Created: 5/1/1982

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USSR: Impact of Credit Restrictions on Foreign Trade and the Economy



n I


USSR: Impact of Credit

n foreign trade

and the Economy .



Office of EufopaoAiulwit .


USSR: Impact of Credit RniriciWoa Foreign TrsoV ana the fccooomy

of ibe nusl JuTiw.ll problems for the Soviet leadership inill be ho* lo dealevtre scarcil of hard currencyime when Ibelowing sharply. Although the slowdown results from the .interplay of many forces, and (he overall weight of bard currency imports in tlx economy is small, these imports play an important role in easing food shortages, raising energy production, sustaining technology and productaking up for unci peeled shortfalls of key products. Hard :y'imports, for example, comprise perhapsercent of Soviet tment in machinery arid

Bui while Ihc Soviet need for Western goods and technology is rising, the purchasing power ofhard currency earnings durings likely to decline:

The volume of oil exports will be steadily squeezed between rising oil tl consumption and oil production that is now constant and will fall later.Soft oil markets probably will keep real oil prices from rising for several II years.

Gas exports will increase substantially if (he gas export pipeline is built.

but not enoughoffset the drop in oil expnrti.

Hard currency earnings from arms sales are unlikely to increaseecause LDC Clients will be less ableay.

exports suffer from production problems (wood products, meiats) or an inability to competearge scale in Western markets (machinery, chcmtcahl

the Soviet hard currency position is siill relatively strong, the debt service ratio it only about I' percent. Nonetheless, prospective stagnation in the volume of exports means that any attempt toubstantial increase in imports will quickly push up bard currency debt to an unacceptable level.arge inflow of Western capital would be required just to maintain the current volume of imports, and this would resultoubling of debt5uadruplinghe debt service ratio would approachercent bylevel high enough to cause concern in financialreach dangerousercent)

In (his tightestern credit policy of restricting the volumethe terms of government-guaranteed credits can play anrote

Avoiding overexposure by private banks, as has already occurred in lending to Eastern Europe and the potentially costly claims on Western udgets if guarantees have lo be made good

Pulling added pressure on the Soviet authorities to reexamine their priori lies.

To illustrate the potential impact of Western credit restrictions, we have projected the effects of some possible sets ofeveling off of new Western lending at the average rateould resultecline in import volume of aboutercentnd would keep (he hard currency debt within manageable proportions. Substantial reductions in government-guaranteed lending coupledessation of medium- and long-term private lending would cut imports by nearlyeicent. Any reduction in imports would be magnified by the increasingly taut Soviet economy.

Even moderate declines in hard currency imports can greatly complicate Soviet economic problems and make allocation decisions more painful. Large agricultural imports are essential to the growth of meal consumption even in normal crop years. Expansion of gas consumption and exports requires massive purchases of Western largc-diameter pipe. Large imports of metals and chemicals are an integral part of Soviet economic plans. Orders of Western machinery and equipment have already been sharply curtailed; further cuts would certainly impinge on priority programs in steel, transportation, agriculture, and heavy machine building.

It is possible that even some Soviet military and foreign policy programs would be squeezed in the latter part off sizable cuts in allocations of foreign exchange had to be imposed. The economy is soit is already rent with widespreadthe repercussions of any substantial cuts ate bound to spread widely, even to mililary industries with all their traditional immunity. Moreover, such programs as aid to Eastern Europe, Cuba, or Third World countries. *hich directly or indirectly use up foreign currency and are already unpopular within Ihe USSR, would encounter greater opposition


b Introduction

? OTTkuI Credit* wihe


; I* jj " SooetU*of

The Rok of IndmdMl Weiiern

Interest Rale Subwdie* Soviet Demand foi Import! Pioipecis for Hard Currency

McXlUBdiM Fiporlt


A'mi Receipt* of Crcdil RmrKiram

The ReferenceAmuidpitd it Rewietioro

Effect oa

BHM ori Hard Cuireney Debt Sovietredit Reitrieiioni

I indinf'cdrl

tm nee Fienntwor*Oc




Net Impact ol Credit Knmciiom

Official Credit Com mil menu to ihee*

n,iruI Sector

USSR- ttlimatedon Wcilern Off.cntly Backedn If TVSO

USSR: Hard Corienei

I.SSM Hard Cuiicw< Pa>me nit

Hard Currency

Assumptions About Soviet Hard Currency Exports in 11

impact of Credit Restrictions

Orders of Machinery and


Western Credit Drawings and

Soviet Hard Currency Cap: Reference

Soviet Debt Service Ratio: Reference

imports: Impact of Ral Lending and Severe


Debt Service Ratio: Impact of Flat



mpacl of Credit

ons on Foreign Trade

and (he Economy

The recent sharp mini round in Sooci hard currency trade, coupled with the difficulties that irreril Eat) for ocean countries are having in paring their debts. Is raiting serious question* about the Soviet Unions cilernal financial ilrenglh

This paper assesses the cium of the USSR's reliance oa Western credits and ibe consequences for Soviet hard currency debl and imporl capacity of reductions in the volume of credits grimed to the USSR. The attesimciiilhreview of the creditsor guaranteed byovernmcMi It then discusses the impact of credit icsiraciioashard currency debt, debt service ratios, andimpoci capacity. The USSR, of (ouiie. would tryidcvltp the effect* of restraint* on Wesiern credits,(he range and elfeciiveness of posiible Soviet responses jre analyicd The paper concludes with wmcregarding the impact of credit rciliKlioa* O" the Sonet Union and on ike tori and composiiion of East-Wen trade.

Official Credits'0 the USSR Bacfciroond and Current Stain*

Rnw Trend*

Duringhe USSR andropc toon advantage of political dctcnic to greatly increase import* from the West Ihe volume of Soviet hard currency imports more than tripled during ihe decade, for an annual growth ofercent. Hard currency impvtii increasedhare of total Soviet unpen ande lato GNP Alihough uiil urullthe ai(regale lies*ercent of GNPl haid currency imports are important to many high-prnriiy So>ici economic ptogumt including those for railing meat

consumption and energy production. They eomr-iie perhapsercent of investment in machinery and equipment'

The cipnnsion of hard currencyji financed mainly by increased earning) from higherand goldas capons, arm*nd Weiietn ctcdits, particularly through mid-decide. Eiportt other than oil.nd arms have on balance barely held their own. Starling fromj very <ow base. Soviet hard currency debt reached almostillion by ibe endnd the net inflow of Western capiial afirr interest payment* paid for more thanercent of hard currency imports. The neiihen slowed gieaily7Almall net outflowfigure It

Aboutercent of the total Sonet hard Currency debt of SMS billion at1 y Western governments Drawings on oflicallyported credits rose rapidly and steadilyhen they leveled off. Use of private crcdii has fluctuated widely Medium and long-icm private credit*een raised mainly in Ibe EorodotU' nailei and have been used for general balance-of-paymeni* purposes, unlike government guirantrcd credits, which ate tied lo paiticular cipoits and projects

The large yamo in Soviet eiport eanuat* resulting from higher oilnabled Mowo* in pay for increased imports of lood and steel, io urinal* ly cease commercial borrowing, and ii> build up u*

' CanpaiW >WioHU*offimi< >ilmof ihrm far iV

il*Came* wMi ntaa A .( - wiai

miia ihr'iluc el niuwii lei <hn prttatuMcii>uiml primirwairktit Uniiivtduiin( ihr eTxuluki'h.i" lla da mr-iKik elImiwil r i

et* In flic pan year> ItO"'softeniniweak ntaikti* lot oiher Sovici expert* due lo the Wenernbidnd uncipectcd niid eacrcnc)wppori of Poland turned Ibc Sonei bard currency balance of payment* fi<Hn tarptut co delicti Woko die*w hitd cunencycsumedmks. obtained ihoit-ierro fooM fiom Weitctn bank* and supoIicm. and took wet" to cut import* But the* couldile in the turodolU' nit Id a* the*ecame

Weu rcUlMtH and ihe Potrthcrnn made WiM-cm banter* far more nenou*lcom mil-mcnttctultiw


StateSK beta* large pwcbltc*b* car'. IfTQi. Mowo- ba>official ind off>cufl> bailed cirdm to financeud>t> mifumuf plant equipment, andi. i- (Hfc i tii< iel

on government-backed credit* jumped from an aver-aieof Ufi million1o neatlyillionul hive Held it tti Whoa1 riteofcanmiimcDl* felleak of neait)billion6 io leuillionr fit cling falling Soviet orders for Weiiern machine if and ectuinmrni

ecent yean haveibe baeklof ofommitirwm'i MoKCM iil! badikhotivail ibk1 (ocloding comm.tmentj foi pipeline cudeiil Perhaps II billHtn of thete commit menu were pledged, however, io contract proposals thai have no-been tciappcdeim-ts debt tervxc payment* and level draaiafi ha* Htad'It reduced the act revwrec mfla* to (be CSSR on official eredut Iromi miiimimof1 Mla-i It* by MHl thereanet ouifWiv. from ihe LSSB a* debi service eicecded drawings

Official Credit Commitments to the USSR in IM7-SB by Industrial Sector -

-Vi'uri-.I* in

i*wibl, dcludu noti, (or niwcoo.1.

Of CDot incicrpti.urden iwcuiKcmtnii oloceiiieoniiKiv

miercsi laici and long-term matutilict cm mosi governacked credits have helped Mosro-conscrse some scarce hard curreno. The micrest rate subsidyecord levelon ihcordcicommercial rates in most WeMern counnioercentage points more than ihose charged on official loans. Uast October increase in the OKCD interest rale guidelinesossible reclassification of the USSR into ihe "rich country" category will reduce Ihe subsidy, bui ocls slis-lj Several years uill be icqoned to pat off ihe official ciedil eummiucdon Cuncessionarsnd nun. eiedil* encnded under earlier agreements can still be drawn at lower late* Because of ihe length* maturities available on official financing (up to eightalfebt service bill was0 million lesvpuld have beentunis limit of five teurv

. contracts for sales of largedia meter pipe and chemical plants were ihe primary beneficiaries of gnsernmcni-backed financing liable ll Pipe conlncis backed by official financing totaled ai5 billion, and approaimalelyM million infor Other energy-related equipment alsoofficial guarantees or credils. Official^cieditv coveredillion in contracts for complcle planu* two-third* of these commitmenufor chemicalith ihe remainder going fm sieclillionl. aluminum plantsillion! andfor machinciy and consumerillion logeiheri. OECD dala reponS) billion in officialommitments foi machine tools and other plani equipment. Small amounts of credits have financed orders for telecommunications CQuipmenl. ships, and ejith-nsov-ing -chicles

Thef Individual Westernrii Orimanx iui been Ihe leader in providing euvctfimf ni-lMCfcci] financinghe USSR,foi more ihin one-fourth of Soviet dra-ings on nccommitments extended by ihe Weile table ll Bonnro-ing imount of guarantee*. ilirwughjihe volume of new Germanecxiiaed well beto*4 peak- The op-ird trend accelerated1 on ihe strength of increased Soviet orden of machinery ind equipment (largely for the gas capon pipend perhaps greater detire by lenders"nsure IheirGerman commitmettU of guarantees on rcpiymcnti'of principal ind inteieit oa loin* lo the USSR -largely because of recent gas pipelinemountedJ billion al0 and have increased since then Despite the large volume of commit Die no. Wen German* ha* depended less on gocrnmeat-backed fmaocVg to support eiport* of capital good* than other ctwpirm. Geti-mated annual disbursements0 millioncneicd jusihird Of ill capoiii of mac Inn-cry. equipment, and large-diameter pipe Shatei for othei Big Six couniiics aie abovecrccitl

Athe USSR'sdebi loermany on guaranteed credit* stood ai appro innately i) ealhon Undisbursed ccanrnilmcnit on principalprobably tM the order ofiHion. To suppom' ptpelme equipment sales. Bonn hit0 million indit guaranlcc* ind0 million lupphcr credit line through ill partially subsidized AKA (Ausfuhriiedii Gmbh) rediscount facility

i'.i" ur.ln: second in ihe amounti credit and guaianiccs extended to ihe USSR ben*" 4t* share of totalcom nuirew (til tharplyo comparedearlier veai* In large pan innthe retail of diminished Japanese interest ia Siberian rctouicr projects Shov/ing Ml mpport for Afghanistan relatedokyo approved no new loam0 cteeri0 million official credit foi Urge dianteirr pipe New comen is climbed1rovided another pine loan, credit*of tlOO miliumonet purchases nl rupe'ivc'* a> well

as sapplier credit) forl other plant and equip meat contract*1 Tokyo alsoredit to finance SI billroa ia eqcipmem purchasesears forSiberian timber resources pratcci.

Disbursement! of Japanese credit* averaged; dra-ingt peaked5 million8 and fell back to SJOO million annuallys the reduction in neweoniributedecline in Japanetc cipoett of machinery and pipe fromillion toillion Atbe USSR ov-ed1 txllnn on official loan* and inillion p* guaranteed eommercial credits

In cootrait to Japan, fiantt ha* been generally increasing its ihaie ol Western credit commitments to the USSR in recent years.rench creditaveraged ani million annually inrapidly from SJOO million50 million0 The impor taacc of the French capon credit system ia promoting sales ia the USSR is demonstrated by the fact Ibat dlmal crcd.ts and gaaraaiea financedeiiwaa;cde ice hi of machinery and pipe ei ports to Ihe Sovtei Union andercent of total export,. ihe Jiigliest share* Tor any Bigcountry. Pans hat rcnoried that Soviel debt on official credit* and guaranlcrs totaledillion atommitment* are estimated to beillion Pans his alsoofferedillion for financing Soviet pwichases of French equipment for the Yama' pipeline, about SI talUoa has been commuted in firm contracts

Credit disbursements by tiely incteased lioniSI5ears large commit rise nit madehelped boost exports of inailniKry andlefutal loaiorreditof ihe Afghanistan sanctions andmounting intcieii subsidies probablyibe pastyear* and pcrbaps

cd ii>ecline in drsbtirsemevi* Italy reported I

i-ulI amount of guaranteed lupcilicr credit*lthough lerms weie sei for0

financing package offered lo support Italy's pipeline-related eipons Final approval ol credits for Nuovo Pigoniract IO supply compressors awaits ihe end of Rome's -pause for reflection" onhc project. Soviet debt on Italian officially backed Credits is estimated ai Siillion in undisbursed commitments, ei-eluding those for pipeline sales

Despite? billion line of credit on very '" favorable termsrd Kingdom supplied less thanerceni o* Western official credits and guarantees provided to the USSR. Little more than half of theline'" -as coninuticd io firm contracts befuic London allowed ihc facility lo empire as pan of the Afghanistan sanctions Nonetheless, nearly two-thirds of Soviet orders for British machinery have been Coveted by government-backed financing.

Bruivh (redit disbursements probablyJ millioncomnured withillionin ihe strengthiiijjoi commitmentsarn fjt;<Jt in ne- commit went*s lust reduced dr.-initvl.iit.eji At srarend lOHl

Moscow probably owed0 million on !lriii.ii Officially backed credit, and had0ndisbursed commitments available Alihotgh ton don has not yetpecial pipeline credn package, it urtdoubtcdly is prepared to provideniijl terms to supportK'i expectedmillion in pipeline contract*

Loam guar anient by (Janatla in support of capital goods eipons to ihc USSR beganid nut become significant until after establishment of5 financial1dideipons and credit disburse menu increase markedly over earlier years AiI. Can ada had eommntcJillion io cir-on contract, disbursements on these commitmenti were proUitjI. no more than SlOO millioncportcdly auihnewmillion Ciciltiliite in cail.fh, Canadian When Boaid has themnnit-up to Ihrrc-ycji financing lor grainut iripji enily the USSR hat not used these facilities lit fnmm


ther countries also eiiena official credits or (uirj'niccf! fomrn'rcijl Iconshc USSR, the derail exposure ii relatively small US commit me nit. "ijiiN by Eiimbanktotaling less than tl bill-on. wttt made in (be nuirk of. No Oimmilmcnis have been aulhc-rifed in ret em yean,estern Europe. Austria. Belgium. Spain, and Swe-den at) have made available financial (icilniciillion or more The largest0 million package extended by the Austrian Government0 to finance Auiirian equipment and machineryew JSOO million loan reportedly was underin early

(nlrrnl Sate Subsidies

France and Italy probablyr half of the interest rale subsidy enjoyed by Men-cow through us official credit opoaiaml. thanks to these subsidies, the Soviets saved an oiimaicd SIM)nterest paymentsrance and SIillion nn inierest paymenis lo Italy Hall otlicul del" had been contracted at commercialthe Soviet* would hive had to5 million more to the United Kingdom andillion more to lapan Any Wen German subsidy was undoubtedly quite small Sinceercent of ciporliSSK have been financed through Wn:KA rediscount facility. When the Sovien dcrsand initreu rates below market Nvtbc* Hermes-guaranteed cediis. ihe German eiportci usually coxn ibe fi nancing cent by charging higher prtei

Inieresi rale subsidies have been viewed b> tome govcr nine tut as an inetpenyn'c wgyiommeand eiporty The rise hi domestic interest uiriincreased the Subsidy clement in the pair few yean, however Subsidy costs in Ivtloereenl of ihe value of ma- hm-ery cinrviv io ihe USSR feu fiance and Ital, .iu} ruu|Myerceni tor the La-ted King-Cam Fam. Runtendon are concerned lhal etna-nation of vah)*dir:4jc-cquaic remainl onjnd Jj|unetc guarantees -outd It magijnirviilnr rusmon because ol Ihr ln-er coin mirnM lain in West Oermam jnd lanan

emand for Imports

Despite ihe help front large infution* ol hard currency imports in, the performance of the Sonet economy is worsening Althoufh the economy is still expanding. Ms rate ol growth hai falka drastically Ihe slowdown items mainly from rising rctouicc Costj. syiiemic inefficiencies, shortfalls in agiicullurc and in key industries such as steel, and anof planning mistakes.esult, growth ol labor productivity hat tlowed markedlyime when

demographic trends have greatly curtailed the supply of new labor.

Economic growth in, protectedercent per year or less, will probably be insufficient io both support nasi ntcs of increase in defense spending anderceptible rue in living standi id* Indeed many Soviet cuircni believe that living standards have been declining over (he pas! lew years. If defense outlays continue lo rise byercent per year las we now proiccis. ihey will preempi aboutthird* of annual increments to GNf*s compared wHh one-fourthidcthip chcMes will he far more difficult: Mto consumer industries, agriculture, and transportation will inevitably suffet i

The resource bind confronting Soviet leaders in turn suggests thai hard currency impOiis will be even more imporiant tr the USSR inth than in.

Moscow needs large imports ol Wewein (armespecially train, io increase food supplies even in good crop years andecp ihem from falling in bad years

Western pipe and compressor art essential for the rapid cipantion of Soviet gas production, which will be ihe main source of additional encigy supplies and hardheesterne- atsoincreasinglyil production

Imports of Wetiern production equipment advanced machine tools would help to raise labor piodiiciiviiy. which is the leyovietin

Tabtr >

USSR:ine Imperii

at orient US doitiii




i|iicatriiril pnsduni

rCmwi mnali





toni o' (emu

. n







(caujicmenu. in other awdi.match fairly well the pattern of past pure hi us ol Western goods tiabfc *L

The USSR, however, realises that it -ill iioi becapand hard currency imporls in realalpaced the first hill ofper year) or even al the more leisurely pacelast half ofercent per year.formulaiwn of ihe foreign Hadelan-ith the bullish

Hade prospcci> oprcssed in previous five-year Har. guidelines In remarks io the Supreme Sovsei in November. State PUnning Coatmiiicc Chairman Baybakov implied that the volume of trade ailh aaa lumamnw cot nine* -OvkJ glow b> onercent per year (Swungompared -ilh nisi* rvrceal6or wane roe ia the Stntcl hard carrcacs iradcihe Plan [hi caMigc an average annualin per

will be shown below, even this relatively modesi goal cannot be achieved wiihoui an excessive increase in Wenern financial eiposure to ihe USSR

Prospect* for Hard Currency timings

In ih: pasi. the USSR ha. been able ioWe irade deficits wiih large sales of gold and arms (tableut ihe outlook for Sovvei bard currency ctporii is to poor lhat Moscow will run be able to stave off large and growing requirements for hard currency by uung Ihe gotd/arms opt-on Inhe USSR relied primarily on sales ofaisrji gat timber aad wood products, chemicals, metals, and diamonds Macbiaery cipons -ere not an importaat factor (tablen, however, the vera me o> eaerayids sodechae sabuaMiiliihe other npom.oa balance headob) aad atats sakscaaaot saw the xiaainia

wanf JiffTTTT


USSR; Haid Currency Payments Position

nUS i


W< think thaiil production -ill begin to oW'ne b> mid-dec ide and that demoticll continueise slowly.Unlcu Moveo" dm. tu reduce "portsastern Europe beyond the Cut* introducedbe stageetontinued Tall in ciporii of oil and oil products (or hied cn'teney. (Tbcy drooped in volame by IS percent8 jndecame ol the uncctiaintMS concerning the luiuie ol piodueiion. coniumpiion. and price* (or oil and ihe relative pi unities ol the wisM dotnesncnd opuriprojectl cl eiporlv cannot be made "Hh any precnaon In. ren ihe "rnd i< dear -only ihe eteni ol the decline it uncertain Sunne>pon> couMniuely

by Ihe end o(,s highly unlikely thai the Soviets could afford any suable oil impoeti Alternatively. Mcocou could choose to maintain tntall hard currency oil cipoeti it Ihe cipensc of its own eomtinters and/or those of Fasicrn Europe

ipons. in comrasti willnot by enough to offset the eipecied fall in oil etporls Potential gas exports can be protected on ihe bans ol ihc capacity of ibe cipori pipeline and ibe contracts ugned with West European countnev Whether ihesedoil capacity is uncertainepends on Ihe growth of Weti LuiOpean vas demand

l-ll. 5


| intf






indiolt Ijj..'


Fee (Out nxuli

wd wood piodKII















and cquipnxni


ind doesl"



volume Of Umber and woodereeni of loial haid Currencytrended downward in, andxpect link or nogro-ih inhonaget of labor and equipment -ill limn ihe harvesting of iimbei. wh.eli moil come increasingly fiom remote areas Inusing domestk demand for lumber and papci prodocu haspcuisieni shortages in the past Wveral years

Clieink'ul exports grew dramatically in thebutaecount loe less0 million inchangc rcveipiv Musi of thexport

resulted fromeals under which Western firms provided ihe plani and equipment in return for future produci exports In faci. Western help has, allowed Ihe USSR io become theeading ammoniaailliond0 frxporis of other enemies Is are not as large, nor are ihey likely to grow substantially inesiern exporter* already have begun lo voice concern about Ihe dumping of Soviet polyethylene andchloride in then markets

Duringoviet eioomof platinum-group metals (mainlyickel, copper, and ntami-num probably will increase, while capons o( eh'omite, manganese, lead, and line will at best remain steady and more likely will fall The USSR produced about half of ihe woiWs ptatimim-group meialt duringnd is assured of large increases in production of these metals ins byproducts of expand* cd copper and nickel production in northern Siberia.ayor surge in Wesicrn demand that doubled the price of these products, however, would yield (he Soviets art increase in foreign exchange earnings of less than il billion.

billion -an amount equalboutercent of Soviet hard currency requirements in the decade,0 (he USSRold inventoryoni

In assessing goldource of hard currency in. Moscow will have ic balance its potential for large sales againii Ihe market's ability to absorb Soviet offerings. Initially, the USSR couldorts or more ofear if all production net of domestic rcquiiemcnti were offacd for sale. This volume could rise byoons by theof the decade if domestic production continue: to increase steadily.

ptobibly has some chance of increasedfrom sales of diamonds.0 receipts from diamond salesillion, equalercent of commodity exports. Because Western demand is highly volatile, however, earnings fluctuate widely.

Machinery exports increased nearly sevenfold duringnd now accountercent of total Soviet hard currency exports. The largest customer for these exports has been Iraq, with whom relation* are now tenuous ai best. Most Soviet machinery is not well suited lo Western markcis. iw is it back stoppedeveloped network for service or spare pans. The Soviets can mass proe-'ice, al low cost, simpleand equipmen, *uch as standard machine tools and haveiicd success in exporting suchto the Weil. The market for ihese products, howevct. is generally stagnant, while competition from newly industrializedlowing.given the growing stringencies in sled and other raw material supplies. Soviet machine builders will hate all they can do ir- meet the demands of the domestic economy.


The USSR ranks second to South Africa as aand marketer of gold. Duringhe Soviet Union accounted for about one-third of annual woikd gold production and about one-fouillt ol the newly mined gold moving in world tradeoldt J'0 tons,ne-half thatb> South Africa, mil more than the combined output of all oihrr producers Gold Iradilionall* has ranked a* one ofop ciixiri earners. viiheceipt* invcu-

Arms Receipts

Military sales have become an important exportfor the USSR. In ihe past three yens, the net cash inflow from aims deliveries hasillion.ercent of foreign exchange receipts. Ii is unlikely thai ibe volume of arms sale* for hard currency will continue to increase. Indeed, ii could fall. The USSR's military order book balgcd0 but fell last year. The dramatic decline in surplur oil revenues of Middle Cast producers such as Libya will make it more difficult 'or the USSR to demand cash for ne* deliveries.

of Credit Restrictions

The Reference Case

An assessment ol the effect of credit rcsliiclionsasis forrojection of what would happen to hard currency imports, debt, end debt servicehe absence of formal credit restrictions. We call this estimate the Refrrtnir Coif. In developing ihe Refetcnce Case and later assessing ihe potential effects of credit restrictions on Soviet import capacity, wc haveetailed accounting model of Soviet debt accumulation and balance of payments. The model can be used lo estimate Soviet ability lo finance hard currency imports.ell a* associated debt accumulation and debt service ratios,ange of impOK and credit assumptions.'

Itic mt*Srl knn nut r* otKn

tvnifiicrCijI inritftin- jnd Iw/ ifedid And ia iIlwihe ittfi irraimmtiuiii)raiefuf*intremt

i in ind in.ii r

' Key Assumptions About Soiier Hard Currency Exports in the I

FlRtirr 2"

Projected Su<irl Hard Current's (ijp: Referencr Cur

Ewp1 (taunt OJrtJtK" 1MI UflLj""

Vein mi imiltif'cli


FinX(lvll US Jrotamn

mi UStj Volomt (billion eufcenwie'ri PncllMIUSiVJ" iteuuadtint mticrt I

&ki (billion (Ml UScWft.ll.on mi US 11

Arm. .lies1 US It Tout titan earning!

i mi us



Ki-ic . . *n

do not .JJ due k> rou-Sir*

believe that oui piohtciions ol earning! capacity and import* jfe conservative in the sense that the* do not overstate (he Soviet need for Western credits.


The ley deierminjnt. of Ibe future volume of Soviet thard currency exports are based on Ihe preceding discussion They are summarised inlong with the price assumptionsssume that nominal prices for Soviet exports and imporis are the product of real pricesdollars'anda rate of inflation that risesercent? to6 perceni3 <ndercent per yeare assume thai real prices of all commodities ciccpt nalmal gas remain constant at curicni levels0 fhc real price ol Sonet gas exports increases biercent by liny aj purith (he oil pure is approached

To calculate the requirements for Western credits. we havein the Reference Case ihai theuld Jllempitold import volume consiani

al1 level through ihehisoviei financing requirements within reasonable bounds: even so. ihe gap between impom plus debt service and earnings (which would have lo be financed wjih new credits) is still very largeebt would riseillion5 and to *'8 billion0 The debt service ratio would increase toercent5 andpercentliguichether ihe international financial community would support debt accumulation ofmagnitude is uncertain.

As suggcsicdtrong case Can be made that ihe Soviets need substantial >rowih in ihe volume of imports from Ihe West over the decade to achieve medium- and long-term economic objectives Bui with

t wKtiimtne inwdll

avcra* iMinioidaerepuKso nw

abneinr mm vieO MMCMM forttitm,,uiKnniOe.iil.iiiendrdilIn'oifa"Ki

Tun ftdi. ul

urojected So tic!se

Debt Sertice Raliu:


USSR: Impin of Credit Restrictions

*.* XI If Jt|.



a v

Swieereoni-intinw. CroM turd oiirtiKV

'.i. rttlrimit


Seventerndit itii'iciimi Ifcbi nvicc

"ii hndinf

Si-iiccrrdii ntirieiion






earnings projection, growth of real imparls atercent perless than in ihe recent pasi--would lead to clearly unreasonable financingoviet hard currency debt -ouW have io tncreate fromillion currently0 billionarsd0 billionhe debt service olio would rise coneurreetly. from aboutceccni now to Jl percentnd ioercenieither Soviet financial watchdog* noi Western bankers would be likely io alio- debl to aCCumulale so rapidly.

Credit Restrictions

The Reference Casearge net inflow of capital |iim ioonstant volume of haid currency imrvetc WcMern iCMriciiOib On lending would compel the t'SSR io reduce its impoils in real term*> hpldhe growth of debt and ihc debt senh iheCist itjbk 'i

now ofthis case allows the USSR. In1iporti affordable in theCredit Kesirxtsons Cateercent leun the Reference CaseJ IS andercent Lest in the Fill Lending Casentpoti capacity iso IJlower in both cases.

Whether oneolicy which results in limiting disbursement) on Western credits io ptcscnt levels or imposes more severe iciiricitoni ihil leadecline in overall lending |in which guaranteed lending Talis and commercial lendinghe effects on Soviet imports are quite similar.

tjjrei em Mara* Currency DeaV Compared with the Reference Case, credit rrstrict ions would avoidndue accumulation ol Soviet debt Even so. in the Flat Lending Case the projected borrowing tor the gat eaport pipeline increases debt by nearlyercentlthough debt declines subsequently In the Severe Restrictions Case, debt declines in ihe period

esult of recent lending and credit disbursements for the gas cipott pipeline. scheduled principal repayment! ove.'lake assumedew years in both credit restrictionhus,ebt declines, and the Sovietposition, as measured by the debt service ratio, is much sounderhe Reference Case (figure 5l

Sonet Response to Credit Res'rid ions

To soften the impact of eredtl rcsinctions on Soviet ability io import hard curiency goods and services. Moscow couMariety of responses Ii could seek credits in countries not participating in credit restrictions or attempt io obtain some relief from ihe assistance it has been giving io Eastern Europe and other client states It might try in reduce the drain onhard currency balances by iieppmg up lit search (or compcnsjiion deals and barter arrangements If these options proed to be unreal, me or insufficient io offset the trnruei of Western credn denial ihc USSR wcwVd have to divert commodities (rem domoiKi Cat back imports paidard currency These alternatives are co- udeied in order

loans from OPEC financial institution- In ihe last few months Moscow has shown Tons ider able interest in gaining access to OPEC petrodollar icscrves.Delegations from Soviet owned banks in the Wesi have visilcd several Middle Eastern countries in an cffotl lo persuade them to increase ihcir deposits in Soviet banks But ihe financial resources of many OPEC countries, particularly those most friendly lo the USSR, Libya, for rumple, win probably be strained for some lime. Iimmnf Mmco-'i chances fen obtaining hard cuneocv loans

Funds might also be sought in Latin America, notably in Argentina and Branl Both countriesarge volume of agricultural lo ihc USSR Butl allowed Poland toillion debt lo finance Brazilian eipons andesult of this experience would be eattemely catcful aboutiicnding large credits lo another Communist coun try. In late March. Soviet officials began negotiations with Argentine officials0 million credit for grain purchases Argentina, howcvei. is not in a

position to offer the USSR any significant credits.

Eastern Europe will not be able lo borrow to make up for ihe cuts in credits to the USSR resulting from Weiiern icstriciions Poland's bankruptcy and the beginning of leieheduling negotiations on Romania's debt have by themselves greatly reduced CEMA's accos lo credits Evena good record of sound financial management--is nowc'sous hard currency band TV chaNt borrowing elinuie also has recently ritended from banks and Ihe lueocur-rency maihcts lo the eapoit credn agencies of Wew-C'i> government! Moreover, if the West eesmt" credits lo the USSR, the abvlnv of the rest of CEMA to borrow would beakened Eastern Europe might be able to escape Some of this negative spillover only if Wesi-tn governments ueic able to make deariheir policies will differentiate between Eastern Euiope and the USSR

E>en if the Easi European countries emoycu more favorable credit rating) it would be difficult for (hem to borrow on behalf of the Sonets Bankert and private creditors would be awjre of any borrowing in

excess of Eastern Europe'srequirements. More-over, since official credits are lied to purchatct of specific equipment, plants, and project* needed by the USSR, it would be immediately obvious if Eastern Europe attempted to obtain credits to purchaseitems.

Economic Assistance Fro* Eastern Europe Facing critical economic and financial problems of its own. Eastern Europe will be neither able nor willingrovide much assistanceoscow. In fact, the flow of assistance traditionally has been inpo-litc direction as Moscow has extended large amounts of aid lo enhance ils political leverage within CEMA. Soviet insistence that Eastern Europe assist in soften* mg the effects of Western crcdil restrictions could threaten serious disruption in the Soviei camp.might well decide ihai the resulting damage to its political interests would be greater than the marginal help that might be squeezed out of its CEMA allies.

The East Europeans could not replace the Westource of imports because ihey are in no position to fill Moscow's immediate needs for grain and meat or even the longer icrm requirements for taw and industrial materials. Inew selected instances such as coal and some kinds of rolled siecl does Eastern Europe offer good substitutes for Western exports of raw materials and basic industrial products. The East Europeans doarge volume of machinery and equipment toercent of all such imports by ibein Ihe main the machinery does not approach the Quality or the icchnotOf ical level of that available in ihe West Eastern Europe would Continue to serve occasionallyonduit for high technology flowing from ihe Wol to the USSR. Restrictions on creditshe Soviet Union would not chang- this pattern because il is rooted in the Soviet dominance of the inielligcnce service* of Eastern Europe.

The USSR, however, could help itself by scaling back in deliveries to Eastern Europe of goods marketable in the West in exchange for East European goud> noi rcadils salable tn the West. These cuts picsumaWi would nut affect Poland. Moscownow aMiitancc to CEMA on Poland io ttv lofunhcr economic chaos rhere Romania mightscape some of thv damage resulting from J

tougher Soviet, policy because it pays hard currency for the oil it pvrehasesJrom the USSR The USSR has already notified Czechoslovakia. East Germany, aid Hungary that it inicrsd* to cut originallycrude oil deliveries by aboutiversion ol this magnitudeillionearthe Western market would add neatly SIear to Moscow's hard currencyiversion to ihe West ofercent of current oil exports lo Bulgaria and Poland would add another SJOO million.

Cutbacks in deliveries of Soviet oil and other hard goods, however, woolderious Wow to Eastern Europe. Given their financial problems, ihe East Europeans have lillle chance of buying oil or other goods on Ihe world market or from ihe Soviets for hard currency. Since conservation cffo-is.have largely been ineffeetrve lodaie. the burden would fall on domestic growth and living standards. In Crcchoslo* vakia and Hungary this would mean continued stag-nation in national incomeecline in per capita terms. East German industrial growth rates would slide but remain positive. If the cutbacks continued over several years, slower growth could lurn consumer dissatisfaction into open unrest in several countries.

The Soviets may reason (hat most of the regimes will be able to adapt to lower levels of assistance and might even use the credit restrictions as an excuse lo improve ihe USSR's terms of trade with ihe East Europeans Political considerations, however, are more nicely lo cause ihe Soviets lo refrain from compelling Eastern Europe io eipori more io the USSR whiteower volume of Soviet .exports Fear of growing utiicsi and reduced Soviet, leverage in CEMA would be primary eoiccrns

In addition. Moscow might warn to avoid some of the Other consequences of forcing Easi EuropeanThe countries bearing the brunt of Soviet demands iCiechoslovakia. East Germany, and Hun-garyl mis hi seek indirect aisteliorarar of Ihe burden ihiough cuibacks in defense spending commitments and in aid to Soviei clients in ihe Third World Latent ami-Soviet naiionalism also might revive because of

perception! within Eastern Europeovietihe "colonialism" of the Stalin era Less abtrpopuiarhe regimes would hareup repetition lo mi imam power if ScWkIangered dissidents and tJ

S ' '}

taanpeaialioi Trade

The USSR'* ability lo useeemenu io moid the consequences of Western credit resiric-

ii Quite limited. No major dcali are now under

and the depressed economic conditions in(he Weil will make it difficult for ihe Soviet Union-onclude large new initiatives for some time.

The enihi.ii.on of Western firms for meni of Ike compen*aiio* deah proposed by Moscow has ceoied co-ii-dtiaWi imce ihecticm firmsIhe potential projects in ihe USSRieci* eliewhcic where conditions regarding equity pari-er-pation and managerial participation are fai more favorable The Soviets often tableinancial demands including (l| long-icrm credils lo pay for cQitriwncni required to develop related infrasirueturr as well as the pioductionedium-line credits lo cover consumer goods purchases needed to defray local costs, and (Ji deferred pavn nn on the crcdiii during the full period of project deveWpmeni Weiiern coenpanies alsoumber of pulalls in agreeing io accept dclnerles of Soviei prodactiong period Commit meals lo hay specific qua amies of raw material* and semimanufactures are attractive when world supplies are tight and prices aie using, bul they lose their charm when demand i> slack and ihe Western partnerompensation agreementard to market the products ur lo uiet* own plant*.

Some Western companies are also iclutiani to Can elude compensation agreement* because the* ekinot want io iponsor addilional eompetiiion on ihei* mar kcis For rumple, the USSR panchaied mani ehcn-ii-*al plant*OX Under theof lonar of the contract* for these plants. Urge Soviei, beklrverari lo depressedcucn la rone hasc began and will eoaiinue over the net! vrvcralex espoei* haveicai dol of

oppoittrun and have made Western companiesof enieriog info contracts involving pToducti Ihai do notolal market

Bane* Arrangements

All hough in the pasi ihe USSR ha* bartered Soviei arm* for 7ambian cobali. trolleys for Creek citrusnd feitiUeer* for Thai corn, ihcscdo not have much potential for easing ihe Soviet hard currency position Barter deal* ptcsentlt account forery small portion of Soviet trade mamly with less developed couainev Since most of what the USSR wants from I. DO can be sold by these countries in world markets, ihey hate little reason lo make barirt dealt wifh the Soviet Union

Dome*lie Diversions

Lacking other alternatives, ibe Soviet leadership could decide to divert doractia- production to ihe eipcai sector. With respect io otl. at lean, this option already may be under active consideration, although it depend* in large part on meeting plans for sulniitul-ing irii for oil in Ihe domestic economy.ignificant volume of domestic production, however, wouldeavy cent simply because ihe goods most marketable in the West areigh demand in ihe USSR

Imparl Cull

Moscow thus would have Imlc choice bul to reduce imports How (he Sovien mighi choose io allxstc <ueh curt -ill depend on the degree of credit reslrie turns and developmentsbe economy Accordlo oar cams. Scniel planner* lace import icdiielieanofear ia real lerias if Credit rcsi'ieiions limn accessWeiiern goods By i'ie end of the decade, import shortfall! would be closerillion annually.

In ihcn deliberations, planners will have toc-rf-ird pfogiim* jfhe

desire so ceattaaacand ibe urgenirnenis for ia" materials and miSuiiiial producli lo deal with domestic shortfalls thai have led io severe hot tie necks in ihe finnomv


Assuming agricultural production returns torend, importi of grain and other farm products could (all by roughly JJ billion*ven after allowing for rebuilding of groin stocks One. ha If of these potential hardsavings would offset the cost of purchases fur th; gaseaporlarge pan of ihc remainder will probably be allocatedrowing purchases of ihe taw materials and intermediate goods increasingly needed io feed Soviet industry.

Imports of equipment and capital goods arc likely lo bear the brum of any additional cutbacks thai might be necessary over ihe neat few years. Import* of machinery and equipment have in fici fallen fairly consistently in real terms in recent years. Orders turned up1 only because of ihc gas cipo't pipeline liable Si* In the absence of pipeline1 orders with Western firms would have totaled1 billion.

if some near-term reductions in agricultural imports were possiblecsujl of bciicr crops, and imports of raw jnd industrial materials were held constant in real terms, capital imports other than for Ihe eipori pipeline would (all sharply. Whileomposition of recent orders suggests no clear liend in the pattern of machinery imports Oom Ihe West. Ihe priority given to the energy sector in- Plan suggests tint energy-related machinery imports, will more than hold their own. and Oihcr machinery purchases would sufferesult of creditThe cuts might be severe enough to affect not itnlnew Capital purchases bui also the si/able and growing flow of spare parts and replacement machin-crs needed tu maintainnts already in operation in Ihc U'SSR.

Import decisions will become eccn more difficult by mid dcs'.idc. As indicated abuse. Sosici economic growth is trending diixnujrd as the Icjdeiship searches foro ai'cclcraie productivity gum To su'tam popul.i' morale and prumotc labor ptodocliv-tls the Pohlbuio miuld scanteast ni.iinijin imports AflCrhe gap

I hr l

liSSR: Orders of Machinery and Equipment

between ji jilabilits of mciii and other qua'il< loud, and consumer demand it likels. to widen substantially Consciauently.f gram and meii ptiaaubty will tread upward.

The USSR mold probably cut back on hjid

of manufactured consumer goods, bulin;.mi areivelyeu ihuin si billion tail year. Moscow tvaghi alio be ableeduce some imports* and industrial material* after the middle of the decade if t large Steel ecanpktes mow uridcr eooMrWiof. at htosce-petik and Kursk begin opcistton The Soviets would tbra be able to reduce

but not eliminate purchases of many types of Weiiern rolled iteel. The USSR alto itlant toillion tons of large-diameter pipe annually. If production rcachei this level. Soviet imports of large-dianvter pipe could be halvedaviag of0 million On the other hand, large purchase* ofmaterials and basic industrial products havenlur< in Ibe Sovitt importtheoscow has used foreign tradet domesticndthe poor perfiirmance of Sovietindustries continuingnot worseningof industrialaa be e> pec ted i* the faiatc

In the latter pan ofcr. Mimo*have math leuuneuver in preserung imports ol farm product* and indum-al male mi Ii at the expense of equipment and machinery purchasei Indeed, shortage) of hjid currcne) may be inicnsif)-ing jail a>oreign machinery is reviving Ai noted, ibe USSR already had curiawcd itssettl sad inacbincf)ia the Uitcr part of Ihe IvlfV and ihese imports are likels to be fairly low ihe nexi ft"cpi loi cncrg> equipmentheo* ever, the Poliiburtt isind that the pruduciivii) gciii*lan arc nut maleriabring ii could then dectdk io lr> to latieavcrrueah the help of foreign nvMhincr* aad (qaiwncnt ia order toheaad deal "ita ihe bottleneck* itui Ptfatjlan target' arc owiambtlioui and inconsistent

f*ft Impact of Credit Rrilrietions

A reduction in ihe avallabiltii of Western credils will make even more difficult the dim ion* Mjsco- man make among; key priorities ia thegrowth to military programs, feeding the population.-moderniring the civilian economy, supporting ill East turopcan clients, and expanding (or maintaining) Its oversea! involvemcnts. Because economic growth will be slow through. annual additions tooutput will be loo small io simultaneously meci the incremental ckmands thai planners aic placing no the domesiic economy Even now. stagnatioo ia the pro duction of key industrial materials is retarding growth in machinciy out pasouicc of military htrd-ware, invcsimeni goods, and consumer durables.these conditions, restriction* oncredits, coupled with ibe likely negative odious of private lenders,he hkcli-hoiid of ihorlfalls tn bcah civilian and military pro grams Thrs will intensify ihe pressures on Soviei leaden -that are alreadyalter politic* of long Handing.

If growing economic stringencies and crediten prompt Soviet leaden to cut back on impcii. it icem* hkrly that, ia true batiaastic tradition,efforts would be implementedioad braih faihinnumber of Soviei minisinci across theEven now there arc indications that the Soviei authorities aie moving in ibis direction, as they did during ihe hard currency crunch of ihepecifically, major Western ciporleril<goods lo the USSR have beea aotif-ed ihai Soviet purchases arc being sealed back or delayed For Soviei foreign trade oegam rat ions, this meam deep cuts in wimcihe order of ti laercent The very lop priorii> progiams no doubt would be spared, but many relatively high priorityclwdiag some miliisr* (nog'San. coaM bel keasl indirectly

Cut* in machinery imports, lor ctample.etard prvgicsi inumber of induslital ice-lots steel, machine building, ol refining, loboiics.


ransportation, andHilime when Mcuo> is countingtrategy of limited investment growth andn productivity growth Unlike in ihe, however,acklog of undigestedequipment enabled the USSR to Im off old irtkincry orders. very few new projects involving Western equipment arc nowand ihe need lo modernize tinting facilities is great. Because growth In domestic investment is being Held back by shortages of iter) and deficiencies in machineryMoscow's only alternative lo Westernemeans of modernization wouldhift away from the high priority accorded defense

ioda it

In Ihc long term, sustainedst rict ionsorce Moscow to reappraise its priorities. No one can predict how various Soviet programs wouldeasonable to assume thai those icguirmg the largest hard currency expenditures would be theerabit io cull. There would be growing pressure from various mtmuiMseal interests to spread ihc bui Jen of hard currency tavoriagct widett. ibe lautnes* of the economy and ihc role Western imporll play in many areas virtually assure thai si'abte impott cuts in almosl an> industry would have adverse iepercussions in other areas

ofeouat topercent of Soviet capital iirvewnstniThe oneihud reduction in plant andcspendiiuics citedcould cut loialInvestmentoticeable amount

Imperii uf uil and gas equipment, for rumple, couldifferenceilhou barrels per day ol ml eqirn a'em produclaon in ifec auddlc and laic IvMH The laiget part uf ihrs >uuld be gas

uf Sonet elect ionic productionector of high imponunct lo Ihe Sonet military effort is of Western ongm Continued attest to We-tern Icshnolug' will be important for further

H.tld currency- short fulls could also impinge onpiunuciiun ihroogh their effect on civilianlhal support production of military hardware Foruiclusca ofcuntruAcd machine toots could hamperindustrial ptocoses such as the manufaituic of genre and disks for high-performance turbojet en gtnes An inability lo purchase higli-qualily siccl products could leadhange In production plans at facilities that manufacture military itemsubmarine hulk

The trade-offs among these major domestic programs will not be easily resolved, paiikuiarly if the issues become during succession maneuvering. But failure lo modify domestic resource allocationime when credit icsirictMtisarge net inflow of resources from abroad would sel back Soviet ecuoouwc gaogrcss and. in tura. yeopardizc the USSR's ability to sustain growth in military and industrial powerii the West inOi Soviet lenders will become increasingly tempted to bridge ihe gap in domestic ie sources by boirowiig abroad or by changes in policy. Bytringent credit environment sou Id force Moscowchoose bCwten programs that promote ibe health and well-being of ihe domestic economy and Ihe cvono mies of us allies and those lhal rosier continued international tension and military compelnion with Ihe West.

In ihe evolving environment of credit stringency, ihe Soviet have already shown some inchnanoa to change thro policies. They have, for rsample, tried lo reduce economic tupport lo Eastern Europe. Soviet ability to suueerc Eatiern Europe is limned, however, by the political considerations discussed earlierSoviet leaders might become moreressing Third WenM countries -or even indusiiial-ired countries -so make conceswont to the USSRbilateral trade negotiations Although Soviet leverage in this area historically hat been weak, ihr loss ol maikrtt resultingrolonged Wettern recession

induce lome countriesield lo wellpofenlial of Western credits ai part of a

naled Soviei pruiure for concessionary tradecal-with growing economic difficulties

?.materials andsuggestew set" of Soviet leaders, II ibey

odifylan and formulate

' ne Politburo might also look long andnd beyond,ess aggressive

"'foreign aid eipcndilures or the cost of directposture would work io their advantage.

i ments in Third World counuies. Support ofin ihe leadership already sees a

is relatively cheap, but Moscow might giveofime to husband their

weighi to cost considerations in the future.preserve their military might, and shift

mportant, the USSR might become more reluctantgrowth strategy ftoro massive injections of all

undertake major commitments tomaller injections of belter client slates because of the heavy outlays theseemail. Il might even consider reducing,level of involvement in countries such asVietnam. Already, Cuba is under pressureoil imports, and economic aid tosubsidiied food and oilnot increasing, despite urgcnl pleas from Hanoi.

Original document.

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