebuilt This potential will be realized, ofit alternative new sources of gas forarc noi developed %
C. Allerrsolivc Energy Sources
The development of such alternative Weslern energythe Urge gas resources of lhe Northtake too long lo have much effect on the Wesl European demand for Soviet gas inut could determine whether Western Europe seeks additional Soviet gas In. At best, an5 billion cubic meters of new supplies couid be delivered0 through increased Dutch and Norwegian production; estimated Norwegian gas reserves are by themselves sufficient toarge expansion ol production Ineveral African and Middle Eastern countries also have thc potential to increase gas exports during
Continental gas import rcquu emeriti arelo increase byillion cubic meters ins demand grows and domesticdeclines. Under favorable ciicumstarsces. North Sea and Uutch gas could meet abouterceni of ihese requirements, or aboutillion cubic meters North African gas could provide0 bilbon cubic meters Supplies from thc Middle East and North Africa would be subslanlially less secure froa disruption than would gat from West Kuropeaaj sources Moreover, the likely investment costs of devel-ocang and transporting ihis gas would lie extreriKb'" high (See table 4)
Proposed Non-Soviel Cat Project* (or Western Europe
neealiiitiiru foe uiei now underwith both UK
hi-m. ouX be oxr- rnvboblr mUdV^olWIIill
CWo would HM lorloomrrt ProUblr
In northern >ei|nri lo babnce re-
Euroneim H> Algeriaan
bIomt Ihit. nn. Mcuculartv if Al-
Italian piprlinr II
T ram-Sahara pipelioe
Reouirn additional euannreuxi Probable
Ufiirlliblr Rcquira new lerlei of liim-Medi- Some poutblliir leirmnnn inprlinri
Unreliable WJI loon beU.ubi. to cocBirvci. iu.il 'oI.ict wdl be
eioinord if oVmand niiiai
bill we brli'vr Niceriin revenue
if iii fll ' Coeineded
coum potential Uanui and warn
Trench fi/mi ire PMbMH
ddiMfJ mem ire do> Saw rmubdatv
ii end ol lablr
Continued) Pi-oposedms Prokcti (or Weston Europe
falboo cttb*c Production ind meic.i) Transport Ctyfl *
Fi.rlyreniMe Will orobibiV be but* onlybil,tv ind secure ipkn*.
moiiijm rlv reliable Only li ofUtote r
tod tecure diKwri by inompany] of MO billion cubic metcn o*roved up ifjrj idpicent oiUteUi
ire devebprd Wiwrhaod.
require discovery ol wtvn Soak
Evfrt if receot flu discoveries ire Some tvuitiiMy proved op. tne pt it likely to be
rW Lj'iifl LN:;
Temporarily -helped bectuse ol ProbiWe dilute to find
politic! teMiceo; hiflti HutMV impiob-bV tfiftut fee* ind bnjemike ihiidifficult to implement
IC AT* Weit Euro- IMS
FolilicilUrtport to Wesiero
Medium hiflh Politic ill ^and Wen Ormain fit itu Some POSSUM v
Eietudcs wellhead value ofljv*-corto
as cow* vnoVfe* billion BTU* delivered lo Wetietnedium cost.SS. htchbove 15
Multinalional cooperation will be critical if sizable new volumes of North Sea nas aie to be brought to tin? Continent by llie. Protects to lioosl Nonh Sea ga* capotts will require enormousillion mav be needed to developoll gasfieldwill have to compete with other North Sea oil and gas protectshare of the development funds to be spent during the neat decade Interest rale subsidies similar to those offered for the construction of the Soviet pipeline could substantially speed development of North Sea gas reserves, an interest rate subsidy ofercentage points could cutercent from total investment costs
Cooperative agreements to transport gas to the marketplace will be equallyas swap agreement, for example, would involve increased Nor-svegian gas deliveries lo llie Uniled Kingdom in exchange for delivery of equal volumes of British gas to (be European Continent Thb could save SIillion In facilities investments and could shorten lead times by Iwo lo ihree years Similarly. Dulch participationoordinated gas marketing strategy could vastly simplify Norway's efforts to irscrease future gas sales
Although the commercial advantages of such arrangements are sizable, numerous political obstacles must still be overcome, including Norwegianto become overly dependent on hydrocarbon development Other critical factors determining (he timing and size of nesv North Sea protects Include:
Tax policial. Thc current UK tax regimeerious deterrent to Ihe development of small lields Norway's petroleum taxes are also high, and develoiwneni has been slowed further bv short drilling seasons and generally cautious governmcni policies
Market oroioeett. An unprecedented decline in West European gas consumption during the last two yean has clouded the outlook for tbc future size of lhe Euiopean gas market.uncertainties could cause North Sealo hesitate before launching newespecially in view of the possibility of being undercul by cheaper Soviet gas.
Revenue need* of producing countries. If lhe budget crisis in thc Netherlands worsens,
pressures to Increase gas sales will increase. Similarly, Norway may be inclined to Speed gas development because of lowered espceta-lions of future oil revenues.
D. Soviet Dependence on Western Oil Equipment
The USSR faces increasing dependence on the West in developing and processing its oil resources in. The Soviets already have drilled most of lhe relatively shallow, easily located, accessible oilThey specifically need Western seismic and welt-logging technology to bolster their abilily to explore for oil reserves insee annex) The Soviets plan to nearly double the amount of drilling for oil and gasnd to increase it further in the, but their drilling productivity is poor by inter-national standards. Thus. Western tin, drill pipe, tool joints, drill bits, blowout preventers, and drilling-fluid technology could substantially aid Soviet drilling efforts.
The Soviet oil industry faces rising fluid-lift requirements in, as the amount of sealer produced along with oil increases. According to Sovielarge additional volumeillion barrels abe lifted5 simply lo maintain production of oil at0 level ofo handle the high volume of fluid, the Soviets plan to double lhe number of wells producing oil wiih the help of submersible pumps and gas-lift equipmenl. Imported equipment could boost thcof this effort because llie capacity arid quality of Soviet-made submersible pumps and gas-lift equipment are low.
Thc Soviets* least explored prospective areas for new petroleum discoveries are offshore, andand development of the continental shelf will contribute to their oil production in. The USSR already has received substantial assistance from the West, and continued assistance could speedin the Caspian Sea and Arctic areas
Thc United States Is the preferred supplier of most types of oil and gas equipment throughout the world because it is by far thc largest producer, with tlie most experience, the best support network, and often thc best technology, ln someexample, large-capacity down-holeUnited Statesorld monopoly. The position of most
DS suppliers in lhe changing wot id mulct has been preserved by establishing overseas subsidiary firms and lice-Hen during the past decade Tlirse offshore operations delerrcd new competition Irom "wedging in" to overcrowded mar Lets Up lo now. the lea mice curve (or new competitois has been very steep and entrance has been too cosilyighly cyclical market- Dooms in demand often liigger newin additional capacity, oftrn only lo be followedrying up of ibe market when pi od net ion beginsoonths later. Risk it high for any newcomer because tlie period following lhe boom is marked by fierce price competition unlil lhe excess capacily is worked off. Nunrlhelest, In recent years Ihe US share of the market decreased, even before tlic US embargo was imposed
IV. OPPORTUNITIES FOR WESTERN GOVERNMENT POLICY
A. Possible Restrictions
governments, al considerable costcould increase Soviet economic difficulties
Restricting Soviet access lo Western oil and gas equipment and Irxhnokxgy
Eliminating subsidies. Including government guarantees, on credits lo the USSR
Using their influence lo discourage Western firms from entering inlo large-scale energy peojects with the USSH.
Taking Heps lo shrink the potential Western energy market loi Soviet gas by developing alternative energy sources
effectiveness ol such steps dependsfactors, including tlie scope ol the action,of cooperation among the Western Allies,duration of thc restriction. It Is highly unlikely,that Allies will participate in anexcept in response to specif iewith the result that such anikelypartial and/or short dived On Ihr otherelter chance ol gaining Alliedcredit policy and on developmenl ofsources, especially if common groundstrategic" policy concerningrelations
following sections consider (lie impactWeatern measures on:
The construction of Ihe export pipeline and lhe planned Soviet gas deliveries lo Western Europe
The development of Soviet Ml production
Thr development of new gas export nrrMects.
B. Impact on the Gos Export Pipeline *
Wc believe that tbe USSR will succeed in meeting its gas delivery commitments lo Western Europe throughnd will do so without significani diversion of domestic resources from other sectors Deliveries could begin Insby using existing pipelines, which have excess capacity of at leastillion cubic meters annually.
The Soviets probably can begin deliveries through thr new pipeline5ith tlieurbincs buill with the CE-madc lolors already shipped from Western Europe, or aboul lo be shipped, and by operating compressor stations without standby units. Moscow could deliver through the new pipeline abouterf lhe planned annual throughput of nearlyillion cubic meters Turbines using anumber Abt horn-At (antique contracted brforr the US embargo to build for the Soviet Union under CEboostto mote thanercent of capacity. Forof pipeline operation and periodic maintenance, however, the Soviets might use some ol tlse available turbines as standby units, thcieby reducing throughput somewhat
II is highly unlikely that full capacity will be needed until near thc end of the decade, because West European gas demand is lagging substantially Before the end ofhe Soviets will be able to fully equip thc pipeline using either imported or domestic equipment Bv then they will probably be able to produceega-att turbines, in spiteistory of troubles. II neceswry. the USSR could divetlcrews and compressor-station equipment from new domestic pipelines to the export pipeline or even
detailed niney of tbe eiportatin, see CIA Intetligeree Asieomenl SOVStlOOTS, Outlook fa the Siberia-lo-Weirem Europe fotural Car Pipeline.:
Estimated Impacttntbirxo by NATO Countries and Japan on Selected Oil Equipment
el i. .OSSaaeiiaai
and Deiiee or* Eatunaicd Impact oiIneoatd bv NATO Meaben
tpUwaiioai lucceaiutingmiimeieiorad re-
Mode, tic ddayi in olfihore dnaUnc ooee-
Dull Uu drill puk. toot aNnta. Small
ti ifling rouipmit
Fluid lilt mumnsrni
Cfuiinnml lot pitiduciile and (itw SubH.niial etUnc hlgh-prrouic. hlnh-iulfui (ll
Oil refinery secondary proceuU* Small
in ili fit
Sm.II ihorl'iun uriiuct
Uiiib im Snail
Potentially mooVtal' in ihort ran. depend im on Soviet import ellorts Start raa VSodn.tr
Loot ton Modrtale
Oilor noduclnin ol hifh-tulfui'ir andMl ia
WM Saxna and etar-here
Sbort iiwi SwbsiMulrun Moderate
Potentially wbrlaM.il ilcred
wah plan, ioirlinenes. ba* iber
hew concluded no reef* acieernrmi lor
I hii equipment
a domestic pipeline lor ciport use to emuic capacity adequate to meel conlraclual deliveryThis diversion would be costly, bui il is highly unlikely to be requiredrge scale More likely. Moscow would be able lo meel Western Europe's demand svilh little or no loss in domestic gasdcliveiies
C. Impoct on OJ Development
he impact of ex pott restrictions on oil develop-mem in the USSH. would depend critically on Ihe development ol domes!ht oil equipmentcapabilities While some improvement is likely over the decade, we do riot believe lhal it will come in time lo offset the need for the linds of Western equipment shown in table 5
Continued denial of US oil and lias equipment svould retard Soviel oil production, particular-
ly in offshore drilling and in production of high-pressure, high-sulfur gas
Denial of all oil equipment by all NATO countries and Japan wouldubstantially larser impact, which could reach as muchv the end of the decade-almostercent of total oil production
D. bnpoel on Future Gas Export Oeols
he most damaginE measures lo the Soviets in llw long run svould be inflicted bv Westernthat restrict further agreements either lo buy Soviel gas or to sell Moscow oil and gas equipment Under such conditions llie USSR would lose lis main source of ne- hard currency earnings in
C. Impact on the Soviet Economy ond rWilitory Capability
Shortfalls in Soviet oil and gas produclion would directly affect the USSR's ability loearn bardTo protect its hard currency earnings. Moscow would be tempted to further cut energy exports to Eastern Europe. And the importance to the Soviel economy of substantial hard currency imports is such that, in the eventaior production shortfall, allocations of oil and gas lo domestic Soviet uses would be
Corisceueiiees lor lhe Economy. Energy shortfalls would affect the Soviet economy and might lead to cuts in imports. Tlie USSR would be reluctant to cut food imports because this would risk popular unrest and. in any event, would probably adversely affect Incentives and productivity.
Further reductions in imports of machinery and equipment would hinder industrial modernization and productivity. Cuts in allocations of oil and gas, or of imported materials such as steel, would create peoduc-tion bottlenecks, cause, some plant capacity to be unused, and disrupt supplies in many parts of thc economy. The bottlenecks would diminish andeventually disappear as the Soviets look steps to conserve the scarce products, to substitute otherand to adjust the pattern of demand.
Given all thc uncertainties surrounding the scope and duration of Western measures, and (lie way thc Soviets would cope with and adjust to these measures, quantitative measures of impact can at best be viewed as illustrative orders of magnitude
Tlie eflect uf Western measures on potential Soviet energy output (measured in dollars at world market prices) would appioximate the following(in billions of dollars per year):
Sanctioni US alone
New Coi Pioiecti
current pine line)
In tlse hypothetical easeull Western embargo on all oil and gas equipment, including large-diameter pipe, the cost lo the Soviets wouldillion annually0 Tbis case illustrates the particular importance of Western line-pipe lo the Sovset gas program over the neat several years, inhis dependence will decline as Ihe Soviets master serial production of multiwall large-diameler pipe
The impact ol ihrsc shortfalls on Soviet CNP mightultiple ol thc above losses, especially during the period when bottlenecks could not be avoided. The potential aggregale economic impact could be characteri'rd as follows
Insignificant, in the ease of US unilateral controls aimed only at lhe export pipeline
CNP by the enduldercent less in the caseustained Allied embargo o( oil equipment, bul the impact would be much smaller in thc more likely case that US Allies provide limited, if any. cooperation.
In the hypothetical ease that includes anon pipe, the Soviets wouldoss In CNPercent0
0 lhe effects of Western policies could be enhanced considerably if follow-on Sonet gas protects were squelched
Soviet costs on lhe orderercent of CNP0 are significant.oss of GNP would be equivalent to all llie investments made in housing constructionr nearlyercent of all industrial investmentsr moref military expenditureshese measures indicate only the order of magnitude o( forgone Soviet CNP and do not equate to poteniial cuts in investment or defense spending While the cumulative effect of sueh losses would clearly increase pressures on Soviet decaiionmakeri. we cannot ludge how they would choose to spread such losses throughout thc economy
Additional Western actions such as restricting subsidized govern ment-guaranteed credits could raise Ihe cost to thc Soviets of Western assistance by0cai. Ciedii eitctutons themselves
probably lall sharply if eovcrninp.nl guarantees were withheld, as most bankers arc reluctant to extend large long-term credits without government
n the long run. tighter COCOM leslndions on militarily sensitive technology (Including technoloey and equipment lhal indirectly contributes toimprovements in weapon systems) would perhaps be thc most valuable action for (he West. Such action would retard maioi improvements in Soviet weaponry, which lhe West would be forced lo counter While the dollar value of such aciion is difficult lo estimate, the savings in terms of Western spendmi lor defense annually would probably come lo billions of dollars
or Military IVogrnma. The reduced availability of hard currency and energy would also make more difficult the decisions Moscow must make among key priorities in Ihegrowth in military programs, feeding the popula-(ion. modernizing the civilian economy, supporting its East European cbenls. and expanding (or maintaining) its overseas involvements, because economic growth will be slow through, annual additions to national output will be too small to simultaneously meet the incremental demands lhat planners are placing on the domestic economy Even now,in thc production of key industrial materials is retarding growth in machinerysource of miliury hardwaie. investment Roods, and consumer durables
If growing resource stringencies and hardshortages prompt Soviet leaders to cut back on imports, it seems likely that, in true bureaucratic tradition, initial efforts would be implementedroad-brush fashionumber of Soviet ministries across lhc board. The very lop-priority programs no doubt would lie spared, but manyhitch priority ones, including some miliiarycould be hurt at least indirectly
Even in the longer term, cuts in machinery imports would tetard progress inum bet of industrialmachine building, oil refining, robotics, microelectronics, transportation, and constructiona lime when Moscow is countingtiategy of limited investment growth and relying instead on productivity growth.
ard currency shortages by themselveswould have little effect, however, on Sovietof Western technology and equipment which direclly facilitate qualitative Improvements in Soviet weapon systems. Ihese inputs are so important to Moscow that thc necessary hard cuirency willbe allocated lo them, and the value required probably is atew hundred millioneai Such military-related acquisitions, legal andcan be prevented onlyroadening and lightening of COCOM controls
educed Soviet petroleum and gas output would aggravate civilian industrial bottlenecks and. therefore, might cause civilian encroachment onproduction, sucheallocation of some miliiary-oriented metallurgical and machine-building facilities lo produce thc embargoed oil and gasTechnical requirements, however, could force significant "upstream- changes in capital andFor example, major changes in capitalwould probably be required before assets In the defense industries could contribute to Ihe production of energy-related equipment such as drilling rigs, platforms, or pipe. High-tcmpciaturc components made by the aircrafl industry could more readily contiibute to the production of compressor equipment for the gas pipeline projects. Increased production of turbine* and transformers for electric power would^ also requite shifts ol skills and machinery lo thc civilian electrical equipment producers from thcindustries
he materials used bv defense plants could be redirected to alternative civilian production wiih greater ease. For example, powder metallurgy used In the production of munitions could be redirected to the production of drill bits for petroleum extractionavailability of steel for drilling rigs and tubular goods could help the Soviets meel Iheir oi) drilling and gas output targets In addition, special steels for the manufacture of turbine blades could increase lhe reliability of gai turbines used to power electric generators and pipeline compressors Concrete, as-phall, and other construction materials would help to overcome thc serious lack of infiaslroctureroads, housing) in crucial areas of energysuch as West Siberia. Transfers of fuels,petroleum products, from Ihe military would also ease civilian production bottleneck*.
Ihcic is the possibility ol resourcefrom defense facililies. the atmmnhcre ofKast Westwould be likelyafter imposition of anSoviet leaders to raise even more thedefense programs in tbe allocation ofa weakening of the industrial base forcein military programs, thb would notand the effects on overall Sovietwould be very gradual.
V. WEST EUROPEAN PERSPECTIVES
A. Attitudes Towordesl Irade and Trrsrie Sanctions
general the West Europeans believetrade with the Eastruit of detenteit contributes to improved relations. TheySoviel behavior will be more restrainedarge stake in the InternationalMany West Europeans would thereforesanctions, arguing that tliey also hurtand do not affect Soviet behavior in anyproblem lies in developing wtth the Westat Least the majorof the strategic implications ofIrade and agreement on whai kind ofshould digger what kind of response.
espite statements to the conlraiy, Alliedwant lo prevent the pipeline issue Irom affecting maior initiative! in NATO, such as INF deployment. If therolonged, however,ikely to adversely affect thc political dimaie in which final deployment decisions will be madeit could icinlorce the self-image of the West Europeans as tunior partnerselationship with the United States in which thev have an equal stake. The pipeline ban could be seen in Western Europe as anothercries of US moves that have eroded European confidence in US leadership and intensified aniiety about US-Soviet relations. Although START and the INF lalks have reduced Eurrrpean concerns about lhe US willingness toialogue with Moscow, tlse pipeline decision will contribute toabout bow tlte United Slates will manage tbe East-West relationship It will also nurlure suspicion aboul lhe seriousness with which Washington will pursue arms control negotiations
esult of the era of detente, some West European political leaders generally have acquired more complacent altitudes toward the USSRIn their view, the superannuated Sovietalready is undergoing an uncertain struggle for succession and faces economic burdens that II can manage only with considerable difficully. These West European political leaders, therefore, believe lhat it would be in the interest of iheir countries toess confrontational approach to Moscow in the hope of precluding the emergence of more intransigent leadership following Brezhnev's departure
West European perceptions of the Soviet threat depend heavily on Soviet actions close toirect intervention by the USSR in Poland or else where in-Eastern Europe would greatly harden West European attitudes, at leastime. By contrast. Soviet actions in Afghanistan. Africa, and Cential America, while unwelcome to West Europeans, are perceived as lesshreat and would not have much effect on Allied willingness to support US initiatives outside the treaty area.
B. The Pipeline Deal in West Ei*-opeon Eyes
he West Europeans are convinced that the pipeline dealood one for them. In reaching this conclusion ihey are looking at thc dealackage. tjLing into account their protected energy needs and considering such aspects as the cost and reliability of Soviet gas, the cost of their eiport credit subsidies, and the eiport sales that are likely to result. Tliey arc convinced that they will need large additional gai supplies, especially inhey have notextensively on whal llie additional gas revenue might do for Soviet military power, but they lend to argue that the Soviet military will get pretty much the resources it wants whether or not theuilt. They are skeptical thatn the Wet's interest lo cause cutbacks in Moscow's consumer-oriented and civil investment expend It met, which ihey believe would suffer most if earnings from the pipeline were reduced or cut off.
he West Europeans' prime energy goal it to reduce their dependence on OPEC While that dependence has fallen significantly3 It is still high enoughustained OPEC cmbaigo would
aline, impaci. in searching for OPEC substitutes, llieuropeans obviously wouldto find Western energy sources because of llieir reliability ll is partly for tin* reason lhat lliey plan lo substantially eipand llieir use of coal and nuclear power. Nevertheless,mainly lor homelie the primary fuel displacing OPEC oil. and there have been no alternative gai sources thai could match llie Soviet offer. Wesl European gas producers have lieen neither willing nor able toproduction sufficiently in, andnon-Europeanas Algeria. Nigeria. Qatar, Indonesia, andloo unreliable or too expensive or both
he Wesl Europeans further believe (lui the Soviet gas deal Is relatively advanlajfcous in terms of security, flexibility, and price. (Sec inset below.)
lie total number of jobs in Western Europe dlieetly dependent on pipeline contracts is00 Nevertheless, these wb losses are important because they are roiscetittated in key depressed industries.
ll in all the United Stales would havear better chance of aborting thc pipeline project if it had weighed in earlier and stressed the strategic Implications of East-West trade. Thc time to act probably was beforeperiod when the West Europeans were evaluating the project By the time Washington raised strong obieetions, tbe West European governments had already committedlo the deal and contract negotiations were well undct way. In addition, the US arguments initially focused on the Question of energy dependence on thevery issue that tlie West Europeans said
of the Pipeline
Seewrfy The deal isrovsdes the West huropeaosyear cai supply Ironspartner tha' they consider more reliable than OPEC They think that Moscow will deliser the cai on seised ule both lo maintain ill hard currency earnings and to preserve its reputationeliable trade partner. Furthermore, they maintain that ihey have rarelullv considered the consequencesoviet cutoff At the protected peal deliveryof the pipeline currently being built.Europehole will get eadvercent of It* total energy tupphn Iron* Soviet gas. whileurchasget aboutercent olercent of It* total energy lupnllei Irom the USSH Planned gas storage capacity in Western Europe will equal about three months of Soviet import*nd many industrial gas usershave the capability of switching to other foctaesult, the West Europeans beheve that thev could cope withistained Soviet gas cutoffan* ceonornlc disruption
Ffexibnfrv. The Soviel* also sgifcd to ifgnilicanc flciibllllv in ifai deliveries. West Germanyctober willne-time option toreduce the base amount of gas in ils3 billon curjec meten per year) bv up toercent More irr.poitjni. each puiehauiv country in each year of thc contract wdl have the rightduce deliveries during that year up toercent Ih4ow the base amount
A West Eixopeon View
W West European* were pleased bv the price formula even though they will be pa vine more lhan thc current market price lor most gas The contract apparentlyase priceer miIIton BTUt, lo be adjusted Into future charates in oil prices, as wellloor price of SSThe West Eumpearu will pay whiehr.er is higher: toi the adjusted base price The West Germans were particularly pleased ihat thc adjustment formula Ii basederceni on the prices of heavy and light healing Oil and onlyel cent on the price of crude. They beheve that the prseet of these products will rise less rapidly than crude price* In luture years, because ei eater use of coal, gas, and nuclear power will hold down tlie demand (or lieating oil. Most current gas price* are below those in the Soviet contract but are rising rapidly for rum ph. West Cermany2 I) paying an average ol about Ster million BTUi for imported gas. upercent1 Even atloor price. Soviet gai would be aboulercent cheaper, on an energy eouivalent basis, than oiler barrel Cuen lhal the Soviet ga*-ill not reach lull volumend will conlinucuring which time oil price* are likely to rise lar above currentif only because of worldWest European! are confident that thc bulk of the Soviel las will be purchased at tbe adnisted base price. wh.eh will always be well below thecrude oil ptioe.
had already studied carefully and rrtolved lo iheir satisfaction
C. Poivbic Areas of CramtyrarrMse
hile reiterating their intention to riooof com-milinenls already made to the USSH. uveal of llie major suppliers sec lhe necessity lo tone down public polemics over the pipeline issue, minimize lhc damage to transatlantic relations, and seek somewith lhe US position. Underlying this need is the realization that European firms -witlwut Americanbc far less competitivek* world energy market The four West European countries involved (France. West Cermany. Italy, and theKingdom) have thus far failed lo develop aStrategy with respect to US sa net ions Allied acceptance of any US package designed to achieve consensus on joint sanctions would be contingent on tsvo essential criteria: (I) that ihc burden lie shared evenly among the Western countrieshal thc sanctions not be applied retroactively. Possible areas of compromise mighl include:
The second ilrand ol theecond Soviet pipeline is an obvious candidate lo meet Western Europe's projected gas shortfall in, although there are no negotiations in prospect al lhe moment. The West Europeans would be cooceiiied about substantiallytheir dependence on Soviet gas. The gas needs could lie satisfied by someof other measures: conservation,of oilier fuels, or other sources ol gas. Norway, for example, could eipand gasenough toarge part ofWest European needs in, if development efforts are begun in lhe neat few years Civen these possibilities, lhe Westmight be willing lo renounce the Soviet option
Tighter credits noted earlier there is considerablefrom Westending subsidized interest rates on Soviet credits. Tlse West Europeans paid some lipscrvicc to the idea at Versailles and might now be pressed to act. The French have been the strongest opponents of higher interest rates,with goodthey would lose some Soviet salesesult Although supporting it on interest rates, the Wesl Cerman position Is by no means wholly consonant with that of the United States On government eiportlor example, Bonn argues strongly againsi theiris adamant that it will do nothing on this issue at least until subsidized export credits arc limited by other West
Tiehler COCOM restrictions. There Issome support in Western Europe for tighter controls, and the Uniied Stale* canompelling ease that technology transfers are contributing significantly tomilitary improvements. Purely out of self-interest, the West Europeans should see that these Soviet gains detract from their security and/or compel them to increase defense expenditures.
ore important than compromise on thesepoints, however, is the need to leach agreementhared understanding of the long-run strategic implications of East-West Irade. Such anbas been notably absenl in Ihe pasl. but the time may now be ripe to achieve it Although the sanctions imbroglio has heightened llie serious differencesWestern Europe 8nd tlic United Statesthe linkage of economic and political policies. It has raised the West European contciousness of the issues and the depth of US concerns
SOVIET DEPENDENCE ON US AND WESTERN Oil AND GAS EQUIPMENT
aving drilled molt of their eaiily accessible deposits, the Soviets now need Western seismic and well-logging technology to accelerate discovery ot additional oil reserves (or the remainder ol theSoviet exploration equipment, however, withated technology and limited data-processingis poorly suited to the exploration ol complicated geologic areas such as the poteniial petroleum-bearing regions in East Siberia, as well as to finding oil and gas in smaller, subtle geologic formations in the West Siberian basin Soviet equipment is alto inadequate lor efficient offshore exploration, drilling, and production, lacking paiticularly the sophisticated positioning, sta-bihnng. and seabed production capabilities ofequipment
estern geophysical equipment would help the Soviets explore deeper, hard-lo-find subtle traps. Mod cen Western seiimograph software anddigital recorders, cable, geophones, computers, fieldenable them to increase theiicapability and better locate potentialtraps. Western well-logging equipment for drill ing-fluid analysis and final borehole evaluation would improve bolh drilling efficiency and oil discovery
Magnetometers ond Gravity Meters
equipment involves highlytechnology and data-processing capability.aieas. such as East Siberia, will be difficultwithout this equipment Tbc USSR'sin this area is perhapsears rarjiind that olSkania of Sweden is the only known producer of
"this equipment outside Ihe potential embargo group, and ilmall producer
seismic cqeipmerit is necessary ifarc to find smaller and deeper oil and gas
deposits. The lack of this equipment will limit Soviet production five to seven yean from now. as well as further in tlse future If lhe SovieU try to develop lhcir own seismic capability. Ihe oil industry will need improved computer technology andesources Seismic equipment Is available elsewhere, but thc data-processing capability is closely held by Western firms
well-logging equipment couldaid Ihc Soviels in identifying and assessing new oil and gas deposits. As is the case with seismic equipment, well logging loots could be produced within one to two years in counlries outside thc Western embargo group, bul llie all-important software, which is more tightly controlled, would not be available
of geologically complra and deep oil and gas reserves is consuming an increasing share of scarce resources throughout ihr USSR Inowever. Soviet drilling equipment, characterired by poor metallurgy and manufaclunng technology. Isisadvantage relative to new Western equipment in working such deposits Reservoirs of moreeters arc considered loo deep for present Sovietustained embargo could substantially slow oil production in theesternpreventers and remote hydiauhc controls are indispensable for controlling high pressure, corrosive gas when einloring and exploiting deep reserves Western drill pipe, collars, and tool joints would be lighter and stronger ami provide improved efficiency in deep drilling operations. These items wouldextend the depth capability of existing rigs by at leastoercent Improved Western tungsten-carbide insert bits with sealed journal bearings would provide tbe Soviets with state-of-the-art cutting and beaiing technology The latin features determine
bit life and lbc meters drilled tier bit run The longer thc bit holds up. the fewer bits used per veil Changing the bit lakes up toercent of all deep drilling time. Thc Soviets change bils twice dailyeter depths. US mldconiineni drillers change bits abouleek
Oral Pipe ond Tool Joints
7 The Soviet Oillanperceni increase in drillingill probably not be met, in part because of the insufficient qualify and quantity of domestic dull pipe Tlie Soviets cunenlly impoit substantial quantities of drill pipe. Countries outside NATO and Japan could fulfill only part of the need in the short run, but could eipand production within one lo Iwo years Increased Soviet production would require larger allocations of crude steel to the pipe mills. Inituation lhc machine-building and melalworking sector would probably be theloser (tl consume* someercent of steel output).
he Soviets badly need Western technical help in improving operationsurnkey bit plant purchased Irom Dresser (US) If substantial improvements in the plants operation* are noi forihcomirur, imports of Western bits, which giveoimes longer bil life than normal Soviet bils. will have to be stepped up to meet drilling lequi rente Ms,
Other Specialized Drilling Equipment
hc United Staleside assortment of drilling toob thatariety of tasks such as retrieving broken drill pipe Specialized toobgreatly lo drilling efficiency when uneipeeted drilling problems arise dealer use of such toots could lead to some increase In Soviet drilling efficiency-Much of this equipment requires special steel and precise machining and would be easier and probably less costly for the Soviets to imporl tlian loCountries such as Austria and Finland could produce ihis equipment within one lo Iwo years, but il is questionable whether such firms would invest the effort based solely on the Soviel market
Blowoul Ptevenler* (BQPs) ond Control*
Soviel wclb can be drilled usingSoviel or Romanian BO Pi The dangersin drilling for high-pressure or high-sulfurrequire the use of high-pressure BOP*corWiol* Although countries such asFinland, or Menco could produce ihuone to Iwo years, an embargo wouldga* condensate development in Westpressures) and Central Asia (high sulfurthen.
Soviets need production equipmentold. developed fields and new undevelopedIn both cases, tbe availability of themnre reliable Western items would betlieir advantage. Oil producllon I* most affectedencroachment at the Volga-Urals,Wesl Siberian fields. Large quantities offluid lift equipment is critical looutput levels and improving oil recoveryunsleveloped high-pressuie. corrosive, andand gas deposits will require equipment madecorrosion-resist ant alloyedcasing, tubing valves, and the like Highpressures and temperatures cause manyto fall, and development of deep reserves atandbe deferredif special Western equipment is not available.
WeBseod Assembles, Downhole Consplelion Units, Cosing, ond Tubing
lie situation with Ihis type of equipment it almost identical to that with the blowout preventers. Soviet and East European equipment is adequate for most wells, but high-pressure gas production and high-sulfur gas production require speciality steels and different machining. Countries outside NATO and Japan could begin production of all of ihese items within one year. Soviet production of this equipment would requite reallocation of scarce specialty steels.
r elfort to improve offshoie oil and gas exploration and production capability has been
launched by (he USSH The Sovieis puicliased ihiee drillships, Iwo sem(submersible drilling platforms,ull complement of US technology and ecjuipmeni duringlan net ind. Offshore oclivtlles have been concentrated in lhe Soviet Cas Minislry. which will manage boih oil and gas eiploration and production Eiploraliori for oil will be tlie focus of offshore activity inasmuch as onshore Arctic gatare abundant However, tlie most promising offshore areas could be moreerampie. the Caspian. Azov. Kara. Baltic. Barents, and Okhotsk Seas. The icy waters of the Kara and Barents Seas have lhe most potential, but tbey present tlse most serious technical problems for exploitation Ice flows could prevent year-round operations In all but parts of the weslern Barents Abo. pipelines to shore would sldl have to traverse Arctic permafrost areas
Offshore Positioning Equipment. Tensioners. Risers, ondompensating Systems
lthough most offshore drilling cquipmenl Is currently produced In countries outside NATO and Japan, essential positioning equipment is not The lack of such equipment would cause moderate delays in the Soviet offshore drilling program, especially Arcticountry such as Finland wouldrequire two or more years lo develop this tech noi Csfy Thc Sovieis would require several ycais more.
IS. Current and future Soviet plans for newconstruction arc stiongly biased toward natural gas. whose production has, ihus far, been heavily dependent on Western large diameter lincpipe.turbine compressors, ball valves, and controls. Weslern pipe-coat ine and wrapping materials are also needed Soviet llnepipe is unsuiled for high-pressure natural gas transmission service in the Arcticturbine-eompressors, pipelayers. and valves are generally too small, or too limited in capacity to do thc iob efficiently The Soviets, however, are cuirently attempting to improve lhe quality and capacity of these items. Similar cffortielade lechralogv in thc pail proved unsuccessliil. bui the Soviets* political prestige is now on the line as far as lhe exportoncerned Some improvements can be expected, but the Soviets will still need all the help they can get in building major gas trunklines.
large-Diameter Pipe ond Valves
It) Depending on lhe amount of Western large-diaineter lincpipe already in Soviet Inventories, an embargo on pipe and valves could severely impede Soviet ptogess toward the USSR's goal of completing six So-lnch gas pipelines. Tlie completion of one or two pipehnes5 might be prevented, reducing potential gas deliveties in thit year as much asillion cubic meters The Soviets are developing their own large-diameterye red pipe manufactured in short sections. Use of this pipe wouldissive increase in tlse amount of welding required for joining pipe In any event, production of this pipe almost certainly will be insufficienl lo cope with ambitious Soviel pipeline conitruction plans through theteel requirements for Soviet sell-sufficiency in Isrce-diametcr pipe should beAlthough olher countries, such as Sweden, could produce the pipe and valves, lhe existing large pipe-mill capacity in West Germany. Japan, and Italy might defer potential suppliers Irom undertaking Urge investment to supply the Soviets, who openly are trying to develop their own production capability
he Uniled States. Japan, and llaly arelhe only producers of pipelayers large enough to handle thc large-diameter gas pipe Soviet production of such pipelayers is iust beginning, and their quality is uncertain The lack of Weslern pipelaycis would slow the Soviet effort, although lhe impact is difficult loasoi uncertainty is the degree lo which the service life of equipment is ledueed under Soviet operating and maintenance conditions
Compressors and Turbines
estern compressorsmegawalt gassize the Soviets cannot vet seriallyhave been ordered for the Stberu-to-Western Eutopc pipelinc. II einanded US sanctionsl lowed by lhe NATO countries and Japan, the Soviets could lose someillion cubic meters of gas annually for one lo two years The Soviets have two principal options in thc laceull NATO and Japaneseusing smaller turbines built in the USSR or in countries outside NATO and Japan and perfecting theirmegau>r. turbines,
rocessing equipment udeveloping the high-sulfurgasficldsof OmulAstrakhan. High-qualityaiea inSoviets aretlie mainthis producing equipment. Firms in countriesSweden could enter the market within one to
Soviets intend to expand theircapability substantially inf additional secondary refining capacily will
make refinery operations more efficient, and allow the Soviets to refine crude oils with higher sulfur content. Plans lo substitute gas for oil would involve displacing heavy fuel oil from preseni uses and wouldoviet inability to further refine heavy fuel oil. The heavy fuel oil currentlyarge share of refinery output, and we anticipate lhat the export market for this product will continue to be unattractive lo the Soviets
hile thc Soviets arc installing secondaryequipment, they would probably like to obtain more Western units but may be constrained by hard currcoeyshortages.
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