USSR: IMPACT OF ECONOMIC DENIAL MEASURES (ER 81-10021)

Created: 1/1/1981

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3?IA HISTORICAL REVIEW PROGRAM RELEASE AS SANITIZED

USSR: Impact of Economic Denial Measures

USSR: Impact of Economic Denial Measures

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Thil piper wai coordinated with thc Office of Politicalnd the National Intelligence Officer for USSR and tUttcin Europe

Intelligence Sources and Methods InvolvedINTEL)

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USSR: Impact of Economic Dental Measures

Key Judgments

. Aignan invasion have hadmall imtnri nn Ihr- Cruris

urge pari, thismi.ed willingness by ihc major grain exporters

Because of acions taken by Moscow and faKcring Western support, .he impaci of .he measures will coniinuc lo wane.

Grain Sanctions

When sancUons wereear ago. Moscow was in theio soften (he effee, of (he9 harves..is pom could handle, abou,illionrain fromo.hcrstreetThe

"Mef'haSeSding taw

blU^Kcommodi.es has caused Moscow

"^and soybean meal denied by .he

" 0 Ung;ICfmLTA'been fully replaced by Argenlma and firms in Wes.crn Europe.

one-

'supcrphosphoncacd (ha. were canceled by ihc Uni.ed Sia.es.

Industrial Sanctions

nC'i0nSarge par. because Krancc. West Germany, and Japan have no.

w3trio:on ,iadc in cquir.NeT

rrhavc fcboundcd

r^rn^3ndonsavc no. rcurned lo bus.ncss as usual. Tokyo is wj.hholding supnor. for Soviet

e of Siberia, .he Uni.ed Kingdom is ma^ining ul7rce,eon

iii

government-backed crcdils. and Italy has not yetcheduled new credit agreement. The posi-Afghanisian lightening of COCOM controls on technology exports is basically intact. Support for restrictive measures, however, is likely to erode further in the absence of new Soviet aggressive moves.

Vulnerable Industries

The inierruption in US lechnology sales will retard urgently needed mod-emi-aiion of some industries:

Soviet oil and gas exploration schedules, especially in promising offshore and arctic areas, have been sci back by recent delays in granting export licenses for such items as drilljhips and rigs.

The revocation of licenses for lhc Dresser drill bit plan! will complicate efforts to improve drilling efficiency.

Similar action already has delayed plans for important Soviet steel and aluminum projects.

US denial of computer part- and assembly line equipment has further retarded an already lagging Sovici effort lo double production capacity for diesel engines at the Kama (ruck plant.

Thc impact of these denials will be diminished severely to the extent Western Europe and Japan continue to step in as US replacements.

Contents

fate

Key Judgments

Inlroduciion

Grain Embargo DuringTA Year

1

Soybean Meat and Meal

forTA Year

Fertilizers Teebrwtosry and Efluipmenl

Allied Suppon

of lhc Den.il Measores on ihc USSR

Grain

Dcsatal ofFertili

liripc^cJMachirtcry and

Impjci on Soviet Planning and

Appendixes

COCOMJMwical

Soviet EtTeeii To Circumvent COCOM

HiW.it'l

Principal US-USSR Economic Denial Mcatorw

Ihe USSRurchaictllbon torn of OS-oopn rota in each ofI US-USSR loni-Te-m

rmenlyeaneiobcr-WSeptember lejamit bowt.

jmort| ilHHcma;or (raiflctpoctcmicrr*

Argentina not IO rcnlac. denial

of allalcaof

on ibr ulr of vet'H'4 eerieuliwelprodeeii madeceniauici Irom USpnsSucIl (foe dimple,USocanQ.

of ih.pmenuof1 millionear elaelefhe USSR.

Tfcbnolap

A totaliwrnmeruivpponednd laaianteei wbieouenH* re-uedojuai I" leu eoncrutoniry t'.nrn on nc-crcchH

Aiuranon lhatnd Iifunete firm, -odd no. beio labttituie for protecti US firm. couldpunae bceau.ee/ theevde.gmc..

A US Ccernmentof nil oniitindini andriport IMrnirfor ul: o'equipment and icchnMo to the USSfl

USSR within COCOM channel, to intli.de;

DefaetoobwrxnceoribyCOCOM member ifatm let thene "emi idi-ufiielen CtXOM hill

rorriilo include COCOM ecu-of any luteCO million Null iriMJCtiecin "Sieb Watera tcchnolory eonlnbtrlci "othe development of

Scniel induiliyilitary-re levari area, even il neither Ihe

Kchnotoeinoi the tquajnicnl ii currently on ihe linof COCOM-

embargoed item.

on ne- re-ie- peocedurei foe fiber -JUKI, leten.

endline silicon tueaiiil in the

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USSR: Impact of Economic Denial Measure;

1 i

Inollowing thc5ovic< Inlfrvenlion in Afghanistan, the Unilcdnd the major Allies announced aprogram agairal theackage of ecMornicaw res wai adopted to hinder Soviet lgricultvral production and locilcm technology (see chart).

So far. the Soviet Union ha* been affected ment by Ihe grain embargo, iiccaute Moscow obtained mbsian-lially lets grain in thc US-USSR Long-Term(LTA) year than ithe importantinecause of thelded setback. The impact of ihe technology denial measures, however, is less evident because any impact would be felt onlyeriod ofovici dependence on Weitern goodi is small in most areas and Allied cooperation has been weak From ihe sun. tbe key governments in Western Furor* and Japan opposed lough technology sanctions; Ihey all interpreted our requests for cooperation nit rowly. They worried about developing an adversary relationship wiih Ihe USSR, and ihey did noteduce their own access to Soviet maikcts or Soviet eneigy. In general, tltey doubted lhat Soviet actions in Afghanistan were serious enough lo/eopardire the gains from detente

This paper i.esteries of avieiimcnls b)ffice of Ecoivointe Research of ihc impact cf Western economicn thc Soviet economy. We will first review the status of the sanction* and then discuss their effect*

THe Sanctions Effort

The Grain Embargo DuringTA Year.9 grain cropillion tons left lhc Soviet Union far short of Ihe amount needed to susiain planned growthe livestock seclor. maintain carryover stocks, and met! requirements for food. feed.

carryover stocks, and meet requirements for food. feed, and induitrial uses. To soften the effect of lhc peso* harvest, we estimate Moscow would haveillion ions of grain and soybeans inTA year ending on JO Septembermuch as ihe Sovieis could have handled logHlieally. Although Moscow was counting onillion tons of US grain, the imposition of unctions reduced allowable Soviet purchases to the LTA agreement minimum of 8tons. (The USSR alsoons of US grain ordered in ihe preceding LTA year.)

Thc Soviets bought an estimatedillion ions of grain from all sources duringTA year (secoscow obtained nearlyillion tons of gram fiom non-US sources for delivery byeptember Of thisillion tons reptevents replacement of theillion tons of denied US gtam Argentina increased its sales to the USSR more lhan any othc' country and in July signed an LTA of its own5 lo provide the Soviet Unionillion ions annually of grainillion tons ofillion tons of sorghum, and one-half million Ions ofn oddmon to the mayor grain caponing countries. Eastcm Europe supplied anillion ions of grate, Theillion tons were provided by Sweden. Tui ley. Thailand, and South Africa and through some sir ill-scale diversion

We believemall imc-ant tyf embargoed US gram has been diverlaJ to the USSR. Last Spring. US corn rrponedly was being transshipped through the Romanian port of Constanta and. so early0 on* of US wheat allegedly had arrived in the same po" destined for the USSR.

Soybeans Soybean Meal, ami Meat. The Soviets have encountered little difficulty in coping with the em-bar go on other agricultural commodities. Moscow was scheduled loillion ions of soybeans and

l>erw|se indicated,to tnmi'tctmf

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USSR: Total EsllnialedTan.

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tons of soybean meal from ihc United Slate* inTAut receivedorn of bean* because of the sanctions. Thc denied beam and meal have been fully replaced: Argentinaons of soybeans to thc USSR, and firm) in Western Europe have supplied atillion torn erf soybeanlhan -as denied C

arge portion of the meal was :Wcsicto Europe from US origin beans

Despite the embargo on DS meat sales. Soviei meal imports shouldons in calendaitons above the9 level

Although Argentina seems to have supplied ritost of Ihe inclement. Eastern Europe also maystepped up deliveries

TA Yttir.0 gram cropillion tons has again Icfl production far short of rcQtiircmcflit lhe impactombined US cmbirgo on gram esporls beyond theillion ions would be eeinsidcrably sens Ik: than last year, reducing Soviet gram imports byillion Ions in comparisonimport possibilities if Ihe embargolifted. Moscow has already lined up more gram forTA year than it intf-orlcd in the

inA ycar.Sub-itamial additional amounts "ill be available from Argentina and ihc European Community, which hasecord harvcM. Smaller amounts could come from other countries, includinc Romania, which could al Ihc tame lime import grain from lhc United States.

Although Ihcre if link question lhal evenontinued US embargo the USSR will bc able to purchase- all the grcin il can handle, coniiniiaiion of ihe embargo will reduce sovici port handlinr capacity. Under optimum conditions Ihe Sovicu can handleillion lorn of grain, loybcinand other bulk fcedsiuJTs per year. The UShowever, hat forced thc viearger number of small ships (particularly formying up Sovici port facilities and creating additionalreducing port capacitytons of grain,nd other feedstuff* foronths endingnternal tail congestion it nlu> hampering thc movement of grain from the ports, especially ai Odessa, ihe largest Soviet grain pocj. where railcars not suited for grainare being pressed into sconce

Phosphate Ftfiiliieru Accordingyearexchange agreement concluded In the. Occidental was lo sell theillion tons of superphosphoric acid annually (equivalentons. purchasing in return ammonia, urea fertilizer, and potash. The Soviets intended to use lhc super phosphoric acid lo produce "liquid comples" fe. 'infers,airlyercent) phosphate nutrient content, in seven plants ordered from French firms6

Soviet officials hive been only partly successful it replacing US-origin acid after shipments were hatted in February. We estimate that Ihc USSR hasmaterials equivalent to about one-half of (he quantity originally eipeeted from the United States. Soviet orders of superphosphate and ptiotphoric acid have toiiledons in noirient valueost of the material was sold by flr.ns inTunisia, Finland. Belgium, and South Africa. As forupplies, the Soviet Union in Octoberive-year contract with two flelgian firms for

the deliveryons per year of super-phosphoric acid to lhc USSR beginning inach0 tons ofrepresentercent of the yearly amount the Sovici Union was lo receive from the United Slates before lhc US embargo was imposed-

Technology and Emuipment. Ineview of US export control policy, ihc United Stales applied stricter controls on icchno'ogy canons lo the Soviet Union--partictilarly computers, compuicrand technology to produce oil andf license applications lhal probably would have been approved under pce-Afghanistan guidelines were denied, and some goods whose export licenses were tevoked remain unshipped.

Other NATO partners and Japan, which male upere asked lo adop. similar po-Vic* to prevent the US measures from being undermined SpcciFrCaTIv, Ihc Allies were asked to:

Agreeeneral tightening of COCOM controls on high-teehnotogy cxnoris to the Soviet Union.

Give assurances that their Firms would not bclo step in and fulfill contracts vacated by US companies.

' Suspend con-Civrir.it> giik-erniTKni backed crcdils and guarantees

Central to the call for lighlcncd COCOM controlsequestlanket "nei-cxccpt ions'" policy under which the member counlticswcre asked not to request exceptions lo sell COCOM embargoed items lo lhcrocess know-how- proposal also was tabled for nearly all mayor plant sales to the USSR not now subject to COCOM review, and COCOM mem-bers were asked to consider tightened administrative anV processing procedures for thcof computers and related software, polycryslallinc silicon ncedca for the production of integrated circuitsnd Fiber optics and lasers

The Co-a. uiwwmi of NATO courinoi litoa.

oTko ih*tmHitric* twe

orari cnurriiC'OM.

1

The secondnot lo replace USwas aimed at two largeetted by US actions. The US firm. Armco. In parIncrship with Nippon Steel of Jflpan. had wonillion eonltaclo participate in equipping Ihc Novolipclsk speciality mccI plant bul was unable lofutfilUt because of ihc denial of eiport licenses forechnology. Similarly. Alcoaot German partner Klcseckner were on thc verge ofontractillion aluminum smelter ji Sayansk *hen sa net ions were announced

On the rtnancing issue, the mayor Allied, countries were asked not lo provide official credits or guarantees roteiports to ihe USSR. The request was subseqtxnily modifiedn appeal lo limit the flow of new credits, adopt Organiutiononomic Cooperation and Development (OOCD) consensus einorl credit lerms. and shorten credit maturities

F.vcn though ihe counirtci initially lupporied lheheir support was rclucitint. vague, and contingentthe enpiwi nf competitors WhileIhc Wei Lu rope,ins not the Japanese wanted ie Hcfv the USonnciinns they clearly were unwilling lo sacrifice much Soviet business to protest ihc Soviet move into Afghanistan an attitudeStrongly reinforced by domestic luropcanrci-noe-commercial interests active in tne arket. Thc Allies also noted that bcctutc Ihc US Lipori-Import Hani no longernded Crcdtls for Soviet projects, ihe United Stales request regarding credo Icrrm did not involve equivalent US rest ram l

Despite their rccoaliooi. ibe ccsMirsgsomplied wtih the USdemarchcs al firsi Request for suffer COCOM conttotl wereh lherequest seemingly enjoying iheup port. Those countries potcniially ableubstitute for thc United States in major USSR coniraeis instructed their firms not to .center the bidding for ihe Novolipclsk and Say.sncV "Ojeels andcretins'rum Canada. Italy, the Untied Kingdom, snd (Timer were held up Japan nntl Wen Germans iWitMtW they had stitncndr-il or would delay Soviet credit applications

Erosion af Allied Stpport. With the Amcdthe signing of newlh the USSR slowed significantly. Through Ihe first half of thc year. Soviet orders for Weslern machinery and equirsmeni totaled less0 million, eomjvsrrd9 billion ia the first half9 (seehe only majorillion or more)e concludedMS million contract with France to batM offshore rig facilities at Raku and Astrakhan lie cospcraiton was particularly evident for Japan. Italy, anil ihr United Kingdom: the combined value of sales by ihc three tola ledillion duungabout one-tenth lhat in the9 period.

But the commitmenls provede neither categorical nor lasting, la May, French officials indicator) an intent to proceedew multiycar creditdecision whtch would allow French firms to conduct Irade on virtually the same terms ihit had been in effcci before Afghanistan. In lale July. President Ciscard allowed the French firm Creusd-Loire in reopen the bidding on ihe suspended Novoltpeitk steel plani coniraci. Inrctrsot-Loiie subod-tar)0 million chemical plant contract, which, likeI.;peisk. almoM certainly will be fi nanccd with official crrdiis Thc othrr ma mm Allies beganollowench lead The Wesi Germans tn early August approved0iedil guarantees foi thc sale of large diameter pipe to lhe USSR and signaled Klocckncr it could renewfor ihe Sayansk aluminum smelter Toksoalto .in-tonne rds musing ahead with Soviet credit .lpplKJlttsnt for Siberianrraeral irade.esuli.vrdcrs fen nuekwery anoi'ed 'he "euesd half0boutbiii,on

Rclairoosii the Soviets, however, nave still nota business-.it-usual basis. In spile of itsplans to proceed with support for somedevelopment projects. Tokyo is holding olf on otherhe United Kingdom is maintaining its free re on govern mm;-backed credit* loth' USSR, and lia'y. although complaining aboul losing business to

USSR: Order* of Western Mi.hlnerjEquipment

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Include* S3 CO million order loemethionine plist for peodiiciion ofIced

and West Germany, still Ins not yetserw credil pact. Perhaps most importantly, the lighter COCOM guidelines still are basically intactnotification in0 of intern to sell computer equipment to thc USSR under an administrative procedure for processing lower performance computer sales, however, couklrecedent for otherto back away on requests for lighter COCOM controls. These pressures will mount further if Fiance chooses lo proceed wiih ihe export oftelephone switchingplant.

Pressures foe expanded trade relations with Mosco* also will intensify if thc Soviets continue lo offerprojects to Western firms and emphasirc thai contracts will go lo those countries lhat rejectThc Soviet message is especially pointed with regard to the newly pcoposed West Siberian-Western

F.uropc gas pipeline. Trumpeted as thc biggest Easi-Wcsi deal ever, lhc roughly SI5 billion natural ga* pipeline project will carry substantial quantities of Sovici naturalistanceilometers from Siberia to Western Europe. Although West European and Japanese firms arc eager in win contracts that couldillion or more for com pees sort, pipe, and related equipment, businessmen have been told they will receive conn acts only if official financing is made available

Impact of it* Denial Mnuin on the USSR the Graia Embargo, The COOscQacrKcj of reduced gram imports have fallen most heavily on ihe Irvestcxl sector, already suffering because of ihe9 grain and forage crops In an average year, theloek sector con-.umei roughly half of all grain: pro-

ccsscd foods .iiof about one-thud, and the remaii'cr is used lot seed, alcohnl and other products, and stock accumulation. When thc cop is belowstocks arc drawn down and thc leadership has lo import to make up Ihe deficit insofar as possible.

Stockdrawndowns and large imports partially clove lhe gap between the9 crop and requircments. Becaosc of the US embargo, however, ihc USSR was dented roughlyillion tons of gram daring ihc9 JO0 In lhe absence cf siock drawdowns, grain feed availability would have been reducedercent. Expressed in another way, this was enough grain in produceons of pork (carcassquivalent to slightly moreercent of meat outputecausearge slock drawdown, however, lhe loial grain availability for feeding only dropped an7 pcrccniage points.

The impact of the denied gram on the IrvcMock sector has been manifested ineal output redocttone in herd numbers, and lower lircwtighd of the animal inventories. Farms were forced to stretch available feed supplies by increasing slaughter rates in ihc earl/0 and by reducing feed rations. By midyear, slaughter rates had returned io more neatly normal levels, but reduced feed rations continued lo be reflected in slowing growih in livestock inventories and reduced slaughter weights.

We expect meal produclion in0 to be aboutillion Ionspercent lessn addition, herd numbers by yea0 may have been roughly equal to those of thc corresponding date9 'ccauseetermined campaignetain herds in the socialized sector, Excessive slaughtering of prime herds, for which data arc not yet available, may have been sufficient however, lo offset any invenior> gains in ihe socialize! seelor. particularly for bors. Poultry is ihc only category cipccicd to show much increase in numbers and product output

Record imporis of meat in0 will offset some of Ihe production shortfall Nwrlhcless, per capita meat consumption will begin lo decline in earl*

ovietave been complaining ofcontinuing shortages of meal, butler, and milk.

The food situaiion has been dcscribctTas thc worst in many years. The recent siril:es ai ihc motor vehicle plants in Tol'yailiand Gor'or es-implc, reportedly were touched off by foodd stopped only after authorities rushed in supplies from surrounding areas. Repot is of local rationing and of sales of meat to selected groups through places of work have risenevel unpiecedented since tLr harvest disaster

ecowl successive crop failure, the Soviets' feed grain problem will be worse this year. We cs-;imaic that grain supplies for feed could be downercentcar ago. if the grainremains in effect. Depending on whether Ihc Soviets adjust herds downward or attempt lo maintain ihem on thc assumptionciurnioa more normal grain crop next year, we believe meal production1 could drop5 million Ions. Al Iscst. meat outputgain roughly equal0 production level ofillion tons. In anyeat shortages will be serious during lhe rsexTonihs. As noted earlier, the USSR will probably import more lhanO0 tons of meat in calendarrccoid for Soviet meat imports. Wc expect Moscow to try tu import as muchillion tons this year. .

Denial of PhoiphuK ftriilizm. The suspension of exports of US-origin acid has delayed the Sovietcomplex" fertilizer program for atear because Ihc available matcial isower grade lhan US acid and is nol immediately usable in the Soviet program. Accordingly, wc believe Ihc "liquidfertilizer plants have been unable lo operate al matemall fraction of their intended capacity. The impact on0 grain crop is difficult to assess. If Ihc fertilizer had *ccn applied entirely lo grain, it is possible that the effect of using substitute materials could have icsullcd in lhe loss of grainillionillion tons of grain

In ihc longer icrm. the Soviets probably can purchase sufficient quantities ol phosphate intermediates and finished products to overcome their delicti infertilizers. The new Soviet contracl with two Belgian firm* toons of super -phosphoric acid in each of lhe ncil five yearsis pan of the Soviet effort to find alternate suppliers for embargoed US materials. In addition, thc

USSRycar agreement with Morocco8 under which (he Sovici* will assist in developing phosphate deposits at Meskala in return for IO million ions of pbesphateearlthough implementation of the agreement has been slow. Soviet officials could decidepeed up ihe development of the Moroccan project if ihc sanctions stay in effect. Finally. Soviet efforts to obtain replacement acid may bc made easier by the decision to allow Occidental Petroleum to sell non-US origin materials io thc USSR, an arrangement similar to that allowed thc multinational grain companies.

Imporn of Machinery and EouiptnenL Aside from the slowdown in new orders in the first half0 and scattered reports of production disruptions because of lack ofspare parts or denial of equipment scheduled to be delivered under pre-Afghanistan contracts, wc arc not aware lhat production in any Soviet induslry hasoticeable setback to date from technology and equipment sanctions. Indeed, since the thrust of the embargo is toward limiting future exports, aimpact would not bc readily apparent until some time tn Ihc future. Except for the Uniied States, which accounts formall share of Western expons of manufactures to the USSR, the sanctions wereto new business: shipments of Western machinery and equipment ordered before sanctions were imposed have continued unimpeded. Even Ihe US sanelions have been highly selectiveumber of items still approved for export. ,

For any individual industrial sector, it would take considerable time for the denial of technology or production equipment to work ils way through the productionlonger than theonths ihe embargo has been in place. We think thai the sanctions will have some impact on (he future, especially in thc energy, metallurgical, and motor vehicle industries.

Energy Eoulpmem and Technology. Thc impact on Soviet oil produciion has been minimal to date because most energy equipment sales have been exempted from sanctions. Deliveries of high capacity submersible pumps that are needed lo support oil produciion. for example, have continued to bc supplied under pre* embargo contracts. ThccdS firm for delivery of .'GO pumps to the Soviet Union

1 has not been canceled, and shipments have continued unimpeded

Because of production shortcomings, the USSR has been turning increasingly to thc West lo help upgrade its large petroleum equipment industry. Westernprobably have reduced future produciionbecause of disrupt ions io Soviet explorationoldup of export licenses, for example, delayed the nan of Ihe scheduled0 Sakhalin exploration program ^

J'lhe delivery uf diillshlps built tn Finland with US technology and components also is behind schedule.

Thctartup date of lhc Dresser drill plant also could bc delayed for some lime now lhat export licenses for training and assistance in selling up the plant have been revoked. The projectpceially important because the drilling sectorajorin Ihe Soviet oil industry, and Moscow has been counting heavily on Ihc plants to increase drilling efficiency. Thc plant willurgston-carbide journal bearing drill bits awhich arc expected to last considerably longer (five toimes) than Soviet bits under comparable operating conditions Tbe greater efficiency would help reduce Soviet downtime for bil replacement, thereby boosting productivity and reducing the need toespand thepark. All of this equipment and technology is critical to Sovici efforts Io sustain oil production in

On thc other hand, there is no evidence that Soviet gas production has been affected thus far by thc embargo. Sales of largc-diameter pipe in suppoet of Ihc USSR's ambitious pipeline construction program wereonlyew months and. in fact,ew recordillion ton*0 Western governments are nru likelv to restrict pipe sales in the future. Indeed. Japanese andirms earlier this year signed general agiecmenu with the USSR to provide pipeultiycar bavii

Not is the nroposed new West Siberian gas project calling for swaps of Soviet gas for Western pipes and compressors likely to bc affected by sanctions in light

of Ihc apparent government decision* to proceed wiih nccotintions. In jny event, any delays thai do occur arc likely to be mure thc result of disagreement over prices for ihc gas and credit terms lhan any difficulties in purchasing equipment and technology.

ent and Techntitogy. Thc denial of metallurgical technology in lhc twocaeesof thc slec! and aluminum industries could be troublesome Io Ihc USSR in thccvcnl US technology remains embargoed. Shortages of ferrous and nonferrous metals have plagued Soviet planners for several years. Even though French and West German firms are proceeding wiih the Novotipcisk and Sayansk deals, lengthy delays will bc encountered if USthe USSR is Still countingnoi obtained eventually. Thc deals have already been stalled for eighi months by thc US withdrawal. The purported startup date for Novolipctsk has been delayed several years because of lhc need tu redesign original proposals incorporating US technology now denied thc USSR; industry sources now arcS for initial operation. Since the Nozoliocisk plant would have reduced Sovieton Wesiern specialty steels, the delay will ensure continued Soviet purchases of these steels from the West. Moscowecord SIillion for sieel imporis. excluding pipe,nd imports areto bc higher this year

Motor Vehicle Technology. The Sovici Union has been importing high-volume, high-productivity machinery from thc West for producing, machining, andengines, drive-train, components, and bodyumber of years as part of an ongoing effortheicfe industry. Toward thai end. thc USSR in theeceived USfor the purchase0 million worth of machinery and technology for the production of diesel trucks at the Kama Truck Plant. Among the more important US equipment sold io the USSRomplete foundry,ophisticated IBMsystem for monitoring its productiongersoll-Rand diesel engine assembly line, Al capacity, Kama willhree-axle diesel trucksngines annually. Trucks produced at Kama have been integrated into Sovici military transportation units as well as intounits in the Warsaw Pact countries. Most recently. Kama trucks have been used in surport of Soviet military operations

in Afghanistan. Because of this usage. Ihe resupply of spare pans for thc plant's US-supplied computer was embargoedecond US diesel engine assembly line for lhc plant was denied.

Thc US actions have greatly complicated and delayed Soviet plans for doubling output capacity for diesel engines. Although negotiations arc under way with several Japanese and West European firms to replace the Ingcrsoll-Rand diesel engine assembly line, it will probably bc two yearsew line can bc put into place, even if Moscowontract soon. In the meantime, lhc lack of engine production crpacily iscurtailing thc output of new classes of trucks and buses dependent on thc use of thc Kama engines, mostew Ural truck intended primarily for military use. Since ihe trucks can bc used for bolh civilian and military purposes, both sectors will be affected. Current produciion activity at the facility has not been affected by sanctions

Computer'. The sanctions haveajor cfToci in arresting the movement to further liberalize thc COCOM controls on computers. Before Afghanistan, proposals were being discussed in COCOM lo permil ihc export of much higher performance models than in thc past

Controls arc now directed most heavily at monitoring thc export of large computer systems to the USSR. Thc tightened COCOM controls on computers have effectively stalled the sale of large computer systems to thc Sovici Union since January. While the number of such large systems sold has never been great, imports often haveritical Soviet need. For example, several large US sysl.ms have provided the Soviets with unique capabilities for geophysical exploration related to oil and gas prospecting.S computer at thc Kama Truck Plant foundry wastoignificant role in increasingIn the absence of sanctions, the USSRwould have purchased additional seismic computers for petroleum exploration. We also believe existing systems already in place in the USSR would have been upgraded

The COCOM countries seem to be less willing to restrain sales of medium- and small-sire computers (for ihe most parilso controlled by

8

COCOM under various adminitlraiivc procedures.tales of medium and imall computer systems, which traditionally account for lheei'ales, continuee expe ruble to (be USSR under the post-Afghanistan sanctions and have increased this year. Through0 computers were pur-chased by the USSR compared wilhor all9 and an average ofnits for the past Ihree years. While the)'arc relatively low-performance equir>ment in Western terms, these computers offer important features unmatched by Soviei models. Sovietdo not measure upestern performance and reliability standards and lack (he versatilepackages lhal come wilh Western rrsodcls.

Electronic Components. The USSR is engagedajor, long-term effort to mejdcrniie its telecom muni-cations system. Most of the equipment acquired from the Wesi is either not controlled by COCOM oravailable under procedures simitar lo those for computers. The French, however, have indicated ihai they may submit an exceptions reqursi to COCOM involving manufacturing lechnoiogy for compuler-cootrolled telephone switching systems. Theof ihc French contract may go far beyond lhal of an Improved communications system. There isthat Ihc French also imend loclaled component manufacturing facility valued alransaction of this magnitude it probably relatedntegrated circuitsuchfacility would allow ihe production of largeof IC*ariety of military applications.

In addition lo dependence on Western IC technology and production equipment, the USSR relies on the West foressential raw material for the IC production process. Wilh Ibe imposition of lighter COCOM controls, (heeen cutoff from ihc supply of silicon [*

Because of sketchy information, we are unable to assess to what extent Moscow has been able lotechnology sanctions through illegalcither ihe clandestine acquisition of Westernor theverily purchased items for

unauthorized military use. The leadership traditionally hasigh priority to, and resources for, such efforts. These priorities have not lessened with ihc imposition of Western denial measures (seeor discussion en the diversion effort)

Impact on Soiitl Planning and Altilildcs Thc economic sanctions have heightened the debate between advocates of expanding trade with the West and those favoring greater autarky. Sanctions have strengthened the hand of those favoring self-sufficiency who have long argued that Ihe USSR is dissipating its patrimony by exporting vital rawfor Western technology

Within this context, the denial measures havean element of uncertaintyime when Soviet officials arc putting the finishing louehes onlan and have forced thc leadership lore-examine the long-term future of USSk- Western trade. Nevertheless, Moscow probably sees little alternative to continued Western trade. More than ever. Moscow probably is convinced thai Western Europe and Japan arc anxious tosecure export markets and future energy supplies and do noi intend lo jeopardise long-icrm ccoi-cration with Ihc USSR. In anyhc USSR's purs nil of new credit lines from Western governments and its discussions with Western firms on new projects indicate that the Soviet leadership is not seriously entertaining the notion of autarky, at least with respect to its industrial sector. In allee the sanctionsemporary disruption requiring ad hoc adjustments ratherufficient reason to redraft plans for future dcvclopmcnl.

The continuing interest of Soviet buyers in US grain, oil and gas equipment, ander high technology also argues ihai Moscow still views the Untied Slatesupplier of key imports. But even if Washingtona willingness to improve trade relations, lhe Soviets are likely to be cautious about reviving trade with the United States. Even Ihosc Soviets who favor US-USSR trade claim lhat they have now lowered their expectations and lhat no series of US actions can 1restore thc pre-Afghanistan silualion.

Agricultureifferent story. Thc denial of Western grain has hurl ihe USSR and hat reinforced iu long-held hope a'seeking agricultural self-sufficiency. But lhc Soviets are realistic enough lo know lhal it will isle lime to achieve self-sufficiency, giren thc vagaries of weather aed numerous inefrrctencies in Sovietand have actively sought long-term agreements with non-US suppliers to ensure future grain

Appendix A

COCOMistorical Overview

current program of export controls on Iradc with Ihe USSR and other Communist countries goes back more lhanfter Woild War II, ihcof Sovici power over Eastern Europe and ihc perceived Sovici military threat to Western interest led the United Slates and its allies to consider the use of export controls to help maintain economic andsuperiority over the Blocnhe United States and six of lhc Wen European Allies formed the Consultative Group, an informal working group al Ihc ministerial level toultilateral approach for control of trade wiih the USSR and EasternermanentCoordinating Committee <COCOM)-wat established in0 loprocedures for export coniiois and serve as the forum of negotiation among Ihe cooperating Western countries. Membership in COCOM was eventually extendedountries comprising Japan and all ihe NATO signatories except Iceland

COCOM as an organization has no formal trcty or charter basis and isart of any otherorganization. It operates on Ihe basis of aagreementule of unaoimily for all decisions. Thus, maintaining COCOM effectiveness requires countries lo act in aof compromise

Although Ihe formal COCOM criteria Mate that items are to bc embargoed only if ihey are designed for. principally used for. or critical in relation toof war. many of Ihe items on the original COCOM list were oriented toward impeding Soviet Industrial and technological development in general. For the most part, the embargo lists encompassed industrial equipment and raw materials that were cither in short supply in Communist countries or were technologically superior to similar products made in ihose countries. Acquiescence by the COCOMwas possible at least in part because several

NATO members were engaged in an armed conflict in Korea and because commeicial pressures for trade were still minimal

I he end to the Korean war. the reduction tn East-West

tensionsnd growing commercial -ration-ships wiih Communist countries led to severepressure to relax export controls. Majorof the embargo lists48 greatly

reduced the number of items embargoed to Communist countries. Periodic COCOM List Reviews since then have normallyattern or Ihc

I'nited Stales proposing new items for the embargo list to protect emerging militarily significant technologies and their products, while agreeinguid pro quo to the reduction of controls on items of has significance.

Reduction of controls has been accomplished instems have been removed from tbe embarjodministrative procedures have been developed that permit individual COCOM members to authorize certain exports of items on Ihe lists withoul having to seek COCOM approval,ody of case law has evolved providing nearly automatic approval by COCOM for certain types of requests for exceptions to the embargo

This reduction of controls continued unimpeded Ihiuu'hout. As in, the impetus came from the European members of COCOM who sought the ccrrvwnic benefits fromtrade with the East and who argued thai much of thc embargo list was outdated and ineffective because of the economic growih and technicalin Communisi couniries. By ihc, lhc pace of libcraliration increased as the United States also began to take more of an interest in cultivating

ii

East-West ul!' first with Ihc USSR and Eaitcrn Suropc and mossl rccenity. with China, i

esult, COCOM controls by thead evolvedroadly based embargo on induatrlal equipment and materials loooc focused on mililary related equipment and certain advanced technologies and their products. Although rxr* techno tog its have been added lo thc list of controlled items, this is largely nulUiscd by administrative procedures for unilateral approvals and the practice of pro fonna approvals of cirxptidns requests in COCOM

cret .

Appendix B

ic( EIToftJ To Orcurmcnl COCOM Controb

Moscow was probably able to drcurnvent some of the sanctions through illegal measures, but there is little hard evidence to enableJ to estimate the extent to which this has occurred. Diversions fall into twoOne is clandestine acquisition whereby the importing country is able to disguise its ownin thc transaction, or the exporter misrepresents the item being exported. The other isedi version whereby an overtly acquired item. approved for export, is transferredifferent end ucror end use

The Soviet leadership has tiaditionally given high priority and devoted large fesourccs lo the acquisition of Western technology by all means at its rtupcul. These include legal importation through open trade channels, scientific and technological exchanges, illegal diversion through trade channels lhat evade export controls, and classic clandestine acquisition through secret agents, industrial espionage, and communications intcrcepu

Clandestine Acquisition

The Soviet clandestine effort places highest priority on weapons design and military produci ion technologies that have militaryis, technologies associated with the production of scmiconductor-i. computers, instr-amcnUlior, microprocessors essential lo computer-con!rolled machine toots, and so forth.

While Ihe effort is large, the yield from the effort probably is less than satisfactory to the SovietIn some weapons design areas, theiruexeases have been substantial. 1st tbe IWOs. for example, Moscow was able toS Sidewinder air-to-air missile as wellomplete set of production drawings. In many other areas they have been less successful. Because of the inherent unreliability of clandestine purchases, large outlays often yield small returns; more important, since clandestine acquisitions arc rarely anxompanicd by document it ion and engineering assistance, the task of absorption ef Ihe foreign technology is rendered for more difficult.

An overall assessment of Soviet success in clandestine acquisition is not possible. Our information is loo sketchy. In some areas we haveelatively complete picture of thc scope of these acquisitions. The semiconductor induslryase in point. Here, the Soviets haveystematic effort to acquire all of thc ingredientsemiconductor industry. It has enabled Ihe USSR to rapidly build up their semiconductor industry and to make major progress tn closing thc gap with ihe West in semiconductorDiversions of advanced produciion machinery have also permitted the USSR to field militarywiih more advanced electronic systems than otherwise would have been possible in the tame lime frame

In-Place Dirersiuo

Thc term usually refers to diversion of equipment ortated civilian end useilitary use. The distinction between civilian and military end use is somewhat artificial when talking aboutMilitary production it builtyramid of basic civilian industrial capabilities. Thus, authorizedtechnology, installed in civilian industries, often yield important benefits for military produciion

Aside from this, we believe cccational divcrrions of US equipment and associated technology from authorized lo unauthorized end uses do occur in the Soviet system. Although wc know ofew such instances, our end-use controls are an imperfect mechanism forsuch diversions. Sonet authorities have strong rnotivations for treating diversion activities withsecrecy. Consequently, our ability lo detect them is inherently severely restricted.

Original document.

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