1
TOR: THE RECORD
attached moniorandiini was requested by Undersecretary of the Treasury McNamarollow-onriefing on recent Soviet activity anc' payments"propsects in
MiSTnrijijlAl.ROGRAM9
r soviet. Analysis
2
wwous
1 Ul CD-nc-j
DSSR:
of Western Credits
-Western willingness to extend credits to the USSR--an
inportant factor In the rise of Soviet imports _ln theuilley element In both the scale and timing of Soviet imports in the - Western credits provided approximately ercent of the USSR's import capacity between1 and Thanks to the rapid Increase in oil and gold prices, Moscow was able to sustain growth in Western ioports in without an Increase In its net debt.
The USSR, however, is encountering a hard currency bind l and, with no relief in sight, faces even more runch in the coming years. The only potential large export earner r the foreign exchange horizon is the Taaal gas pipeline, the first line of which will not begin operation until 6 or later. Even then, earnings from the project will not cone close to offsetting the decline that wc project in oil earnings untileanwhile, Soviet dependence on trade with the West Is not expected to diminish, and may well increase. To cover protected grain needs, build the gas pipeline, and sustain the flow of other nonagricultural goods, the USSR would have to boost its hard currency Imports and debt considerably more than the lan implies.
To suggest the magnitude of the USSR's hard currency needs and constraints, we have constructed a ba1ance-of-payments accounting model to projectin1 US dol1ars--trends in the
COBW-frESTIAL
USSR's hard currency foreign exchange accounts through The Dodel, which consistseries of standard accounting identities, projects overall payments trends uith assumed values for Jcey earnings items such aa the volume and prlce_of oil and gas, gold and arms sales andin a reference requirements.
Our calculations assume that agricultural imports drop from their peak billion in1 to ill billion in2 and to
ear. One or more bad harvests in this period could, of course, raise Soviet agricultural ioport needs considerably. We have alao assused that imports of machinery and equipment, other than for the Tanal pipeline, remain atillion through most of the decade while imports of nonagricultural, nonmachinery items such as steel, pipe, and cheoi-cals grow at the sane rate in real terms as in. Imports for the Yamal pipeline total $2 billion annually.
Overall, imports that must be paid for in bard currency are projected to grow under these assumptions at an annual average rateercent during , slightly faster than implied by Planning Chairaan Baybakov in his plenua address last November on thelan, but not as fast as the annualercent rate recorded in. In view of the resource constraints that the 0SSR faces in the next several year.*, a slower rate of increase In import volume would nake it more difficultr Soviet planners to deal with prospective shortages and raise the technological level of domestic fixed Investment.
Moscow cannot expect ouch help from merchandise exports In paying the rising Import bill. The key van..Mr in the calculation is Soviet oil exports whose earnings have Increased sharply In the past decade-as a result of spiriting world market prices. To cover the range of likely Soviet oll^ options, we have projected two extreme scenarios: a) oil exports constant at about through 5 and then dropping to zero by nd b) oil exports falling to by 5 and to zero during '. Be cause of soft demand in Western Europe for oil, prices are projected to fall ia real terns over the next two years before leveling off for the rest of the decade. Gas exports, on the other hand, are expected to rise tobillion5 and then Juop to $9 billion as tbe Tamal pipeline goes into operation In In gas earnings will illion if a *cond Tamal line is built. This assumption allows for aporccnt increase in the real price of gas (currently undervalued In relation to other fuels) during the decade. In all, the gas project will add nearlyillion annually to Soviet hard currency earnings.
Coatoodlty exports other than oil and gas, meanwhile, ore held constant atear throughout the period. Uhile soae Individual export items {platals and diamonds) will continue to be In demand in the Vest, most Items in the
These scenarios are consistent5 oil production of tl to, exports to client states, and domestic oil consumption50 level)5allowing for arinual growth at the rate of the past few years).
USSR's export catalog arc products not veil suited to Western aarkets er>-> or for uhlch Western demand has weakened (timber and other oetals). If anything, our assumption may bec. The volume of these exports 0 was Jower than it was in8 (table and further slippage -has occurred . Volume exports of wood and wood products fell more thanercent6 Real exports of machinery and equipment and of dlaoonds levclud off, and sales of ferrous aetals ar.i agricultural products fell sharply 5 and In light of the sluggish forecast Tor the developed Western econooies and In view of production problems in the DSSR, wc doubt that export oarnings will rebound in the next several years.
Hor are the prospects especially bright for earnings from other sources. For these projections we have assumed that Moscow will scll--atper troy ounce--all of the gold produced each year in excess of domestic requirements, and that arms receipts will remain at1 level ofear. Earnings from transfersi es (including freight and tourism but excluding Interest earned) are held constant at the current level ofear. Interest earnings on Soviet assets In Western banks are projected to add another9 billion a year to overall receipts. The level of Interest eranlngs Is based on tho assumption that Soviet assets in Western banks remain at illion a year through and that they earn interest of5 percent a year.
CQiTTB&iTl It.
Table I
USSR: Exports for Hard Currency Products Other Than Oil and Gas
ollars)
5 . B 9 0
Coal and coke
quipment
metals
and wood products
products
CO|EiORWTTTt
cojiw-ornmiL
For the projections of debt service, we assumed an average annual Interest rate of5 percent on new commercial debt ate percent on new government-backed debt and debt Incurred for the Tamal gas.pipeline. We assume that the average maturity for medium- and long-term commercial accounts for about two-thirds of total commercial debt--and for government-backed debt Is five years. For the Tamal pipeline, we have built in a three-year grace period with repayments over eight years. Short-term debt Is held at one-third of total commercial debt throughout the. Finally, net expenditures under "errors and omissions" are held at0 level ofercent of merchandise exports.2 This assumes that the Soviets provide no extraordinary hard currency assistance to Poland
With the above assumptions, the model was used to determine financing requirements for maintaining an assumedercent annual real growth in Imports. Our projections {summarized in tableuggest that uoder the high oil scenario, gross debt would rise from a billion this year illion In5 andblllion In0 (in1 OSnder the low oil scenario, debt would rise billion5 and 3 billion Western credits would be needed to cover approximately two-fifths of the USSR's imports In
e "Errors and omissions"alancing item included in balance of payments analysis to account for unrecorded financial flows. For the USSR, the account includes such Items as hard currency aid to Poland and credits extended to finance exports such as oil to European customers and machinery to LDCs.
COJO^ORIfTIiL
nder the first scenario, and three-fourths under the second.5 In either case, the debt service tardea, while probably still manageable would in the latee considered far too heavy by both Western lenders and the Soviets.
Almost any alteration in financing terras^ would raise the cost to the USSR of doing business with the West. At present Moscow benefits substantially from subsidized credits extended by its major trading partners in Western Europe and Japan. Roughly tO percent of tbe OSSR's outstanding debt carries terms with Interest rates which are * to 5 percent below commercial market rates. enial of concessionary financing terms on the roughlyear the USSR now receives in official financing, for example, would raise Moscow's debt service costs by an average0 million per year in .
Neither the Soviets nor Western bankers, of course, would permit suchassive Soviet financial burden to develop. Hoscow instead would have to settle for lower Import levels than assumed In our reference scenarios because any reduction in the volunc of new Western credits would lower Soviet Import capacity substantially. To estimate a more realistic import capacity, the model calculations were reversed so that imports could be projected with assumed values for future Soviet credit
ensitivity check, the Mae high ond low oil scenarios were run with Imports risingercent annually rather thanercent. Debt in the high oil scenario climbedillion5illion In the low Mi scenario, itillion50 billion in
USSS: Hard Currency Payuents If Icport volume Increasesercent Per Tear
' ' US S)
"
Oi1
balance
Exports
gas
imports
froa gold
froaj Anas
and transfers
receipts
payments
account balance
and omissions
financing requirement1*
draunc
principal repayments
debt
service
service ratio
oil" assumes hard currency 3ales plateau5 then drop tc zerolow oil" assumes oil exports fallTotals may not add due to rounding.
5 billion drawdown of Soviet assets held in Western banks In ISSl. Debt serviceercent of total merchandise exports plus receipts from gold, arsis, interest receipts, invisibles, ind transfers.
COjU^fTTffTiL
drawings. Three scenarios were constructed for each oil export profile: cenario Uniting the USSR to 0 dr.twing levels of billion per year, all at commercial terms with Interest ratcs_ at 5 percent; cenario Uniting drawings 5
*
billion per year at commercial terms; cenario that assumes no new credits are drawn. In each case, financing for the ramal pipeline project Is unaffected by Western credit restrictions. These calculations are summarized in table 3.
In all three Cists, Soviet import capacity Is substantially below thr level required to allow East-West trade to ease the USSR's economic problems appreciably in the. If Hoscou can maintain existing oil export levelst could probably postpone deep reductions in imports until after ven if it received no new credits. If Soviet oil exports declined substantially before however, Moscow almost certainly would have to reduce its imports more rapidly. The Soviets would incur less debt but would also have ouch less access to Western goods and technology. Western credit restrictions in this sltutatlon would accelerate the decline In Soviet import capacity inut would not make much difference thereafter. After the the differences in debt service among the three scenarios begin to offset the differences in the volume of new credit drawings.
USSR: Estimated Import Capacity
(Billion igftlxcept aa notedT
Oil"
Oil
'990
case with unconstrained borrow! fig:
Imports
Total debt
Debt service ratio (percent)
*
new credits United5 billion at comoercial rates: Taperts
f reference-case imports) Total debt
Debt service ratio (percent]
6
credits, limited to commercial drawings5 billion as coeaerclfcl rates: Imports
f reference-case Imports) Total debt
Debt service ratio (percent)
5 21
3
27
no new credit drawings: Imports
f reference-case Imports) Totrtl debt
Debt service ratio (percent)
1 U*
AL
In all of cur scenarios, veprojected Sovietrd currency paynents through 0 in igfll US dollars. Thus, vc have flaauaed that export priees-^eicept for oil and gas asbove--and lroport prices move together. Because of the decline in real oil prices in- Soviet terras of trade deteriorate In those years but inprove soeeuhat throughout th^ rest of the decade due to the continued rise in real gas prices. The projections would be less pessimistic if Western econoolc growth--and demand*-picked up enough to cause another round of increases in the real price of oil and other raw oaterlals.
QOSriDEHTIAL
Original document.
Comment about this article, ask questions, or add new information about this topic: