SOVIET ENERGY POLICY TOWARD EASTERN EUROPE - A RESEARCH PAPER

Created: 6/1/1980

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Soviet Energyoward Eastern Europe

National

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Center

Soviet Energy Policy Toward Eastern Europe (u)

A Research Paper

Research for this report was completed

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paper was coordinated with the Office of Economic Research and the National Intelligence Officer for USSR and Eastern Europe.

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The USSR faces complex challenges in dealing with the energy shortage of. and in few areas arc the issues more involved or the stakes higher than in its energy policy toward Eastern Europe. The difficulties are great enough in purely economic terms, the political implications arc weighty in their ownnot for Eastern Europe alone. This paper examines the interactions between the Soviets and the East Europeans on energy and related issues, in an effort to provide an appreciation of the nature and the magnitude of the problems facing MoscowH

Resolution of the energy supply dilemma in Eastern Europe, through its critical impact on East European economic growth and economic interaction with the USSR, is likely to have important consequences in areas of major concern to the United States. Whether the Soviets are able to handle the East European energy squeeze without provoking serious upheavals, which might call for Soviet armed intervention, could significantly affect the overall course of detente, East-West trade, and possible arms limitation agreement H

In order to cope with their energy problems, the financial problems associated with them, and the intractable difficulties of technological progress. East European states are likely to continue turning to the West for relief. This will be especially soisSoviet plan of integrated action on the energy front does not quickly bear fruit. At the same time, both the East Europeans and the Soviets will be competing increasingly with Western countries for OPEC oil. Given their lack of hard currency and. for the most part, less competitive manufactured goods, those countries in the Council for Mutual Economic Assistance (CEMA) must continue as vigorously as possible to seek oil. either as compensation for development assistance or as payment for arms shipments. Both these strategies will likely intensify the struggle in the Middle East and other oil-producing regions between Western. East European, and Soviet interests.

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Soviet leadership views the USSR's energy relationship with Eastern Europe in ihe context of its efforts to increase specialization and division of labor among the Soviet Bloc countries, strengthen East European economic dependence on the USSR, and weaken East European tics with the West-thai is. lo promote Bloc economichis energy relationship has in fact been the single most important clement inefining the substantive content of economic integration.

The significance of the energy issue, however, transcends economics. Economic integration is seen by Moscow as one of the threetogether with military and politicalsupport Soviet hegemony in this strategically vital region. The manner in which the energy needs of the Soviet client states arenotan important factor affecting their economic growth and domestic political stability. |

Despite countcrcurrcnts and resistance both in Eastern Europe and the USSR, Bloc economic integration has gradually increased in recent years. Given Eastern Europe's bleak prospects for substituting imports of energy and raw materials from other suppliers for imports from the USSR, or for substantially expanding exports of manufactured goods to the Western market, the trend toward integration probably will continue in. If sustained, this further tilt toward the Soviet Union in the orientation of the East European economies willajor political achievement for the Soviet leadership^

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the lastears Soviet energy policy toward Eastern Europe has been characterized by remarkable continuity and consistency. This stability is not surprising, since the policy has been shaped in response to an unchanging set of fundamental Soviet interests:

To put the brakes on Soviet oil exports to Eastern Europe.

To recoup the costs of Soviet fuel deliveries to Eastern Europe.

To assure lhat East European energy needs arc nevertheless met as much as possible.

To use the energy relationshipeans of strengthening integration, (u)

overview of ibis research paperpreviously published as an intel licence assessment in1

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N Orok&SQCOS TRACT

interests are not all mutually complementary, however, and in recent years tensions in Soviet policy and conflicts between the USSR and its allies on these issues have grown. The outlook fors that these policy dilemmas and conflicts will become still more acute, forcing even tougher choices on Moscow. In the face of potential instability, the Soviets are as likely to demand that their East European allies strengthen discipline or take other political countermeasurcs to cope with it as they arc to attempt to buy it off with more fuel faj

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Soviet-East European Dialogue

Despite their domination of key energy-related posts in the institutional structure of the Blocs Council of Mutual Economic Assistancehe Soviets have been compelled by the principle of unanimous voting to engage in protracted negotiations as they have attempted to push their strategy through CEMA. Thus, it has takenozen years or more simply to reach agreement on what the Bloc energy program oughte.|

In the negotiations, the East Europeans have argued implicitly thai:

can be no comprehensive solution to the East European energy problem that depends upon the stales in this region substantially meeting their own needs by developing indigenous resources-

central elementloc energy program must be energy and raw' materials deliveries from the USSR.

The program must address critical near-term energy problems.

The program should offer long-term guarantees within the CEMA framework for energy supply.

cosls to the East Europeans must be kept within tolerable limits.

arge extent, these arguments have been ignored by the Soviets. The leading Soviet spokesman on CEMA mailers, Premier Aleksey Kosygin. has never publicly accepted the premise that the solution of the East European energy problem isoviel responsibility. The themes he has stressed point in the opposite direction: that although the USSR will help, the basic responsibility lies with the East Europeans themselves. Thus Kosygin and other Soviet officials have talked about conservation, the role of coal in the energy balance, the upgrading of secondary' refining capacity, nuclear power, synthetic fuels, expansion of the unified electric power grid, and renovation of electric power generatingareas in which Soviel assistance is possible, but in which the main burden must be borne by the East European economics.^

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So*lee Strategy

The Sovietswo-track policy in their energy relations with Eastern Europe, proceeding simultaneously along multilateral and bilateral planes. The main multilateral arena bas beer. CEMA and its various organs. The CEMA forum has been used by the Soviets primarilyeans of channeling Bloc economic discussions in the proper direction and of committing allies to agree in principle to various common economic activities. Bilateral relations are used for establishing concretely who should get what and at what cost, and theyore private and effective mechanism for the Soviets lo bring to bear the full complement of their power resources, to play off one partner against another, and on occasion to make concessions.|

The CEMA Prvgram. The current Soviet strategy for dealing through CEMA wilh the Fast European energy problem is embodied in Ihe so-called Power. Fuel, and Raw Materials Target Program adopted by the CEMA session ofhe Target Program represents an almost total victory for the Soviet position. It places the burden of responsibility for energy provision basically on the East European states

First, it assigns top priority io electric power generation. The increase in electric power supply is to be accomplished in the near term through the expansion of coal-burning thermal power generation, and in the longer run through nuclearwhich the Target Program assigns highest priority. Second, the Target Program reflects tbe Soviet line in its heavy stress on conservation and efficient energy utilization. Third, and most importantly from the East European perspective, the Target Program responds only slightly to the critical East European concern over future Soviet energy deliveries'^

The Target Program includes no joint projects lhat wilt guarantee oil to East European states inlan period and no follow-on to ihe jointly undertaken Orenburg natural gas pipeline project lhat has now been essentially completed. The only joint projects now on the books that will guarantee delivery of energy from the USSR to Eastern Europe are two nuclear power plants to be built in the Ukraine. Given ihe likely leadtimes for commissioning these plants, there arc thus no collective CEMA projects al the moment that will increase Soviet energy deliveries to Eastern Europe in any way

Bilateral Dealia'i. The East European states collectively exercise no influence over the key decisions of how much oil the USSR will export, and whal the delivery proportions will be among CEMA. hard-currency, and less developed countries markets. Decisions on exports lo individual Fast

XOFO^WOCOrtTRACT

rs European countriesare arrived at through strictly bilateral negotiations in which the (fast European states are able lo affect Soviet policy only marginally J

For several years, the Soviets have been telling the East Europeans notsignificant increases in "planned" oil deliveries during theplan period. On occasion they have warned that unless stiffmet they may be compelled to reduce the volume of deliveries.currently available suggests thai the Soviets are largely adheringline and providing for little increase in oil deliveriesrs 0 level. The Soviets have tempered their position somewhat byto discuss marginal deliveries above0 level that would be

paid for in hard goods or hard currency. In the negotiations about therade agreements with individual East European countries, there are some recent signs that there may be some flexibility in the Soviel position, although the Soviets so far appear to have made only small concessions on the volume, price, or method of payment.

Currently, it appears that the Soviets intend to intensify rather than relax the oil price pressure on their East European clients. They will probably increase the share in total oil deliveries of so-called "above-plan" oil. which must be paid for in hard currency or goods salable for hard currency <that is, hardnd they have shown signs of unwillingness lo agree to predetermined prices for such oil. They have been seriously considering moving from the existing five-year basehree-year base {or even shorter period) for calculating the lagged average world market price they use in setting the yearly CEMA oil price. This would raise the price of

rs Sovicl oil sli" closcrhe level xt by lhe Organization ofCountrieshere have also been signs that the Soviets

might insist on receiving more hard goods for "planned" oil delivered under

the five-year agreements. In addition, they have generally been very

unreceptive to requests from the East Europeans for credits over

period, although there have been recent reports that they may be prepared to

help the Poles with ruble credits.H

Policy Dilemmas

If lhe Soviets are unprepared fully to meet rising East European oil needs, or

rs t0 mceI lf,em1 affordable lo Eastern Europe, they are in effect " East Europeans both to cut back economic growth and consumption and

to find oil elsewhere. Fundamentally, additional supplies of oil can only be acquired by Eastern Europe now for hardin turn can only be earned through exports to Western industrialized nations or oil-producing states and their

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Easi Europeans are being put in ihe position of having io increase exports to hard currency markets while reducing imports from the West as much as possible {even at the expense of sacrificing equipment and raw materials imports that in the longer run would promote greater hard currencyt the same time the East Europeans are being pressed to expand their hard goods trade with the USSR. The pressures on Eastern Europe to export more to the West and to the East arc likely to be satisfied, if at all. onlyeduction in consumption,

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dilemma confronting the East Europeans also poses policy problems for the Soviets, who wish to avoid both political instability arising from consumer frustrations in their East European client statesore Westward orientation in their trade. The Soviet response so far has been ambivalent. To some extent, the Soviets may believe lhat the CEMA energy program will satisfactorily resolve the dilemma. The Soviets unquestionably also feel that they have already made major sacrifices to meet East European energy needs, and they resent having to do even more to support living standards that they perceive to be higher than their uwniJIH

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principle, the Soviets favor strengthening intra-CEMA trade ties and reducing East European dependence on Western trade. But even as Moscow has increasingly pressured the East European states in recent years to direct more trade toward the USSR and to limit their indebtedness to the West, it has tolerated new East European trade arrangements with the West. To be sure, Moscow's tolerance is especially evident in areas that have helped promote specific Soviet political or economicas enhancing the prospects for Soviet arms control initiatives or facilitating the transfer to the USSR of Western technology. The Soviets, however, have tended to look the other way rather than meet East European hard currency borrowing needs themselves when this has been the only option.)

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and the Oil-Producing Stales

The clear and present need of Eastern Europe to supplement Soviet oil with growing OPEC deliveries, and the Soviet political and economic stake in the satisfaction of this need, arc the factors that give the USSR even todayritical interest in assuring rising CEMA imports of oil from other oil-producing states. This interest will further intensify as the USSR's own oil consumption is increasingly constrained by falling oil production.

ideaoint approach by the CEMA countries to the oil-producing states goes back at leastnd5 CEMA signed cooperation agreements with Mexico and Iraq, although so far nothing much appears to have come from these agreements.8 the notionollective CEMA

approach to the oil-producing Males was elevatedeclaredin the CEMA energy Target Program. The Soviels haveIIIII mddc ltie greatest effort to coordinate and control activities in thepolitically sensitive area of arms trade and military assistance. In other

economic areas, however, joint CEMA collaboration with oil-producing countries is more problematic: there have certainly been some attempts at it. but often there appears to be either no collaboration or outright competition.

Even if Eastern Europe turns more to the West or the Middle East to earn the hard currency needed to purchase additional quantities of oil. its overall energy dependency on the USSR will not be substantially affected. Eastern Europe gets almost all its natural gas. increasing volumes or electric power, and (with the exception of Romania) the major share of its nuclear-related technology imports and all its nuclear fuel from the USSR. Natural gas nil deliveries will rise in the future, and nuclear tics wilh the USSR will in time become criticalajority of East European countries. The point at issue is thus not declining dependency, as some observers have argued, bul the degree of leveragetrong persisting dependency will actually provide the Sovietsituation in which attempts lo exploit it could undercut the USSR's own prospective gains from economic integration or threaten political stability in Eastern Eur

Oiitlook: Soriet Energy Polky and Political Instability In Eastern Europe

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Moscow is obviously concerned about the possibility of political instability in Eastern Europe (especially in Poland, which is probably ihe country most vulnerable to massnd is prepared ul least to listen to Ihe argument lhal failure by the USSR to satisfy fuel demand in one or another country couldrisis. Soviet leaders, however, have heard this argument before, and arc probably disposed to interpret it in the first instanceign of unwillingness on the part of their allies toair share of the burden. Nor docs it necessarily follow lhat the Soviet leadership will be prepared to make concessions on fuel deliveries even if they are convinced therehreat of instability. There are. after all, limits to disposable Soviet fuel reserves.

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Under certain conditions Soviet leaders may be prepared lo go alonglc)>ll<llVri leader such as Hungary's Kadar. who attempts touted

nationalismeans of gelling people to suffer willingly and quietly. Bui when push comes to shove, the Soviets are as likely lo demand that East European regimes strengthen "discipline" or undertake other political counicrmcasurcs aimed ai coping with impending instability as they are to attempt to buy it off wilh more fuel or credit

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policymakers will probably regard having to use military force to suppress disturbances in Eastern Europe as undesirable. But, under the conditions that arc likely to exist in the first half of, there willimit to the price they will be willing to pay lo preempt this eventuality, even if it were to occur in Poland, where the costs of military action could be high.

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most likely way in which Soviet energy-related behavior might help torisis in Eastern Europe would beumber of possible miscalculations. Thereeasonable likelihood that the Sovietundertaken9 to maintain oil deliveries to Eastern Europe at0 level duringeriod, upon which East European production and foreign trade plansill be based, may be predicated upon the assumption that Soviet oil production can also be stabilized or even slightly increased over this period, rather than declineillion barrels per day as we prcdict-IB

The Soviets may also have miscalculated the possibilities for implementing the CEMA Target Program:

The conservation polcntial in Eastern Europe involves high costs and may not be realized.

Coal production may be much harder to increase than the Soviets believe (with the added danger of unrest among hard-pressed coal miners).

Nuclear power plants almost certainly will not be commissioned as scheduled.

East European hard currency export earnings could fall below anticipated levels.

Both the East European states and the USSR couldore difficult time acquiring OPEC oil even at world prices, much less on concessionary terms, than they may haveegotiations already

The Soviets may also miscalculate energy-induced political developments in Eastern Europe. In their willingness to see living standards lowered in the region if need be. Soviet policymakers may misjudge the tolerance level of East European populations. They may also miscalculate the degree of effective control and managerial competence exercised by East European regimes in coping with their energy problems. It is highly questionable, for example, whether the Polish leadership eveneal ^

There arc some elements of flexibility in lhe situation, however, that may ease the pressures on Soviet policymakers. Energy-produced deprivations felt by East European populations to some extent are measured by comparisons with living standards in the West, and these may also be

stagnating or declining in. In addition, the Soviets have the option of permitting or encouraging East European governments to accept higher hard currency debt service ratios. Assuming Western lenders could be Tound, such borrowing would provide temporary relief,the case ofmight be repaid through an expansion of coal or electricity exports to Western Europe. Finally, the Soviets have the option of sacrificing their own domestic needs, at least temporarily, in order to supply an East European country in desperate straits with more natural gas, oil, or

-AYXUrVrJtatT-

( (intents

Unceruinties

Role of Fconomic Issues

Situation Confronting the USSR

Situation Confrontingr0pe

Soviet Dilemma

issues and Options

Overall Soviet Strategy

ami CF MA Integration

and Change In Soviet Aims

ommon Bloc Energy Program

the East Europeans Have Wanted

East European Tactics

The Soviet Response to Fast European Demands

The CEMA Target Program

Target Program on Energy

of the Target Program

Changing Soviet Attitude Toward "Cooperation"

European Energy Self-Help

Structure

Power

Energy Deliveries to Eastern Furope

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Quantities

Negotiationsil Deliveries

Attitude Toward the Price of Oil

Oil Price Squeeze?

Sources of Oil for Eastern Europe

Magnitude of the Problem

Soviet Response to the East European Dilemma

Deals With OPEC Slates? 44

The Future

East European "Dependency ?

Possibility of an Energy-Induced Eoonomic/Poliucal Crisis in Eastern Europe

of Involvement in the Fast European Energy Problem on Soviet Behavior

Table*

European CEMA Nuclear Power Programs

European Energy Imports and Consumption

Soviet Oilet Escorts

Soviet Od Eagortt

Annual Rate of Itscrcasc of Soviet Oil Production and Eiports

Soviet Oil Exports to Eastern Europe

Pnces of Soviet Oil Exports to

East European Crude Oil Imports

Last European Shares of Known Middle Eastern Oil Exports io Eastern Europe

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8

of Middle Eastern Countries in Known Middle East Oil

Imports by East European Countries

Mapa

Europe: Major Power Facilities Eastern Europe Major Oil Facilities Faster* Europe Major Gas Facilities

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Energy Policy Toward Eastern Europe (u)

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Historically, the Soviet leadership ha* placed high priority on retention of Fas tern Europeuffer zone und potential springboard for military action or pressure against Western Europe, on assurance of rule in the region by Communist leaders who will follow domestic and foreign policy lines acceptable to the USSR and who will vigorously combat trendswith tbe demands of "proletarianand op enhancement of Soviet economic returns from relations with the region. This concern for Eastern Europeonstant element in Soviet policy, but the circumstances in which it is expressed are

Present Uncertainties. President Leonid Brezhnev's imminent departure from the scene, followeduccession shakeup in which other members of the Soviet gerontocracy will probably alto be replaced and in which power is likely to be more dispersed wilhin the "collectiveould well weaken thetense of purpose and resolve in dealing with Eastern Europe. This was the pattern. following the death of Stalin, and. after the removal of Khrushchev J

In Eastern Europe today there is probably more uncertainty about future Soviet behavior than there has been for many years At tbe same time, lhe character of relations between the USSR and its Fast European client states has changed. What was once little more than colonial domination has gradually evolvedorm of highl> asymmetric inter-dependency in which the liast Europeans do exercise some autonomy and bargaining leverage,the case ofdefiance of lhe Soviet Union on major policy issues. From (be Soviet standpoint the evolution of other East European states along the Romanian pathossibility that cannot be lightly dismissed. Theoviet campaign tothe Communist countries not onlybut politically and militarily us well, testifies to Soviet perception of their changed relationship with Eastern|

Eastern Europe will provide critical tests for Soviet polk} in, rust at it has in previous decades. There is growing potential for political instability in lhe region. Ineak and drifting leadershipissatisfied working classroad range of oppositional groups,atiotultstK Caiholic Church whose ties wiih the population have been even further strengthened by theolish Pope but whose restraining influence could faltertrung and moderate successor to Cardinal Wyszynski does not emerge. In Hungary.and Bulgaria presuccession or succession maneuvering could produce instability within the leadership and undercut the ability of regimes to cope effectively with public dissatisfaction. Ethnic conflicts continue to smolder in Czechoslovakia and Romania andotentially serious challenge to the Yugoslav leadership. Moreover, most countries along the southern tier of Eastern Europe still harbor territorial grievances against one sr.otherM

Ike Role of Economic Issues. Economic issues arc likely to generate situations in Eastern Europe that will severely ui the Soviet leadership. All of the countries of Eastern Europeecade of sharply reduced economic growth in. We anticipate that05 GNP will grow at an annual average rate of less than half that of. The prospect ofrop in growth causes great concern on the part of East European leaders Theyare that ihc impressive tains ofave created high cspectations for continued improvement in living standards. Sharply reduced growth will be produced by long-term internal economic trends, foreign trade constraints, and major problems of energy suppi. J

Demographic factors will severely limit lheto increase growth through expanding the labor supply. The working-age population will be increasingeclining rate in Czechoslovakia. East Germany, and Poland, and will actually decline in Bulgaria and Hungary. Only in Romania will the rate increase. Labor shortages will be aggravated by the

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of external flow* gf redundant agricultural labor to Ihe clues and

The East European regimes may hope io offset tightness in ihe labor supply by accelerating capiul investment. The scope for action, however, is sharply limited by the rise in consumer expectations and ihe need lo deal with increasingly serious externalsi rair

Only major improvements in efficiency can stave off economic stagnation in ihe face of labor, investment, and energy constraints. Vet such improvements cannot be attained without structural economic reforms. East European regimes have, on Ihe whole, been extremely cautious in approaching the whole issue of economic reform -and for good reaiun Past experience has shown that economic reform carries with ii arisk of political liberaliraiion. Except perhaps in Hungary, major relaxation of central control seems most unlikely. Indeed, as economic problems intensify, so may the tendency lo lightenatural urge to avoid experimentation in times of Stress. The responses of East European leaders lo growing economic problems in the pasi few years have consisted largely of centrally directed cuts in imports and investment and ihe selective imposition of price increases. So far. the rulingthe partial exception ofnot been prepared lo accept widespread market determination of prices and allocation of resources. J

East European economic prospects are tightlyby ihe extent to whuh needs for imported Wesicrn equipment, industrial rawnd. in some instances, grain, can be mel by exporting to Ihe hard currency market, and by ihe need toteeply rising hard currency debt that had reached ISO billion by the end9 Easter-Europe's position in the world economy hasmarkedly in reccn! years, and this trend is likely to continue innaaaj

The large increases in Imports from the West in the first half of which were viewed by many as crucial to East European economic development and modernization- have slowed appreciably. Eastgovernments have been compelled to order this curtailment in order to bring the explosive rite in hard

currency dcbl under control. The ongoing requirement of keeping such debt within manageable bounds will continue to restrain growth in East European imports from ihe West At ibc same time, the substandard quality of East European manufactured good* and Western trade barriers have kept hard currency exports below desired levels. J

On top of other factors, the rapidly shifting world energy balance promises to make the decade ofubstantially more difficult for Ihe economics of Eastern Europe In most of the East European countries, energy shortages arc likely to account for at least half of the decrease in economic growth. Energy availability in each of the countries of Eastern Europe is dclcrmined by domestic production, net imporu from other Communist countries, and net imports from the West. Domesiic production of energy varies widely among (he six countries. Only Poland and Romania are able to meet most of their energy needs through domestic production. All of the countries except Romania now acquire most of their oil and natural gas from the Soviet Union. Thus Soviet deliveries of oil and gas haveritical energy source for most of Eastern Europe. Efforts during the sixties andto "modernize" energy consumption have reduced the share of coal in loial energy consumption in every country except Romania, and have raised significantly ihe relative shares of oil and gas. At the same lime, these efforts have increased each country's dependence on imported energy sources. H

Abundant and cheap Soviet energy imports were the basis for meat of the growth of East European energy supplies over the past decade or so. The need to expend hard currency on energy imports has been small, accounting in most Of Ihe countries forew-percent of total hard currency imports. However, depleted reserves and the increasing opportunity cost of supplying I'.usi European needs will limit Ihe quantity and raise the price of Soviet oil deliveries during. The East Europeans will beforced to lurn to the world market to meet their incremental oil needs, while also having to pay for Soviet oil more than they have in the past with goods that might otherwise be sold in the West for hard currency |

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and nationalism provide (he bonds of allegiance, such as ihey are, that link most citizens with regime in Eastern Europe -although stability is also rccnforced by apathy, the inertia of three decadei of Communis: rule, and the factajority of East Europeans have never experienced art alternative to Communism. With the substantial rise in living standards in the first half of, expectations have also risen, and the evidence clearly indicates that East Europeanin Poland and Eastacutely aware of these publicThe risks of failing to satisfy public demands have already been well illustrated by the riots in Poland0trikes in Romaniaeported work stoppages in Hungarynd intermittent labor strife in East Germany over the past several years. Yet the new consumer demandscannol be mel under the likely economicof, in which stagnation or even an absolute decline in Irving standardstrong

There arc no easy answers to East European economic problems. The traditional "extensive" growth solutions of more labor and capital investment are becoming even lets responsive to the requirements of "intensive" growth, and even lets available, than tbey were inost reduction, quality improve-ment. and greater competitiveness on foreign markets depend on capital investment, economic reform, and access to Western technology. But reform is severely constrained because it is seenhreat to political stability. Technology imports are inhibited byEast European debt, difficult Western market conditions, and Soviet ambivalence toward Easttrade with the West, la all East European CEMA countries, there are conservative elements who will continue to fight economic reform. The conservatives want to protect vested career interests but also to avert the risk of political destubilization. despite thethat the absence of serious reform over the longer run will be more CestabJirinc

The balance of economic gain and loss has always been central in defining (he FastOutright exploitation by (he USSR of Eastern Europe in the Stalin era gave way in theo transactions lhat on balance probably

favored ihe East Europeans. However, in thehe pendulum began to swing the other way.', ihe USSR raised the prices it charged for raw materials and fuels. While ihe Sovietsital stake iniable economy in Eastern Europe, they must also look to their own needs and interest

The Situation Confronting the USSR. Because or declining factory productivity, labor shortages, and steeply rising costs of raw maierial* and energy the rate of growth of Soviet GNP will probably decline to an extremely low level in ihe first half of. If the precedents ofold true, demands on resources to prornole Soviet objectives in the Third World may also rise in. This situation is generating increasing tension between the need Io guarantee sufficient economic momentum in Eastern Europe lo avert political instability and promote Soviet-East European economic integration and ihe need to stimulate growth in the Soviet economy and provide resources to support Soviet global aims.|

Since thenderlying tensions in Soviet-Easi European economic relations have been most exaccrbaied by the steeply rising cost io ihe USSR of supplying Easlern Europe with energy This increased cost results from the depletion of oil. gas. and coal reserves in tbe European USSR, the expense of developing new resources east of the Urals, and the needransport fuel thousands of miles lo the west. The cost has been greatly augmented by skyrocketingorld energy prices. As the price of OPEC oil has escalated on Ihe world market, so loo has the opportunity cosi to the USSR of exported oil that it does not sell for hard currency. Every ton of oil transferred io Eastern Europe at concessionary prices or for "soft" goods deprives the Soviet Union of hard currency income that could be used to pay for increasingly costly imports of Western technology and grain urgently needed by the USSR. Oil exports alone have accounted for aboutercent of total hard currency earnings inkm

The Silmaiioa Confronting (Miera En-rope. The

Soviets must also take into consideration the East European energy constraints. One legacy of Stalinism

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the more industrially developed East European countries was an excessive allocation of resources to inefficient extractive industries, aimed at providing inputs for autarkically developed energy and raw-material-in tensive heavy industries. The shift in the fuel balance lhat occurred in these countries from coal to Soviet-supplied oil inid not fundamentally change matters. Instead, bythe development of tlte chemical aad peirochernrcal industries, it enlarged sectors even more dependent upon large infusions of nonindigenous naturalinstead of encouraging industrial development which could use local resources. AI ihe same lime, an analogous patlorn of industrialization has been sought by less developed countries such as Bulgaria, which have pursued modernization and equalization of living standards with other members of

The possibilities of ihe East European countries meeting the rising energy needs generated by this pattern of industrialization through increasingfuel production are limited andhow limited and cosily is subject to argument Shifting back from oil lo coal in the fuel balance would also be costly. Likewise, the cost of raising energy efficiency in the East European economy (which by Western standards is low) is substantia

Yet. Easinomic growth appears to be directly related to mine energy inputs, with living standards geared in turn to economic growth. To the extent that political subilily andunction of consumption, they arc both directly influenced by energy supply. |

If the East European states are compelled to get oil from sources other than the Soviet Union, ihcy may acquire some of it through barter trade, but they must pay for most of it with hard currency The acquisition Of hard currency through sales other than armaments depends largely, although not entirely, upon expanding trade with the Weal. Such trade, however, has been inhibited not only by Western recession and protcc-lionism in theeriod, but also by the noncompctiiivencsaof East European goods on (he Wesicrn market The poor qualily of these goods arises from technological backwardness of East European industry and inefficiency of existing systems ofand management

Western technology can be imported to curebackwardness, but this exacerbates thebalance-of-payments situation of moststates. Economic reform is thelonoted

is viewed by many East European and Soviet leadershreat to political stability In any event, from the Soviet standpoint increased trade between Eastern Europe and the West beyond certain limits threatens to undermine the economicof Eastern Europe on ihe USSR thatmilitary force in buttressing Soviet hegemony.

The Sorter Dilemma. The dilemma confronting ihe USSR will become increasingly severeweoil production begins to decline in the next several years. If the Soviet Union docs not provide sufficient energyolerable price to Eastern Europe, or does nol make sure thai Eastern Europe is financially able io pay for al loasl the minimum necessary oil imports from alternative suppliers,shortages and high costs willecline in East European economic growth. Al Ihe very least this will damage Ihe Soviet Union's own returns from CEMA trade, and at most it will trigger economically and politically costly instability in one or more of these eocr. tries aa|

Energy shortages have already become acute in Eastern Europe, and unanticipated contingencies {such as the bitterly cold weather ofinter or the forced closing of factories due to lack of fuel) could dangerously strain East Europeanand political systems. It seems probable thai whatever the Soviet response may be. Eastern Europethe USSRdestined at best tovery slow gains in living standards and possibly absolute declit

If, however, the Soviets fail to sell for hard currency as much as possible of what willeclining exportable surplus of oil. they will significantly limit their capacity lo buy Western technology urgently needed to modernize their own economy and eipand energy output, and to buy the feed grain needed to increase meat production.ailure could have serious consequences far labor productivity and public morale.

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paper examines how Ihe Soviets have approached the East European energy supply dilemma to date, and outlines possible future contingencies that may affect the success of Soviet policies. The paper docs not attempt to predict the outcome of Soviet-Eastinteraction in tbe energy field, which will be determined not only by Soviet perceptions, policies and actions, but by East European and third-partyas well -many of them unpredictable. The paper does take as its starting potat.et ofnergy-related issues and options which the Soviets must faccB

Key /lines and Options. The following arc questions which Ibe Soviets must address.

What ace the chances of major economically induced political instability occurring in Easternow mucheduction in tbe standard of living will be tolerated without unacceptable poiilical or economic disarray? What level of risk should Ihc Soviel Union run in rejecting Easi Europeanto cttort assistance through allusionsoss of political control?

What should Soviet priorities be in delivering fuels within and among the domestic. East European, Western (bardnd LDC markets?

How much should Eastern Europe have to pay lor energy deliveries? Whal prices should be charged for oil and gas? What prices should be paid for Easi European goods in return* Should credits beWhat should be done about East European trade deficits?

Which mechanisms, in addition to trade, should be employed to exact payment from Eastern Europe for maintaining or increasing Soviet energy deliveries'* Can "cooperation" deals with East Europeanin Soviet fuel extraction and transportation or in electric power generation and transmission be extended? Should oil- nnd gas-beating territories be leased to East European producers? Should East European Labor participate in Soviet projects1 Should there be coproduction or East European specialization in the production of equipment for Soviet energy industries?

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What political tactics should be used to ensure maximum effort of Easi European countries in assisting Soviet energy production and delivery? What balance should be struck betweenand bilateralism'* How much uncertainty should East European slates be left in with respect to future Soviet energy deliveries? How muchshould the Soviets accept'1.

What changes should lhe Soviet Union strive to effect in the East European economics through employing energy leverage? Should their structures be allcrcd? What about their fuel-energy bulances? V> bal nconsumption levels? Should changes be urged in economicand managemeni?

How should the structural pattern of Soviet energy deliveries lo Eastern Europe be altered? How should tbe relative weight of oil. gas. coal, and electric power be balanced1

How should the Soviet Union attempt to influence East European efforts to earn the hard currency needed to pay for supplementary non-Soviet oil deliveries (nnd. indeed, for some above-plan Soviet deiivenea)?

How should the Soviet Union react to East European hard currency balancc-of-paymcnts problems and indebtedness toward the West?

In what direction should the Soviet Union attempt io point Fast European relations with the oil producing coun tries

Obviously these questions are not necessarily posedmanner in which they arc perceived by theanalysis below attempts whenever possibleprecisely how the Soviets do define (hedo ihc questions presuppose any specific modeldecisionmaking- particularly lhat of therational actor. Finally, we should not assumeto the questions will necessarily bePrior assumptions should not belhe capability of Ihe Soviet system to dealoptimal way with the situation it facesin the present case political leverage has iismiscalculation is

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Energy nnd CEMA Integration. The Soviel leadership views lhe USSR's energy relationship with Eastern Europe in the context of tls efforts lo promote Bloc economicnhis relationship has been the single most important element defining tbe substantive content of economic integration.lhe significance of the energy issue trarncerjds economics. Economic integration is seen by the Soviets as one of the three pillars together with military and politicalsupport Soviet hegernony in this strategically vital region, and the manner in which the energy needs of the Soviel client states arenotan important factor affecting their economic growth and domestic political stability.

Following8 crisis in Czechoslovakia, economic integration was steadily promoted by the Sovietseans of strengthening bloc solidarity. The concept of integration, in contrast lo Khrushchev's approach to CEMA, has been defined in principle to mean greater cooperation among ibe member states rather than the imposition of supranational planning andIntegration has meant movement away from the traditional Stalinist pattern of autarkic nationalin the first instance through greater reciprocal trade among CEMA mcr-iocrs^gj

The Soviet inientiun, however, has been to transcend trade relationships in order to take advantage of the structural complementarities of the economies of the CEMA countries and to promote specialization and economies of scale. The Soviets have also had in mind joint participation in projects as one possible mode ofasic political motive behind integration has been to reduce Easi European dependence on trade with (he West and increase dependence on lhe USSR, although Soviet spokesmenthat the integration they have in mind will actually enhance rather than diminish economic relations with the WCV..J

As in other areas of Soviet-East European relations, the integration effort has proceeded simultaneously along bilateral and multilateral planes. The main multilateral arena has been CEMA and its affiliated organs. The CEMA forum has been used by the Soviets primarilyeans of channeling bloc

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discussions of economic strategy in the proper direction and ofcommitting allies to agree in principle to various common economic activities. Bilateral relationsthe mechanism for establishing concretely who should get what, and at whatconditions where the Soviets can privately bring their power and resources to bear, play off one partner against another, and make concessions deemed advisable. In both the multilateral and bilateral arenas decisions are reached through negotiation, although the Soviets, generally speaking,reater bargaining position, while the Eastthe exception in part of thefall back of the leverage provided by their own weakness. |

Integration on the multilateral plane hascries of documents approved by CEMA during.h session of the CEMA Council, meeting in Bucharest inong "Complex Program for Further Deepening and Perfecting Cooperation and Development of Socialist Economic Integration among the CEMA Memberhe Complex Program detailed broad range of areas of projected multilateral economic cooperation in planning, production, resourcefinance, and scientific-technical collaboration, and provided deadlines for the elaboration andof implementing agreement

In3h CEMA session agreedo-called "Coordinated Plan of Multilateral Integration Measures" would be prepared, which would bring together material, financial and labor resources specifically allocated to community projects in lhe national five-year plans, thus constituting somethingEMA five-year plan (the first of itshis Coordinated Plan, whichumber of specific projects including the Orenburg natural gas pipeline, was confirmed int the29thCEMA:

At about this time Ihe idea began to be discussed of formulating joint CEMA approaches io broadneeds that cut across ministerial and branch boundaries. This concept, which received Brezhnev's benediction alh Congress of ihc Communist Party of the Soviet Union (CPSU)ventually culminated in the approval of three "Long-Term

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power, fuel and raw materials, agriculture and the food industry, and machine building atd CEMA Session inS. and of two additional target programs in transportation and consumer goods atd CEMA session in9

Talk about integration should not, ot*course, be accepted simply at face value. There has been much resistance in Eastern Europe, most vocally in Romania to specific proposab justified in the name of integration. Soviet behavior ilsdf has been ambivalent, especially when the USSR's direct economic interests in trade with the West have been concerned. There has been much slippage in the adoption of projected measures, and projects have developed slowly. Foreign trade flows base not immediately reflected tbeaim of accelerating intra-bloc economic relations.

Nevertheless, there can be little doubt lhat lhe Soviet leadership has taken integration seriously, as the framework for tbe USSR's economic lies with bloc countries. Integration provides the means ofthe hallowed principle ot planning into bloc economic ties. It also broadens the base for military production,otential mechanism forcertain common approaches lo "socialnd creates areas where the Soviets can press the East Europeans to share the foreign aid burden II may also help improve the quality of goods the USSR imports from Eastern Europe, and. as Kosygin staled at the9 CEMA session, it serves the broad political goal of strengthening the "material foundation of oureries of authoritative policyover the years, the Soviets have committed themselves to the integration idealIPJJ

If the Soviet energy relationship with Eastern Europe is viewed as pert of the broader process of integration, cooperation to solve specific problems has from lhe outset been viewed in terms of energy. Evenhe Complex Program focused heavily on energy problems, energy projects, and the linkages between the machine-building industry and energy In his annual speech to the CEMA session delivered inremier Kosygin concentrated almostupon energy issues. Of the five "targetapproved in the putt two years, which are the

current opcrutlonal embodiment of integration, the power, fuel and raw materials program is the central one. with the machine-building program structured almost entirely to meet needs of tbe energy sector.

Continuity and Change in Soviet Ainu. In sharp

contrast to then domestic energy policy in. Soviet energy policy toward Eastern Europe during the same period has been characterizedemarkable degree of continuity and consistency. This stability is nol surprising since the policy has been shaped in response to an unchanging set ofSoviet interests io put the brakes on Soviet oil exports to Eastern Europe, to recoup the costs of Soviet fuel deliveries at much as possible, to assure,lhai East European energy needs are met as much as possible, and, at lhe same time, io strengthen integration nbbkaabbbbj

Most of the basic aims of1 Complex Program arc still espoused by the Soviets today. Thesestablishmentommon CEMA long-term energy strategy.

Implemcntaiion of the strategy through multilateral as well as bilateral cooperation

Forcing lhe East Europeans to pay their share of the rapidly rising costs of extraction and transportation of fuels.

Achievement of maximum energy conservation in Easiern Europe through more efficient use of energy and establishment of "rational" norms of energy consumption

Reduction of rates of oil consumption, in part through culling back on the use of oiloiler fuel and upgrading secondary refining capacity to produce more light products from each ton of oil.

Maximum exploitation of all local energy resources in Eastern Europe, including oil andbut above all coal.

Rapid development of nuclear power

Linkage of the East European and Soviel eleark power networks and expansion of the grid capacity to use electricity more elTrciently and reduce capital investments.

Adoption of joint measures in the machine-building sector to promote energy objectives!

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These aims have been constantly pursued by the Soviets, but there have beer) shifts over lime in emphasis and in approaches to the realization of individual objectives The shifts have occurred largely because of changing Soviet perceptions of their own economic interests, but also partly in response to East European positions. As will be discussed in more detail below, the important shiftsetreat from large-scale multilateral collaboration ineassessment of the desired overall pattern of "cooperation"reater stress on the development of two-energy-iwensive industry inEurope,harper focus on expansion of electric power production lo solve the East European energyon rapid acceleration of nuclear cncrgy.P

Negotiationommon llloe Energy Program.

Negotiationommon energy program for the USSR and lis Easi European allies has taken placeontrapuntal interplay of bilateral and multilateral contacts between the Soviets and their East European clients. The key bilateral contacts have been the summer Black Sea meetings betweenand individual East European party firstand meetings involving the chairmen of the respective councils of ministers, ihe deputy chairmen responsible for CEMA affairs, and the chairmen of the state planning committees. The purpose of these meetings has been to negotiate ihe yearly trade protocols, five-year agreements, andyear cooperation agreements. Extraction of the most basic East European commitments in principle to Soviet energy policy aims, as well as protracted haggling over deliveries and other matters, are taken care ofrather than collegially.

The details of ihe Soviet-sponsored energy program, whichimplicitly involve issues of principle, have been hammered out in the CEMA institutional framework. Two points should be made here. First, the Soviets have controlled the CEMA bureaucracy and have placed Soviet of Hcials in most of the strategic posts concerned with energyThe most important body in this connection has been the Committee for Cooperation in the Area of Planning Activity, which has exercised overallfor implementing1 Complex Program.

drawing up5 Coordinated Plan,argetl has been chaired by Nikolay Baybekov. Chairman of the USSR Gospian. Arkadiy Lalayants. the deputy chairman of Gospian responsible for energy affairs, was leader of (he working group that prepared the draft of the energy-target program adoptedhile the chairman of the subgroup on fuel, power, and geology of this working group was in turn ihe chief of GospianuelfJJ

The CEMA Secretariat, which provides technical assistance to the Planning Committee and thePermanent Commissions of CEMA, is also beadedoviet rcprcsentnlivc, Nikolay Fadeev. The relevant Permanent Commissions (for Utilization of Atomic Energy. Electric Power, Oil and Gas Industry, Coal, Geology, Transport, Scientific and Technical Research, and Foreignre largely if not exclusively chaired by ministers or deputy heads of the corresponding Soviet minifies |

Second, the available evidence indicates that despite their domination of key energy-related posts io the CEMA institutional structure, the Soviets have been compelled by the principle of unanimous voting and the "interested party" rule io engage in protracted negotiations as they have attempted to push their strategy through CEMA. Thus the crystallizationloc energy program hasong, drawn out affair.

Ath CEMA session inhe Chairman of ihe CEMA Permanent Commission on Electric Power, Petr Neporozhnii (USSR Minister of Power androposed to the annual lop CEMA meeting Ihe elaboration of what were lo become the largeiear later, theof the Planning Committee. Baybakov. was urging lhal preliminary drafts of the target programs be completed by the endo that ihey could be reviewed by the Planning Committee "at the beginning" presumably with the object of final approval of therograms att CEMA session in

' Fordltciuiluo or the Committee'* uniciuic*n4 operation ice Nikolay Baybokm. Ekonomlchtikoyt lomdatenettto Wan-thtmo*p. tt-lZfJ

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schedule would have meant that implementation of the energy and other target programs might have begun duringive-year-plan period Butrogress report on the drafting of the target programs was delivered att CEMA session; final approval wasear longer, untild session inhe Energy Target Program that this meeting approved, however, wasist of agreed projects on which two or more member countries would collaborate. The all-important details of these projects were still being negotiated

Thwss. il will have taken five tosii years simplyeach agreement on the content of the program, andof it will not realty get under way untilive-year-plan period. The delay has been caused partly by the bureaucratization of ihc CEMA and individual country planning processes, but still more by fundamental disagreements between the USSR and its partners

What ihe tail Europeaat Hare Wanted. Eastneeds vary, depending on the resourceof particular countries and the current political concerns of theirvenhelcu. it is possible toommon set of demands that the East European countries have pressed cither directly ornegotiations with the USSR over the Bloc energy program|

First. Ihc East Europeans usually argue implicitly that East European energy problems cannot be solved by-developing indigenous natural resources Poland, with its coal resources, does shade this pointecree But with the exception of Romania (and. of course,one of Ihe other East Europeanseriously seeks "energy independence" from lhe Soviet Union. On Ihc contrary, their aim is to involve the USSR as much as possible in the solution of Eastern Europe's energy supply problem

Second, the East Europeans have strongly emphasized over the ycaiv at CEMAndcre. that the central element in tbe Bloc energy program has to be deliveries of energy and raw materials among tbe memberis to say, largely transfers from the USSR (with the possibility alto of tome coal exports from

Third, the East Europeans have urged lhat (he program address their near-term energy problems, which are seen as critical, requiringtrong case can be made that the East Europeans have been perhaps more eager than the Sovietsloc energy program- suited to their interests- -be adopted and implemented I

Fourth, the Easi Europeans have sought long-term guarantees within the CEMA framework for their energy supply. Over and over. East Europeanhave appealed for "stability" and "calculabtlily" of energy supply, long-term commitments for energy delivery' have been constantly presented as an essential condition of effective national economic planning and growt

Fifth, the East Europeans have naturally attempted lo keep the cost to them of Bloc energy measures within what they regard as tolerable limits. There has thus been continual contention within CEMA over how to share energy"

Sixth, discussion of the Bloc energy program has been linked by some member states to the aim of promoting "equalization" of their own level of economicwith lhat of (be more developed members This has been on important concern of Bulgaria and Roma nit

Lastly, the East European stales,reater or lesser degree, have sought in ihc negotiation of lhe energy program to preserve some degree of nationalor al least room for maneuver in international ecxynomic relations. This political motive has. of course, bees most manifest in the behavior of Romania, although it also appears to some extent in the oullook of Poland. All the East European states haveto protect their own hardrade with the West from Soviet encroachment

East European Taciies. The East Europeans' key bargaining counter in negoiiations with the Soviets over the terms of economic relations has been the implicit threat that too much Soviet pressure on East European living standards could incite the populace to revolt. Clear overtones of ihis negotiating stralcgcm

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be detected even in public Hast Europeanover the years. Not surprisingly, the Poles have been among the frontrunners in making this pitch but the East Germans. Czechoslovaks, and Hungarians also have not neglected ill

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Thus, lor example, at the Jlsi CEMA teuton In7 the Hungarian spokesman declared: "We clearly recognize, oa Comrade A. N. Kosygin commented in detail alh and current session of the Council, thai (be CEMA member countries muit to tbe maximum eitcnt alio utlliic Ihtirinternalan inform you all lhat in the ccune of elaborating our energy pottcy and determining our nee* for energy resources we take account ot all of this to the fullest degree In particular.have coniklerably accelerated our exploration uork in discovering new domestic trinity andmaierial resources We have incrcsted tbe share of capital investment* Wc will developranchesore measuredthe spirit of the proposals expressed by Comrade A. N. Kotyinn Wc have considerably increased allocations lo measure* for Ihc rational utilization of energy and arepecial resolution of the government on the broad introduction of measure* to economise on energy. |Bai| our national eondliMini are such lhat, despite all the internal efforts,be forced to increase Ihc vhare of imports lo satisfy our energy andmaterial needs Therefore we retard It as completely justified and, moreover, unconditionally necessary io accelerate the ctabotation of lhe target procram aimed at satisfying raw materia' and energy needs, and lo demote maximum attention to the total, mosi effective solution of theuing in this7 No. a, p.

or agreeing "in principle" io some element of the Sovietprogram, but holding back onresources lo it. Thus, for example, al one point in Bloc energy program talks the East German Government reportedly took the position of expressing interest in the expansion of nuclear power generating capacity, adding, however, that East Germany was unable in the foreseeable future to make anycontribution to this effort. In this connection the East European slates have, on occasion, simply(heir formal right to declare themselves not "interested" in participating in specific Soviet-proposed energy projectsj

The East Europeans may also have beenat least may haveexercise influence over the Soviets by trading support on nonenergy issues for Soviet concessions in the energy field. The frequent conjunction of declarations about energy issues and foreign policy in statements following joint Soviet-East European talks points to one area in which the Soviets have probably sought Fast European backing. It is difficull. however, lo establish what sort ofifoccurred ,|

The Sotiet Response lo East European Demands. In

the official Soviet line on Bloc energy policy presented by Kosygin at successive CEMA Council sessions there has been remarkably little change over the years, and little concession to the Easi European priorities discussed above. When concessions have been made, they have been made privately and bilaterally. Kosygin has not publicly accepted the premise lhat the solution of the East European energy problem isoviet responsibility. The themes that arc frequently repeated is his speeches point in the opposite direction, lhat is, to the conclusion that the Soviets will help, but lhat lhe basic responsibility lies wiih lhe Eastthemselves. Thus Kosygin talks aboutthe role of coal in the energy balance, the upgrading of secondary refining capacity, nuclear power, synthetic fuels, the unified electric-power grid, and renovaiion of eleciric-power generatingareas in which Soviet assistance is possible, but in which lhe main burden musi be borne by the East European economic.

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central clement in the energy programurged at CEMA Council sessions ts norof energy and raw materials (whichin what he has had tout the need forenergy consumption in Eastern Europe.atd CEMA session inpercent increase in Soviet deliveriesand energyo East Europeanduringive-year-plan period,added: "But, of course, we must notmeeting growing demands just on anby increasing production This no longerinterests either of the countries supplyingand fuel, or of the countries receivingwc arc devoting everincreasing attentionqualitative aspect of thetheeconomic use of resources and the creation ofof energy

By the same token, within the CEMA context Kosygin publicly has shown little interest in dealing with the near-term energy supply concerns of his Eastclients. If anything, as these concerns have become increasingly pressing in the last few years, the Soviet emphasis has shifted to activities whose payoffs lie increasingly further downstream. Therom nuclear power, the upgrading of oil refining, synthetic fuels, or improved efficiency in power generation will not have an appreciable impact on the East European energy balance for another five toears.

Consequently, the long-term guarantee of energy supply to be provided within CEMA, as it has been perceived by the East Europeans on the one hand and by the Soviets on the other, has been significantly different When (he East Europeans ulknd "calculability"of energy supply, they are referring to the assurance that there willertain amount of oil, gas, and electric power in five or

years While Kosygin does not lake issue with this way of looking at the matter, he nevertheless poses tbe question somewhat differently: the true guarantee of energy supply' lies in the very fact that provision for it is being maderocess based on joint planning. which maximizes the effects of all the subprograms included within the overall CEMA energy effort. This formulation by no means denies the vital rote of Soviet

and gas deliveries in the past (which the Soviets

never fail tout it docs nol place them in the foreground in the ful

The CEMA Target Program

The Target Program on Energy.d session of CEMA. held in Bucharest inProgram of Cooperation to Meet the Economically Justified Seed*ember-Countries for the Most Important Types of Power. Euel and Raw Materials During the Period up" This so-called "Target Program" represented the outcome of three years of negotiation of the Bloc energy program and now provides the framework for collective energy measures projected forecade. The Program contains both general principles, andand individualndustrial raw materials are treatedhe Program in its entirety is classified material, although many of its main features have been publicizedj

The general principles of the Target Program for energy are as follows:

There shouldaximum attempt by each member country to utilize its own resources,coal and hydropower. to produce electrical energy and to raise the share of electric power in the energy balance.

Nuclear power development should be accelerated through coproduction and specialization ofof nuclear power plant equipment.

- Geological exploration Cor oil. gas, coal, and shale should be intensified, and steps should be taken to accelerate exploitation of reserves already

A broad range of measures should be undertaken to improve conservationie efficient utilization ol" energy resources

Measures should be undertaken to improve the structure of the economies of the CEMA countries from the standpoint of energy consumption, through mutual cooperation in the location of new energy-intensive industry.

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greater attempt should be made to import oil and gas from developing countries, through improving economic cooperation with these countries.

CEMA member states should cooperate in the development of Mongolian energy resources.

These general principles are translated into more concrete measures of cooperation in ditTcrcm energy scctt

In the electrical energy Held, the Target Program covers expansion of the number of coal-fired power plants and cutback in oil-fired power generation, accelerated development of nuclear power, expansion of hydroelectric generating capacity, joint construction of power facilities utilizing Polish coal, jointof energy complexes in Mongolia, and extension of the CEMA unified electric power grid.

In the oil and gas area, cooperation measures do not extend to meeting fuel needs related to powerMoreover, it is clear that the volumes and terms on which the USSR delivers oil and gas to other CEMA member countries are to be determined strictly through bilateral negotiations. Multilateralapparently is envisaged in the areas of enhanced recovery effons. geological exploration, deep drilling, offshore development in ihe Baltic. Black. Barents, and Kara seas, collaboration with oil-producingecondary oil refining, synthetic fuel production, and specialization in the production of energy-intensive chemical prcducisj

In the energy machirebuilding field (which isupon at greater length in the companion target program on CEMA cooperation inhe Target Program provides for cooperation in such areas as equipment For mining, drilling, oilfield opera-lion, power engineering, oil refining, chemical industry production, nuclear power production, oil and gas pipeline construction, and geological exploration.

In the field of scientific and technical cooperation in power engineering, the Target Program singles out collaboration in improving the efficiency of coal-fired thermal power plants, workegawatt water-moderated reactors, developmentreeder reactor.

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development of thermonuclear power plants,of magnetohydrodynamic (MHD) generators based on gas, liquid fuel or coal, and development of solar, wind, and gcothcrmal sources of energy. In Ihe coal industry, the Target Program dwells on lech-nology for deep mining and handling of geologically complicated formations, strip mining, and coal gasification, liqueficatton and beneficial ion. Areas of interest in the oil and gas industries include cooperation in producing equipment for deep drilling, fitting out oil and gas fields, construction of pipelines, manufacture of high pressure linepipc, and secondary refining of oil. Cooperation projected in the geology field includes work on oil, gas and coal forecasting, surveying, geological and geophysical exploration, and utilization of earth satellites for exploration. Finally, in ihe field of energy utilization, the Target Program focuses upon developing less energy-intensiveand equipment for exploiting secondary energy resources.

In all of these fields taken together, the Target Program provided for the elaboration and adoption by "interested" member slates of approximately two dozen specific projects, some of which were in turn broken down into several subprojecis. Tbe Program specified the countries thai had declared an "interest" in participating in elaborating the projects, thefor prcparalion of agreements, and the CEMA organs responsible for working out these agreements.

Meaning of the 1'arntt Program. Whai is immediately apparent is lhat the CEMA program lhal has finally been adopted represents an almost total victory for the Soviet position propounded by Kosygin at successive prcccdingCEMA sessions The Target Program places Ihe burden of responsibility for providing additional energy substantially on tbe East European states themselves, fini of all by assigning top priority to electric power generation. The Target Program ischeme to produce more electricity in Eastern Europe Thiv goal iv to be accomplished In the near term through the expansion of coal-burning thermal power generation, and in the longer run through nuclear energy. The priority assigned by the Sovietsuclear power in the Target Program, as well as the demand that the East Europeans pull their

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in nuclear development, is highlighted in Kosygin's speech to ihe CEMA session ihat approved the program. nij

The Target Program is clearly seen .is an electricity strategy by East European officials. For example, the Bulgarian Permanent Representative to CEMA. Ftashko Draganov. has characterized the aim of the Target Program as that of bringing about fundamental changes in the energy balance of Eastern Europe "The basic clement of these changes is raising the share of electrical energy in final energy consumptionimultaneous rapid reduction in the share of (squid fuel utilized in producing it On this basis the task is maximally to draw local hard fuel, including low caloric fuel, into electrical energy generation and the satisfaction of energy technology needs *|

Secondly, the Target Program reflects, the Soviet line In its heavy stress on conservation and efficient energy utilization. Many projects specified in the Program directly address this concern. These include projects dealing with the unified electrical grid, powerbuilding, power plant construction. Mill) research, the refining industry, fuel substitution, upgrading the energy efficiency of all types ofenergy transmission, secondary energy use, and the development of non-energy-intensive industry.

Thirdly, and mosi importantly from the East European perspective, tbe Target Program responds only slightly to their critical concern over future Soviet energy deliveries In the period ofive-year plan, there were two major CEMA projects that gave assurance of large-scale future Soviet energy deliveries to Pastern Europe: ihe Orenburg natural-gas-cxtrac-tion-and-pipeline project (now being brought to fullnd the Vmnisia-Alberlirsakv high-voltage transmission line. This line, which canegawatts of power, has now been completed and significantly increases the capacity to transfer power from the Soviet to the East European electrical grid (andlthough Hungary is the largest beneficiary of (he line. East Germany, Poland, and Czechoslovakia participate in ihe project and will receive power fromhis seme the projectenuinely multilateral venture. The present Target Program has much less to offer.j

Significantly, this program includes no follow-on to the Orenburg gas project there is currently no multilateral CEMA gas proyect on the books, all hough naturally ihis couldf the large capacity gas pipeline project between West Siberia and Western Europe now being discussed is approved, it is possible that some of the construction work could be performed by East European (especially Polish) crews operating on the basis of some sori of CEMA agreement with payment in gas. Bul the only CEMA projects now included in the Target Program which explicitly involve energy transfer from the Soviet Union to Eastern Europe arcO-MW Khmelmukiy and Konslantinovka nuclear power plants, together withkv lines that will link these plants to Eastern Europe The Khmclmtskiy project, based on anbetween Hungary. Poland, and Czechoslovakia on ihe one hard and the USSR on ihe other is scheduled to deliver half its0 MW) lothe East European partner countries. The Konslantinovka project will deliver an equal amount lo Bulgaria and Romania. According io tbe Target Program, deliveries are supposed to begin from Konatantinovkand from Khmelniltkiyut it is unlikely lhat the plants will be commissionedhad not begun al the end of

In other words, there arc no major colleetnt CEMA projects at the moment thai will increase Soviet energy deliveries to Eastern Europe during the period ofive-year plan. The only way for the East Europeans to receive additional energy deliveries from the USSR in the CEMA contextight be through bilateral barter deals that individual countries might sirike with the Soviets whileTarget Program projects in the field of oil and gas equipment manufacturing ajsj

This is not tbe outcome which the East Europeans had sought in negotiations over (he Target Program. It seems apparent lhat in discussions in thehere was tbe expectation -or at leastmultilateral agreement not only on dectricity and gas. but above all on oil cooperation arrangements would be an integral part of the future Bloc energy program. Such cooperation, organizedultilateral basts.

' lm Ortahsrg pnmxtippean to Kit bumhittily snangri ttarOte the

have given the Eastomewhat stronger collective claim on Soviet oil. and would have cased their long-term planning uncertainties |

This issue seems to have been decided against East European hopes att CEMA session inhere the Soviet draft proposal of what should be included in the Targetailie Elements in Principle of the Long-Term Target Program of Cooperation in Providing for the Economical!)Needs of the CEMA Member Countries for Fuel andas accepted, apparently in competition with other drafts (almost certainly including one submitted by the Romanians)HH

Venting what was probably not only Romanian unhap-piness with this turn of events, the Romanian, Premier. Manea Manescu, declared atd CEMAear later:

I wish to emphasize that in the areas of fuel, power and raw matcnals it is ryecessary to act decisively in realizing new measures cc" cooperation- theof intcr-govcrnmental treaties, long-term agreements and contracts for mastering the reserves of raw materials, fuel and power that exist in the CEMA member countries, for Ihe purpose of increasing supplies and the very fullest satisfaction of lhe import needs of countries which have limiicd natural resources This is the more necessary, taking into account tbe fact that in the target programs approved by us measures are not included for multilateral cooperation in areas vitallyfor our national economics such as provision for needs of oil and gas. as was envisaged originally when it was agreed by us to elaborate Die target program of cooperation0 in the areas of fuel, power and raw materials.

This statementomplaint lhat the Soviets had doublccrossed their CEMA allies.*!

Theiet Aliundehe failure of the Target Program to include large multilnterai projects on Soviet territory

'Sewal tan European reem*ri otsejied In Iheir ipeeehci ai7 CEMA seMlon lhat the Soviets had been thr last tnmntmii the'r draft propotnlv on the Tarccl Pranrani lo Ihe oilierone to only on the very ewol Ihe meeting. |

that would significantly increase the flow of Soviet hydrocarbonsastern Europeroader reappraisal by the Soviets of the concept of "cooperation" between the USSR and Eastern Europe. There is less talk about investment participation by the East European states in big multilateral projects on Soviet soil, and there hasartial retreat as well from bilateral compensation projects on Sovietinvolving East European capital or labor. Instead, there is more emphasis now upon cooperation based on an industrial division of labor and the exchange of manufacturcd goods (especially machinery and equip-mcm i

The Soviet assumption in tbeas that the East European states should recompense the USSR for oil and gas deliveries by participating in theof additional production capacity in the Soviet Union. Thus, for example, Olegeading Soviet spokesman on economic relations with Eastern Cat tape, observed

The Soviet Union has signed agreements on cooperation in the oil and gas industryandumber of cases for the subsequent period as well) with the GDR, Czechoslovakia. Hungary, and Poland, who will take part in the development of extraction of oil and gas, and in Ihe construction of pipelines, while tbe Soviet Union will provide for an increase in the export of corresponding goods to ihese

In accordance with the Complex Program our country2 must present proposals on possible volumes of export of oil and gas to the CEMA countries for (be period up0 and lhe conditions of cooperation of these countries in tbe development of the Soviel oil and gas industry njnj

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Tbe underlying principle here was compensation in fuel: the Easi European contribution was linked directlyayback in oil or gas. In the multilateral arena, the East European investment and laborto the Orenburg project was lo be recompensed accordingormula confirmed4 that5 billion cubic meters of gas annually to Eastern Europe9illion going lo Poland, Hungary. Czechoslovakia,

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Germany, and Bulgaria,o Romania. The other main mul'*'ateral energy project undertaken ineriod, the Vinnisla-Albertirsa high-voltage transmission line, completedsthe participating East European countries in electricity in proportion to their investment

Significantly, there have never been any multilateral oil compensation projects on Soviet soil, although there are some minor multilaterial CEMA oil "cooperation" activitcs (mostly in Easternoviet pressure for investment, equipment, and labor parlieipation in USSR oil production has always been exerted

On the basisilateral GDR-USSR agreement. "Cooperation Between the GDR and the USSR in Creating Additional Production Capacities in the USSR Petroleum Industry inor example. East Germany's chemical machine-building sector was assigned the task of producing in East Germany and then erecting in the oil-producing regions of Tyumenodular prefabricated plants for dcssicaiing petroleum gaseslants for removing gas, salt and water from crude Oil. Ther so East German enterprises fulfilling the latter contract, it was said,reat responsibility for the future supply of our economy with Soviet7 the East Germans reportedly wereillion tons of oil annually in return for investment0 million in Soviet oil production jj

Poland's main direct contribution to the Soviet oil industry has consisted of participation in oil pipeline construction.9 the Polish firm Encrgopol completed constructionilomelcr-long crude oil pipeline running from Novopolotsk in Belorussia to Mazhcykskiy in Lithuania, and had still lo finish eight pumping sialionsanda lank farm.8 part of the Encrgopol crew began workingewilometer-long sectionrude oil pipeline between Novopolotsk and Surgut in West Siberia, plus three pumping stations. This project is scheduled forinor both projects Poland is scheduled lo receiveillion tons of crude oilyear period. This oil will be purchased at CEMA prices, in addition to the annual volume projected by

bilateral Polish-Soviet trade agreements. At least some of the pipe Is Polish-supplied, and the pumping stations were probably purchased abroad by Poland for hard currer

The main Czechoslovak involvement in the Soviet oil industry appears to have arisen out of an5 Czechoslovak-Soviet agreement. In return for an unknown quantity of oil on unknown terms,is committed by the agreement to supplyil pumping stationsBB

Hungarian participation in Soviet oil production was established6 protocol oncooperation in ihe oil industry, signed by Soviet Gospian chief Nikolay Baybakov andplanning chief Istvan Huszar. According to the agreement, Hungary was to supply an instrument factory, data transmission system, pumps, automatic control components, electrical cngin ting products, and oil transfer stations in return for an increase in Soviet oil deliveriesons annually. The deliveries specified by ihe agreement appear lo have run onlyresumably Hungary had to purchase for hard currency much of the equipment delivered to the SoviclsB

Bulgarian parlieipation. like Polish, has involved sending labor to the USSR to build facilities.8 il was announced thai Bulgaria would increase its role in the construction of oil and gas projects In the USSR. Apart from mention of work on gas compressor stationsas processing plant in Uzbekistan, no details of deals are available

All of ihe projects mentioned above were initiated in the, and linked withive-year plans, although some or them will be completed well

In the middle of ihe current five-year-plan period there were some signs of continued Sovici interest in future East European participation on the same basis.or example, the Sovietsooperation projeci forloraiion in the Komi region with thewhom the Soviets have notsupplied oil. In8 the Sovietspressed the Poles to provide investment credits to (he USSR in return for increased oil. At about this

GcnrTaTn^WouTonnrveTcflr^

batindustry projects in the USSR to assure agreed-upon deliveries (including deliveries ofnd would have to double this investment to compensate for increases above the agreed level. Included in this additional investment would be deliveries of goods imported by East Germany for hard currency.

This pressure appears lo have carried overhe Soviet press noted that the economic cooperation protocol signed by Hungary and the USSR in9 provided for "cooperation in buildingbe USSR for eilractton ofhich earlier reports suggested had been insisted upon by the Sovietsondilion for increased oil deliveries inive-year-plan period.

During this time period, however, the Soviets were pushing even harder for approval of the CEMA Target Program on energy and elaboration of the projects foreseen by this program. Apart from the construction of the two nuclear power plants and high-voltage lines connecting them with Eastern Europe, tbe only project in the Target Program that appears eipliciiy to involve an East European commitmenl to anything on Soviet territory is one dealing with coal mining equipment and mechanized mine construction. In this cane, the terms of final implementing arrangmenls arcand agreed upon bilaterally, and Ihe USSR could pay entirely or partly in fuel. The same applies to the other projects in Ihe Program involving spccializaiion in the production of energy equipment (for nuclear power, thermal power generation, coal processing, enhanced recovery' of cel. oil and gas field outfitting, deep drilling, pipeline construction, secondaryvalves, and automated telecommunications

Target Program, however, that suggests anyby the USSR to barter fuel in this fashion.

There is evidence, nonetheless, of frustration with the guaranteed energy-pay back approach toand of drift within CEMA over the issue. In an article in9 the Soviet head of the CEMA working group for preparing the draft energy Target Program. Arkadiy Lalayants, commented:

Implementing ihe set of measures thai willstable deliveries of petroleum requires thai the countries cuke greater efforts involving large capital investments and other malerial outlays. This

earch must be made for those forms of effective cooperation lhat would make It possible to satisfy ihe economically justified needs of the countries for petroleum and petroleum products (motor fuel inEmphasis added *|

Inrominent Soviet CEMA spokesman. Yuriy Shiryacv. admittedestern economist that ihe whole sysicm of East European investment in extractive facilities in the USSR in return for the promise of long-term deliveries of raw materialal these facilities had fallen into disarray because of disputes over Soviet prices. CEMA was unable to solve this problem, which was so acute thai the system would have to be abandoned. Soviet policy in the future would be to encourage Easi European countries lo invest domestically in facilities forof goods that could be bartered for Soviet raw maierials. That same month,omewhat different note in proposing that East European countries acquire oil asfor supplying chemicals for tertiary recovery, lhal East European countries from joint enterprises wilh the USSR for tertiary recovery from depleted Soviet fields, and lhat the USSR continue lo make use of East European Labor along the lines pioneered by the Orenburg gas pipeline project.

Similarly. Bulgarian officials complainedong-term agreement signed with ihc USSR in September

hich in their view should have set out in great detail what Soviet deliveries would be through the year

as reduced by the Soviets to being nothing morepoliticalhe Soviets had categorically refused lo agree to supply oil in any particular volumes or at prcagrced prices|

The change in the Soviet altitude toward cooperation that provides guaranteed furl deliveries probablyumber of causes:

The prices noted above.

A Soviet desire to exercise tighter control over the disposition of its own energy resources, perhaps combined with doubts about their future availability.

The fact that the energy policy priorities set in the Target Program require the East Europeans to contribuie more in the area of specialized machine-building.

Possibly the calculation that further demands for greater investment in Soviet energy development would defeal the broader aim of "socialist integration" by increasing (he already intenseupon Ihc East European slates to develop export trade with Ihe West to pay for the investment.

East European Energy Self-Help

In order to evaluate the Soviet strategy for helping Eastern Europe lo help itself, wc need to look al how this strategy will affect the East Europear

Conservation- Since lhehe Soviets have constantly pressured the East Europeans to conserve energy. In response, the East Europeans have always

attempted, when dealing with the Soviets, to rebut (he argument that they arc not doing everything possible to conserve. Al each annual CEMA session the East European resprcscntalives detail all their conservation measures, in order la make the point: "We can't do anyoviet:

produced any real coordination of policy among the CEMA member countries on how to conserve energy evenevertheless, individual East European countries have introduced many energy conservation measures, some of Ihem quite Draconian.'

Notably, however, these mcausres so far have focused mainly on administrative attempts to restrict such energy use as lighting, vehicle use, and roomthat is, to regulate private consumption, which constitutes no more thanercent of energy use in Eastern Europe. This emphasis does not mean that public sector opportunities to conserve energy are lacking: energy is wastefully used in East European industry, agriculture, and transportation compared with West European levels; the existing machinery is energy-wasteful: and structural changes in thecould produce energy savings. |

The difficulty is that there are big costs and obstacles associated with conservation in the production sphere, and the prospects for major gains here even in the medium term are limited. Measures here are very likely to reduce output, at least in the short run. Attempts io raise energy efficiency in existingdepend upon improving general microcfficiency, which in turn raises the delicate issues of producer price changes and economic reform. Doing something about upgrading the energy efficiency of theimplies accelerated machinery imports from the West, paid for in scarce hardmeans more debt and more exports to the West rather than to CEMA. And implementation of changes in theof East European economicsost of sensitive policy is

^Scerae^

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Structure, From Ihc Soviet standpoim, and perhapsost/benefit poimof view, ji would make sensehift energy-intensive industry near to the sources of relatively less expensive power (that is.nd in Eastern Europe to emphasizeof those industries that consume less power. Soviet spokesmen have consistently recommended this course of action to their East European clients.or example, Kosygin laid out the Soviet position on the chemicalof the key areas of controversy:

Big reserves for raising the effectiveness of social production also lie in expanding cooperation in the area of chemicals, in joint creation of energy-intensive and material-intensive chemicalnear the basic sources of mineral raw materials and fuel.

W'e regard it as expedient to review within the framework of the long-term target program for power the proposal for joint construction on the territory of the USSR of big enterprises with large capacity units for the production of synthetic rubber, ammonia, methanol, polycthclcnc, poly-vinylchloride. ash. and nitriconsiderable part of this output would be supplied to other member countries of CEMA. Construction of such enterprises would permit the European CEMA countries toreater economy of liquid and gas fuel. The interested countries could participate either in the construction of enterprises, ortheir efforts on the production of less energy-intensive and material-intensive chemicalnd supply this output to the Soviet Union as compensation for supply of energy-intensive output.olution of this problem would assist in perfecting the structure of the chemical industry of the CEMA countries and would serveirm basisfor expandingand cooperation. P

material base, and that the time has come lo abandon this burden by pursuing the sort of division of labor talked about by the Soviets. This is. however, almostinority point of view in Eastern Europe.

What the Soviets are asking (he East European states to do first is to scale down their plans for development of the petrochemical industry. This industry is viewedajority of East EuropeanEast Germany and Polandtrategic key to economic growth, production of ugriculiural and consumer goods, and production of hard currency export carnings.|

Secondly, the Soviel demand requires that the less developed CEMA states more gradually pursue their goal of "equalization" of development levels among the CEMA members (which they interpret in conventional Communist terms as development of heavyhe best example here is the Bulgurian plan ofhird metallurgical complex near Burgas* which the Soviets have repeatedly refused to support on the grounds that Bulgaria neither needs the project nor has the iron ore and coking coal with which to supply it. From the Bulgarian standpoint the Soviet position is tantamount to consigning Bulgaria to remainupplier of agricultural products to ihc more developed "fraternal countries."

Thirdly, there is the problem of possible social dislocation caused by shifts in industrial structure. East European political and economic leaders arc extremely wary of disequilibrium arising fromto close down plants or eliminate laborWhen il was suggesiedzech economic official recently (hat the overstuffing of plants lhat had built upK" should be reversed and thai the inefficient plants should be closed down he reportedly replied that he wanted "no! only frank, bul realistic

Soviet position has found some supporters in Eastern Europe. The Hungarian economist Istvan Doboci. for instance, has argued that lhe entire Stalinist pattern of autarkic development of individual East European economic systems led to iheconcentration of resources in primary and heavy industries for which ihcrc was no adequate raw

Finally, there is the broader issue of economicimplied by the Soviet-proposed division of labor. The Romanians have been lhe most outspoken in their rejection of this concept, but they appear to express views whichuchfpopularity among other East Europeans

UI

Eastern Europe: Major Power Facilities

. Sweden

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The assumption (ha! Eastern Europe can do more in the near term to meet its own energy needs rati heavily on the calculation that all the East European states can accelerate coalesserthat Poland can export increasing amounts of coal toother CEMA member countries. Att CEMA session inosygin told the assembled East European premiers:

It is necessary to make wider use of solid fuel (including low caloric fuel) for the production of electrical energy and power-technologicalIn the European CEMA countries there arc considerable natural reserves of hard and brown coals, lignites, reachingS billion tons, apart from expected reserves of aboutillion

According to the evaluation of specialists, the available reserves of coal for the CEMA member countriesonsiderable increase in Ihe extraction of solid fuels. In this way it ismore broadly than isconstructelectric power stations.

Moreover, the USSR's top planning official who deals with CEMA energy affairs, Arkadiy Lalayanu,publicly linked rising world fuel prices, the use of coal, and the possible Polish contribution lo East European energy supply:

The new situation in world energy and the raising of prices on hydrocarbon raw materials has made it necessary to relurn to the question of processing coal shale and bituminous coalhat merits great attention, for example, is theof cooperation ia tbe uulizatson of the Urge deposits of steam coal in the territory of the Polish Peoples' Republic, which are located in direct proximity lo other European CEMA member coun-

The East European states have attempted lo increase coal production, bul they are much less optimistic than the Soviets are that they can raise output significantly. Reserves are depleted, investment costs are sharply rising, attracting labor is difficult, and environmental problems are serious. The East Germans andwho besides ihe Poles arc the largest coal

producers, have repeatedly raised these issues. East Germany has pointed oul at CEMA sessions thai the share of coal in the country's fuel balance is already extremely high. At9 CEMA session. Ihe Czechoslovak Premier Lubomir Strougal pointedly complained:

We are devoting extraordinary attention io the long-lcrm problems of our fuel and power balance. Along with extensive participation in international cooperation, such as the construction of electric power stations, transit gas pipelines, andlines, we arc establishing the prerequisites for the further development of our own resources and for achieving maximum savings in all kinds of fuel and power. At the same time, in coal extraction, we must cope with constantly deteriorating natural conditions. On top of that, in brown coal extraction (stripe must cope with the considerable growth of investments requiredesult of moving railroad tracks and waterways and the relocation of towns and villages Despite our enormous efforts and considerable investments, the lack of minimum increments of fuel and energy- will continue io be one of ihe severest limiting factors in our national economic development in the, even though weower rate of develupmcni compared with the present five-year plan.

Strougal did not mention, although be could have, that the tremendous pressure io increase coal output has mean heavy demands on coal miners inand elsewhere in Eastern Europe for overtime workotentially serious source of unrest. |

In] Complex Programeference to Polish coal as an element in ihe CEMA-wide energy-base, and the Soviets (as well as other CEMA members) have never concealed their interest in ihts source of fuel1 then'

Soviet agreement" to supply new mining equipment only on condition that Poland would increase iu deliveries of top-quality coal io the USSR. Acceleration of construction of Ihe broad-gauge Katowice-USSR railway line9 has been viewed by Poles and othersencetionoviet desire to sicp up imports of Polish coal. |

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II ^rii

10

Dealing with (heir CEMApublic position (hat "Poland, to the extentready on mutually acceptable terms toif fuel resources in satisfying the needs ofJaros/cwicz pledged lo thesession. Privately, the Poles areigh-level energy conferenceolish specialists made dear to the

h'P that raising coal output would beand some senior officials in the Ministry of

Power Industry and Aiomic Energy considered future targets to be highly unrealistic. Yel at the conference Deputy Premier Jan Szydlak asserted lhat Polish bard currency oil imports inould have to be paid for with income derived from coal exports lo the West. Commentsenior Polish official in8 also indicated doubt that long-term coal plans werehe said reserves were overestimated, and that despite widespread mechanization, miners wereworking Saturdays and sometime Sundays.

,nc Yolan siandpoint, as already indicated, itto maintain hard currency exports of coal. As

one Polish journalist observed inThe export of our hard coal gives us annually one billion dollars in revenue. In the present situation we cannot forgo such incomes, all the more so since it is increasingly difficult lo place Urge quantities ofoods on the markets of the highly developed capitalistoland has been especially interested in coal trade with West Germany.'

bYrs IS) rVnriagfThe East European CEMA slates expect to have an installed nuclear power capacity of0 megawatts by the endroducingercent of the region's electricity

(seehis capacity ii distributed unevenly among East European countries, andarying percentage of electrical generating capacity. Current projections of installed capacity5 and

eflect the same differentiated pattern Thus, for

of Po*er Rticior* at

Itiit jl!cd Capacity In

Capaeiiy in IW5* ulled Cspaoiy

MW

Electrical General ing

Cspaaty

MW

of Electrical Genera ling

MW

of Electrical Genet ail re

< >

X

20

SO

C.

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Czechoslovakia expccis io have almostimes the nuclear generating capacity of Romaniahile Bulgana anticipates meetingercent of lis electricity needs0 through nuclear power, as opposed to Poland'sercent mwrn

Wilh Ihe exception of Romania, which appears to have opled for the Canadian Candu reactor, all the other East European CEMA states are basing their nuclear programs on Soviet fuel supply andcurrentressurized water reactornd tbeWR schedulede introduced as the standard reactor in Eastern Europe in the. How these individual national programs are to beis, what the respectiveof the USSR and the East European stales should be. and how committed the East European leaders really are to ihecontroversial issues.

Increasingly in. Ihe Soviets have urged the East Europeans to turn toward nuclear power as the foundation for solving their energy problem. Alh CEMA session in6 Kosygin set forth

what have continued to be Soviet arguments in the nuclear field:

Nuclear power in Ihe long run mustubstantial contribution to the energy balance of the other CEMA countries.

The USSR was prepared to render "technical assistance" to other CEMA countries in theof atomic power stations.

The USSR was prepared to "participate wilh interested countries in building atomic electric stations on their territory."

There should be "broader specialization and cooperation in the production of equipment for atomic electricmovement of the CEMA countries in the nuclear industry would have at one of its major side benefits tbe upgrading of those countries' entire machincbuilding sector. Kosygin alsoitch for investment by other CEMA countries in construction of the huge Soviet "Atommash" nuclear power equipmentdemand that may later have been dro|

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In the Soviet view, attaining major advances in machine building has always been the hey to successFMA nuclear program. Not surprisingly, once they decided to invite ihe East Europeans into the nuclear equipment manufacturing club, the Soviets have harped on the need for the East Europeans to move faster in the machinebuilding sector. Thus, aid CEMA session in8 thai approved the energy Target Program, Kosygin declared:

The Sovieteady to render assistance in realizing the program of construction of AESs (atomicelectric stations) projected within Ihe CEMA framework. Fulfillment of this program will demand/'om all of us the acccleraied creation of large production capacities for the manufacture of equipment for AESs, the careful organization of multilateral cooperation in the corresponding branches of industry, the unification of efforts of the scientific and design collectives of our countries. The Soviet Union is speeding theof the production of equipment for AES. is building for thisarge specializednd is expanding Ihe capacities of other machinebuilding enterprises. Evidently, other countries too are interested in preparing themselves to participate in cooperation in such an important branch of machinebuilding. The agreement on cooperation in the production of equipment for AESs will demand from our countries greathe reequipping of machinebuilding, and in the training of yet more qualified cadres of machine-builders. All this will promote the technical progress of our machinebuildinghole (Emphasis added.)

This pressure, which continues, has generatedwithin CEMA over investment, production specialization, nuclear safety, hard currency trade,some countries- nuclear dependency, nussj

Soviet interest in peornoting nuclear power within CEMA was reflected in the energy Target Program approved atd session inhe Target Program stressed the principle of "accelerated dcvel-opmcnt of the nuclear energy industry on the basis of coproduction and specialization in production offor nuclear powerhis general principle

mm reached by bulgaria, romania, and ihc ussr on lhe komuntincwka nuclear plant. as ussr gospian chairman baybakov had pointed out inhe terms of the two power plant deals, based on the "values of the goods factually supplied by [each]eree settledilateral manner during coordination of economic plans and formulated as supplementary protocols lo

i ere no firms of9 even on the khmel'nitskiy project, beyond Ihe czechoslovakonstruction of the reactor

today, all the fast european states accept the need for some allocation of resources to nuclear power,czechoslovakia. east germany, and bulgaria arc more deeply committed to large nuclear investment than some of the other cema members In essence, the east europeans see nuclearus the only means of relieving the energy squeeze, given the skyrocketing price of oil und extremely limited capacity for expanding coal production (wiih the exception, to some extern, oft tbe same time, however, ihey have reservations about the package prepared by the soviets.

the nuclear program pushed by lhe sovietsood deal for ihe east europeans,what they would base to pay in tbe short termwestern nuclear technology, by Iheof nuclear fuel supply, and by ihe avoidanceassociated with the disposal of nuclearall spent fuel is returned io ihcet.europeans ha vc not rushed to shoulder theof

first, questions have been raised by the eastabout the advisability of investment in the iwo nuclear power plants scheduled forn soviet soil. bulgarian. czechoslovak, and polishon this score have beer, especially strong, probably reinforced by reluctance to invest in an energy facility not under their own control. equally important, the east europeans have been concerned with Ibe trade-off between investment in nuclear power, with its inherently longer payoff time, and urgently-ceeded investment in coal production

in addition, public statements notwithstanding, the easi europeans have also been worried about the safety of soviet-designed nuclear equipment of 'he three countries with installed soviet equipment. east germany has already had serious problems, including radioactive contamination of discharged cooling water, the jamming of fuel elements, poor quality welding, turbine vibration, and inoperative valves, leading to plant shutdowns- the bulgarians have been concerned with the resistance of their equipment to seismic disturbances. and the czechoslovaks, chastenederies of serious nuclear accidents in theireactor resulting in two known deaths and radioactive venting, which have evoked considerable concern on tbe pari of neighboring austria, have also been concerned with the safety features of sovietall of the easi european slates have been unhappy with the lackontainment vessel for the sovieleactor und the absence of an emergency core cooling system they have also been sensitive to public anxiety over nuclear security, at least to ihe extent of having to cope with ihisropagandain view of lhe three mile island incident in pennsylvania.|

east european officials probably have beenmore concerned with issues raised in tbeof the cema nuclear program. first, there has been the question ofatisfactory division of labor among the cema members in the production of nuclear equipment. apart from tbe cost factor, this has probably- been tbe most contentious element in cema nuclear cooperation associated with this issue has been the clearly perceived need lo effect radical improvements in the training andof labor in order to carry out the complex and demanding tusks posed in ihe production of nuclear equipment. finally, there has been evident scepticism over the capacity of an interdependent cemaprocess to meet quality standards and delivery dcadli

at least some polish officials reportedly believe that their nuclear program goals cannot be met unless the power plants are purchased from the west. recent public statements by top east german officials and hb^php^lkomplaints by them to soviet authorities prooaw^cflect serious doubts in east germany that

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and quality control will be maintained.

Because of its highly developedand limited indigenous fuel resourcesuranium. which is Sovict-eontroiled),has been the strategic base upon whichhave hoped to build bast Europeanin CEMA nuclear machinebuikling Lp to aCzechoslovaks have reciprocated thisof their appreciation of the severe limitsown coal production. Yet. thelong complained about the implcmcntaiion ofnuclear program in Czechoslovakia Thehave involved costs, domestic resource allocs-

LSIdll)>ll<IIVn Iwn' lcc'Proi:a' Soviet fuel deliveries, theCzechoslovak output, and hard currency ir.idc,|

Al earlyhe Czechoslovaks clearly and publicly demanded that their commitment of capital and hard currency to nuclear power machinebuilding should be valued "equivaiemly" to Soviet fuelin LSSR/Czechoslovak economic relations, and thus should make unnecessary Czechoslovak credit and material participation in Soviel energyas the qaid pro quo for fuelt7 CEMA session the draft program on nuclear machinebuilding. apparently prepared in this instance under Czechoslovak guidance, drew criticism from Kosygin. One of the issues here was almostzechoslovak attempt tolaim to production of turbogenerating sets for thecaclors;

'In Premier labomir Siroural'l wordiaih CEMA teuton InWc-suppOK that tbe contribution of intccvlcd countries to individual integration measures does not atwayi bava lo lake the (arm al direct credit and inteeral participation The benrfiu flo-ing from integration meaiaret. in our opinion, canlio ui another form, for eumple, ibrouch tbe comt ruction and development (if facilil res whien. from tba point ofofof capiul aad Bard cairmcvvt'eh'tea of production nuthteery and hceaso. and ciccndaum on ibe davvtopmani of tbe

v vt iathe

acd doeOprneivt ofor eaampk. tar ihcof eajajpnirs-.now ekctrx ninous, for UM aredaeaioai of special papas, ceaananauee staikws.aaat ranwaaeeganaapaaeaa.ucber of other tspei ot tottaahapcil covpnvtal ThAhiadcf Ottpit ibcald be dilutedsvunkaihcof fact, power, ra* aiaiemli. ind mtenali Wt rveurmewd. tbeerforc. ;tat (be rraevpk of icowmlc annKaVnaseQMganiwaapain the .nduted hu rrcci'c appropriate attention first of all in lhe elaboration of im tona-iermtaraei program*No

without this Czechoslovakia would be totallyon Soviet supply Tor this key component, would have to restructure its existing nuclear production profile, and would be deprived of an important nuclear export item. In addition, at8 CEMA session that approved lhe energy Target Program, Czechoslo-vak Premierppeared to condition his ap-proval of the nuclear program by dwelling on tbe need for Soviet oil and gas deliveries

The long-simmering controversy between the Soviets and the Czechoslovaks over Czechoslovakia's role in the CEMA nuclear program seems to have comeead during Kosygin's visitrague in

[one of Kosygin's pressure the

Czechoslovaks to speed up production ofhich Czechoslovakia is to be Largely responsibleosygin is said to have proposed that tbe Czechoslovaks cut back on other kinds of industrial output in order to accelerate reactorAt the same time, he reportedly proposed stepped up deliveries of equipment for the Sovietmetallurgical, transportation, and other

The Czechoslovaks nre reportedave countered with complaints about the burden on lhe engineering sector of nuclear equipment production, about the related negative effect on Czechoslovak hard currency earnings, about the share and price of electricity to be deliveredzechoslovakia from the Khmel'nitskiy nuclear power station, about the negative tradewith the USSR, and about the price and volume of future Soviet oil deliveries In lhe end. the Soviets may have made some concession on oil prices, but even if they did. this did not put an end to

In his speech atd CEMA session in Moscow inremier Strougal presented anfrank analysis of tensions in Czechoslovak economic development thai highlighted the impact of the energy problem and suggested some of ihc constraints imposed by the nuclear machinebuilding program. Czechoslovakia, he observed, was notits economic plans and was not coping with its own

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fuel and powerapital construction problems, techal obsolescence, or balance of paymentsough it was fulfilling all iu CEMA integration commitments andithin the limits of oarlthough work was progressing on the targetit was "nevertheless becoming apparent that in most Instances the contribution made by the proposed cooperation will be apparent only"mutually acceptable agreement" on the "complicated and demanding problems" posed by the cooperation program in the fuel, power, and raw materials sectors were to be reached, this depended uponpeedy solution of the still open questions" in the coordination of the national five-year plans foris. ihe level and price of Soviet fuel delivcrieiJ

In this content. Slrougal emphasized the "enormous efforts and considerable investment resources" thai had to be put into coal production, which would still fail to provide minimum increments of energy and thus depress the rate of ecDrKWnie growth. This situation was why Czechoslovakia attributedimportance" toils central role in CEMA nuclear equipment production; but this role was "so demanding (hat il substantially limiu our possibilities for developing other engineeringheof Strougals remarks were clear:was being subjected lo extraordinary economic pressures, which cried out for Soviet relicf.j

Soviet Energy [Vineries lo Eastern Karoo*

Quanmif, Thereteady rise throughn the ratio of energy imports to total energyror* isee table 'I The laahnlfll imports in total energy consumption rose from about one-fifth io about one quarter0mports from the USSR rose at about the same pace as total energy imports, and accounted for three quarters of Ihe total. Duringeriod covered in the table, the Soviet share of energy imports peaked5 and then began to decline slightly. In ihe gas. coal, and elecincity sectors taken individually, the highest ratio of imports to total energy consumption wasercent (coal,aken together, ihe highest joint contribution of imports in lhese ihree sectors to total energy consumption wasercent. The key sector was clearly

il imports, in which the Soviet role was paramount Soviet oil importsroportion of total energy consumption rose toercentnd these imports accounted for over half of all energy imports throughoutthe share began to drop slightly after

Soviet oil production roseillion barrels per day04 millionhile cxporu roseillionver the same period (seehows the allocation of this production in percentages. Throughout, the Soviets exported slightly over one quarter of their oil output. Apartip. the level of exports remained stableercent. Except for the deviant. thereradually rising irend line of exports to Communist countries08 (seehis pattern essentiallyising share of exports lo Easternercent7 percentH

Significantly, hard currency exports also roseaficr declining steadily0he ability of (he Soviets to increase exportsto Eastern Europe and to (he hard currency market was based on cutting back exports toCs. The share of oil exports allocated to these claimants dropped fromercent0ercent8 J

3 the annual rate of increase in Soviet oil production has progressively declined (seehe movement of exports during this period fluctuated greatly, without any apparent relationship to changes in rates of increase in oil production. Exportsere down sharply, however, fromverage annual increaseline with the declining rale of increase in oil production.

In most years, exports to Communist countriesmore rapidly than total exporis. This pattern did not hold5owever, when the Soviets steeply raised exports to the hard currency market in order to attempt to cover their huge hard currency trade deficit by capitalizing on sharply rising world oil prices. I

l

26

Table 2

Kail European Energy Imports and Consumpiinn

ft

-1 rrt,ii .n

Smercent of total cnercv canMinptiau

Sc-elucefii of Will energy Impel!

MO

nuni it prncn'."

Soilm kw* of total energy mcon* Cm!

ssuyorts to peroral of tout energy aaunpdi

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rrr-*'ie'ttnl -j( tuisl tre:*-

2

)

110

10)

9:

0

1

1

7*

1

760

T7J

1

rr 1

Emi furorcMUaaa

odefiBt^ nol.as*.enl.ud clrcthcity inCkKUiM in uindarduMtt.

III

most importa n: comparison is between annual ratci of increase of exports to Eastern Europe and to Ihe hard currency market.he Soviets chose to assign priority to increases in deliveries to Eastern Europe, but ihcyramatically higher priority lo increases in sales for hard currency7 (sec8 Ihe Soviets accelerated increases in deliveries lo Eastern Europe and cut back increases for hard currencysalcs, bringing the two into virtual

Within the East European market, the shares of individual countries in the total Soviet delivery to the region remained extraordinarily constant over the

eriodor the first year ofive-year plan period wilh Ihe first year oflan period, we sec lhal no East European state gained or lostercent of total Soviet imports. By the same token, there was great stability of shares from one year to Ihe next. At the same time, there are differentials among ihe East European states each year in ihe percentage increases of Soviet oil deliveries, although the differentials seem to vary randomly from year to year (sechus, for example, deliveries2 to Poland increased

ercent butercent to Bulgaria, yet3 percent to Bulgaria3 while

Table 3

Soiiei Oil Production and Exports

Bjrreli Per Div

4

Soiict Oil Exports

ptKrnl ul ^roduclic

Communis! countriesercentopart*

53

56

ST

62

no

57

56

Europe

Asia

Yugoslavia _

Hard currency market

Oilier as peroni of lotal esporis

31

13

13

I-

26

ll

29

I

32

i:

34

35

rs IU)

Se^el

Sped

increasingercent lo Poland. Severalinferences can be drawn from these patterns, (u)

The key political factor evidently is how much oil is io be allocated to Eastern Europeloc; lhat is. what will be the division among the hard currency,nd East European markets. Thishoice that is beyond the influence of any individual East European country, or of all of them collectively. Differentials among the more or less constant shares of Soviet oil allocated to the individual East European countries doolitical-economicul not one thai appears to be often considered in any fundamental fashion. Instead, the share pattern suggests that the cumulative allocation over time is substantially the result of adherence to the preplanned differentials. J

Although ihe objective situation of one supplier and multiple claimants would seem to produce competition for Soviet oil among the East European states, the data suggest that if there has been such competition, it has had remarkably little effect. The East Europeans have some scope for exerting political influence, not with respect to the big issues of Eastern Europe's share of total exports or of the breakdown of deliveries among

UI

the East European stales, but rather with respect to the smaller and purely bilateral issue of yearlyat the margin in Sovici deliveries to each Easi European country

Negotiationsil Deliveries. Since aiast European party first secretaries, chairmen of councils of ministers, and planning chiefs have been doing their utmost to convince the Soviets to provide more oil inlan period, and toirm decision to do so as quickly as possible in order to allow ihe East Europeans to draw up plans for their economies inheir success has been questionable, however, the average annual growth of oil consumption in Eastern Europe2 percentercent4he average annual rate of increase of Soviet oil exports to Eastern Europe47ercent and declinedercent ineriod (sec table |

This concern refleeii anjrtncu of itiecknc reuiinnsnip hci.wn groaibof mlMnumpiionandcrowthofGNPiri Easiern Europe In iheor eiample. the annual ONP irowikratc and Ihe annual grnwih rote for energy consumption wereerceni for ihe earlier periodercent for ihe later (

Eastern Europe: Major Oil Facilities

Table 6

Soviet Oil Exports to fcavlcrn Europe '

4

|,4

in

s

Germany

0.0

00

i).t

7 i

5.7

II 1

0.0

ii: *i

00

7.4

no

oo

Crude and prvducu

Sources;aiitradeR

10)

Iheropean standpoint, high rule* of increase in energy consumption were viewed inrecondition Tor maintaining accustomed rates of economic growthbe declared energy import requirements0 of CEMAbesides Ihc USSR, implied an average annual rate of growthercent, wiihercent rale Tor Romaniaercent for Poland although the figures for other East European couniries wereercent.t lhat lime, the CEMA couniries collectively were asking for an average annual increase in Sovici oil deliveriesercent, although most East European countries were proposing less than thispercent. Hungary ercent. East8 percent.percent,percent) I

East European states haveumber of different bargaining tactics with Ihe Soviets. The Poles, for example, reportedly have argued lhat political stability depends upon delivery of the ml. that reiectioa of Iheir demands by the Soviets will compel them to increase their hard currency borrowing and divert exports to the hard currency market, and that Soviel deliveries to individual East European couniries ought to be more or less equal in per capita terms. The Bulgarians arc known lo have attempted lo pin the Soviets down by forcing them into detailedAnd the Hungarians may have attempted to trade their support of Soviet foreign policy initiatives for more oil. One thing the East European leaders apparently have nor attempted lo do in any serious way is to coordinate their use ol CEMA

lcMQ-tfaYrs IUI

mechanismseans of pressuring ihe Soviets. Negotiations wilh the Soviets have been bilateral, and appear to have been conducted al least to some extent in an atmosphere of competition and jealousy among the East European states themselves.

the East Europeans have actually expected the Soviets to agree lo is another maitcr. Undoubtedly some East European; are fatalistic, feeling that the USSR will simply have to provide the oilecause there is no other way out for Eastern Europe.ubstantial number of reports indicate that9 East European officials on the whole were not optimistic about the prospects of increasedn tbe second halfoviet failures to meet delivery schedules may have heightened East European doobu that tbe Sovietsbe able to sustain even0 level of deliveries through the next five-year plan period. Protracted negotiations with the Soviets hadconvinced the East Europeans that difficult timesead

It is loo early to say how the Soviets will allocate their oil production ineriod among the four "markets" to which it is supplied; domesticCEMA. Western hard currency buyers, and LDCtwnh whom the Soviets have concluded clearing arrangements There arc priorities in each market,op-priority recipients even in less privileged markets are likely lo be given preference over claimants in privilegedor example, the Soviets have already agreed to give ihe Finns, who pay in softolid increase in oil deliveries. while bargaining much harder with their own CEMAd hoc adjustments will be made along the way based on political or commerical calculations. Yet the contours Of Soviet intentions arc now visible

We estimate lhal exports of crude oil and refined products to all non-Communist countries fell byercentnd to hard currency trading partners byercent Nevertheless, rising oil prices pushed up estimated hard currency earnings by aboutercent. We anticipate that oil exports to hard currency customers0 will dropercent or more below9 level |

Toward the East Europeans, the Soviets havea remarkably consistent position If weSoviet spokesmen have actually said, ratherthe question through the East Europc-in

see thai the Soviets haveTirrriTyasseiTecrrM Europehole cannot expect any significant increase in oil deliveries over0 level1he Soviets haveo given the impression that deliveries would not fall belowevel, although on occasion they have let it be understoodecline was notespecially if East European states were unwilling to accept terms proposed by the Soviets]-

HIii illi 11

Spree'

(SI

rs [Ul

no increase in Soviet oil deliveries0 under the planned trade agreements, J

In negotiations with individual East Europeanthe Soviets have onole adhered very closely to the general line sketched above, tempering their position somewhatillingness to discuss deliveries slightly above0 level that would be paid for in hard goods or hard currency. It should be noted thai Ibc East European leaders appear not to have had an easy time in actually getting the Soviets to translate their general commitment lo the regionhole into firm contractualprocess that is still taking place There have been conflicting reports about concessions the Soviets may have made in negotiations duringwith regard to Poland. East Germany, and liungary.^ajfJJ

rs (CI

Ihe current five-year plan the Soviet Union is supplying the CEMA countries withillion tons of oil,illion tons of petroleum products,illion cubic meters of gas andillion kilowatt hours of electricity. In the next five-year plan it is planned to increase deliveries of fuel and energy resourcesotal ofercent. But, of course, we must not counl on meeting growing demands just on an extensive basis, by increasing production. This no longer meets the interests eilher Of the countries supplying raw materials and fuel oil or the countries receiving them. (Emphasis added.)

percent figure as meaning

When projected increases in Soviet exports of natural gas, electricity, and coal are taken into account, Kosygin's statement implies oil shipments to CEMA of. whichercent greater than average Soviet deliveries planned. but almost the same0 deliveries. When exports to Vietnam, probably not included inlan, are taken into account, Kosygin'serecnt figure probably signified almost no increase In oil deliveries to Eastern Europe. This interpretation is strengthenedadio Moscow announcement on9 that during Brezhnev's meetings at the Crimea with East European leaders it had been decided to raise Soviet oil deliveries to CEMAillion ions during ihe five-year planworks out toarginal increase over0 level JH

i offtCKiT^nerr^

The relatively unyielding Soviet position does not mean, of course, that they may not change il in (he future; volatile conditions in certain countries (for example, Poland) might induce them to supply more oil. trade factors might lead them lo reconsider hard currency sales, or, as Is argued below, they may have miscalculated how much oil would be available for export to anyone. |

ISI

net effect of this type of attitude istrong disposition at all but the very top levels not to give special treatment to East European interest, and a

ec East European living standards

lowcrc^fnccd be. On several occasionsH

H Soviet specialist' have been divided over Tncpriccsas well as quantities of oil to be delivered to Eastern Europe, and that negative sentiments have been linkedeneral unhappiness with the scale of export of nonrenewable resources. One mightthat it is only because of the actionsmall number of top leaders and officials, who bear direct responsibility for performing the "stateman "s" role of weighing the conflicting demands of maintaining political stability in Eastern Europe and promoting Soviet economic self-interest, that oil deliveries have been kept as high as they havend at concessionary pricesMM rs

IC)

Aa Oil Price Squeeze? It is extremely difficult to determine how much the Soviets have actually forced the East Europeans to pay for oil- and this is not only because the Soviets6 ceased to publish data from which one could calculate oil exportumber of factorsearing on the problem:

There have been three categories of Soviet oil deliveries to Eastern Europe: deliveries based on five-year trade agreements; deliveries based onagreements in which East Europeanor labor is paid for in oil: and straight hard currency purchases by East European countries. Prices have been calculated differently for each of these classes of deliveries.

rs (SI

Yre 10

Secret

IUI

real cost of oil has depended significantly upon CEMA prices for goods exported by East European countries to the USSR, and thesehave been Subject to arbitrary determination and muchby no means necessarily reflected real costs.

- The real cost of oil has depended in part upon ihe cosi to East European countries of their participation in compensation deals, which have involved the transfer of "hardepayment of hard currency loans, and provision of labor.

for oil has to some extent involved the redirection of East European trade from the Western hard currency market to the USSR, which entails

EOopportunity costs as well as direct hard

losses.

IS)

In CEMA trading practice, transactions in one sector (for example, petroleum) apparently may be balanced by transactions in totally different sectors, making it impossible for outsiders (and perhaps insiders loo) to determine what the "dear actually was.

The costs to East European couniries of Soviet oil have to some extent been offset by balance-of-paymcnts deficits they have been allowed to run in their trade with theare in effect Soviet loans to these countries. Thus it is not possible to say precisely what "price" the Soviets have forced the East Europeans to pay for oil, even when the oil price per se is known. Nevertheless, converging pieces of evidence suggest that the Soviets have been fairly tough with the East Europeans and are likely to become even loughet

other fuels tended to rise much faster than the average prices of those goods with which the East Europeans paid for fuel delivered under five-year agreements, ihe cost of the so-called "planned" oillargest share of oil sold by the Soviets to Easterndramatically. |

A Western estimate of the rale of increase in the price of Soviet oil delivered to CEMA5 is presented in tablehereargeercent)ollowedullnd then substantial increasesccording to this estimate, the Soviet price reachedercent of the price paid by the West to OPECecause of lhe steep rise in OPEC priceshe gap between CEMA and OPEC prices probably widened sharply once again by the end

: price i

1 percent of the price paid by the Poles for hard currency crude imports. Another report indicates that9 Soviet crude oil wasercent cheaper for Poland than Nigerian crude.0 percentprobablyfor the East European stateshole at the beginningefore the big OPEC price jumps. It must be borne in mind, however, that there are significant differentials in the prices paid for oil by individual couniries depending upon reciprocal credits and prices presented to the Soviets by the East Europeans, different mixes of crude oil and products, transportation costs, and poiilical concessions.

ollowing the OPEC oil price revolution, the Sovietsear ahead of scheduleevision of the old CEMA pricing practice according to which prices of goods were fixed for five-year intervals on the basis of the average world market pricereceding fixed interval. The new formula, whichompromise between what the Soviets wanted and what the East Europeans argued they would be able to bear, dictated that prices would change each year to mirror the average price over the immediatelyfive-year interval. Since the average price of oil and

From lhe Soviets* standpoint, the five-year moving average pricing formula hasajor sacrifice of potential hard currency earnings, which they have accepted in order to soften the blow to Eastern Europe of rising world fuel prices. Without this assistance, lhe Easi Europeans would have had to retrench already in the second half of. East Europeanabout the economic validity of the OPEC price

rs IUI

I utile "

Price* of Soviet Oil Exports to CEMA

Venaerove: of A U rofcO-

UndAHfinK. CtavMPrw liprjerO.de

MrKt-(f of Swnct Eipocu From USSR

icdProduce. rudeto cc

rfMCM)

(6)

IUI

used in delerrnining Sovtelnlikely to hive nude much ol an impression on Soviet ncg ators The evidence suggest thai is CEMA prepares forive-year plan period, the Soviets intend to intensify rather than relax the price pressure on their East European clients

First, the Soviets apparently arc gelling ready to Increase the share of so-called "above-plan" oil in total oil deliveries to Eastern Europe. There is some evidence of this9 negotiations v. ith Hungary and Chechoslovakia This oil would be paid for cither in high-quality bard goods or bard currency. The net effect, then, is that the Soviets would simply beiven amount of oil from the Western hard currency market for sale on the East European hard currency market. Moreover, the Soviets have given signs of unwillingnessgree to predetermined prices for such oil. During difficult negotiations with the Bulgarians over long-term trade relations in

he Soviets refused categorically lo agree to provide "liquid fuels" in any specific amounts or al preagrecd prices, but agreed ooh to deliver additional quantities of oilonpian basis with prices negotiated at the lime of sale.1

ltllllO-JbYrs ISI

Second, there is converging evidence thai (he Soviets have been seriously considering changing Ihc five-year base for calculating moving average world-markcl priceshree-year or even shorter base, which would raise Ihc price of Soviet oil to Eastern Europe even closer lo the OPEC level. I

it] -Mi- /Tips III

rs (I)

>oviet posi

Iftake it or leave it" attitude is frequently detectable on Ihe Soviet side. The Soviets, whose rising trade surplus with Eastern Europe helped cushion the impact of escalating oil prices in the second half of, have been very hard-nosed toward requests for credits, although Ihcy may grant Poland some relief. At the same time, the Soviets are said to have leaned on the East Europeans to increase their contribution to the Warsaw Pact and have evidently sought to shift onto East European shoulders more of the foreign aid burden. Naturally, it is always possible for the Soviet leadership to reconsider and make concessions if this seems warranted by the security or economic situation in individual East European slates But at the moment the Soviet position on oil prices appears to be unyielding.!

ind even more threatening, are indications that the Soviet* might be considering insisting onarger proportion of bigh-Qualiiy hard goods even for "pUnned" oil delivered under five-year agreementsove wouldainful break villi existing policy, which permitted the East Europeans to pay for much of their oii imports wiih overpriced soft goods.

SK had recentlyyear agreement wilh Fast Germany under which, startingast Germany would pay average world market prices for oil |

Finally, no Soviet concessioris apparently will be made in ihe broader area of CEMA finances Where Ibe Soviets have pressed9 for additional East European investment in Soviet extractive industries, ihey do not seem to have addressed the East European complaint lhal East European states must contract high-.nicest hard currency loam themselves while making low-interest loans to the USSR

S1

Alternative Sources of Oil for Eastern Europe

The dilemma facing the Soviets is clear. If ihcy arc unprepared fully to meet East European oil needs ai an affordable cost, ihcy arc in effect telling the East Europeans both to cut back economic growth and consumption and io find oil elsewhere, fundamentally, additional supplies of oil can now be acquired by Easlern Europe only for hard currency. To gel hard currency. Eastern Europe has three possible sources:

Soviet hard currency loans or gifts.

Hard currency trade with the Western industrialized nations plus hard currency loans.

I lard currency trade wilh whai the Soviets refer io as "solvent" developingIhe oilstates and their beneficiaries.|

The only viable long-term solution forapart from Soviet-managed militaryin the Middletrade: but tradeworld standards of quality, service, and soEurope currently is hard-pressed to meetThe question is. lo what extent can it doa further expansion of East/West tradeacquisition from the West? The answerquestion turns on ihe prospecis forcooperation" within CEMA, on Ihe one hand,increased borrowing from the Westrs

rs IU)

Magnitude of the Problem. How much oil will the (fait European states "really" need to Import for hard currency, assuming lhal Soviet deliveries remain flat for lv*'L'n fortunately, there is no quick answer to this question. Nominal Easi European "need" depends, in ihe first instance, on the requirements for operating (he projected capital stock available in thenchunction of existing capital stock, investment, and technology imporu.arn, will hinge on decisions about minimum tolerable levels of consumption |

Ihe picture becomes more complex onceare taker, into account in definingneed for oil imports then depends uponcapital utilization raicisthe total availabiliiy of all forms of energy inIt also depends upon hard currencydebt-service obligations, the availabilitycredits, the balance foreseen betweenand nonenergy hard currency imporu. andof imported oil. Hard currency exporton Western market conditions, theof East European goods, and the extenthard goods are allocated to the CEMAavailability of Western crediu dependsin the West and the outlook ofon the one band, and ihe debt-serviceEuropean leaders are prepared lo accept on the

IS)

Over any prolonged period there isevel below which nonenergy bard currency imporu cannot fall without severely disrupting ihe East European economics The East European countries may already have approached this floor for imporu of industrial materials, capital goods, and high-technologywhich make upthe bulk of hard currency imports.

In the past. East European economic growth has been promoted by substantial annual increases in total oil imports However, when the large Romanian imports are excluded, the size of annual increments declines steadily fromercentJercent9 (see tabicf Romanian oilxcepted. East European imporu of crude oil from OPEC countriesercent of tola! crude

imports5here was. however, wide variation among East European countries in the share of oil imported from OPEC assjj

As was noted above,8 the non-Soviet CEMA countries were proposing an average annual increase in Soviet oil deliveries00ercent,ercent withoutbviously, however, if Soviet exports were held flat0 levels, but East European states wanted to attain the same rate of overall growth of oil imports. OPEC imports would have to be accelerated itar faster paceercent lo make up the difference, since these imports at present constitutemall proportion of lota' crude imports.

Given flat Soviet oil deliveries, the average annual rate of increase in East European hard currency oil imports thai would be necessary to meet fully tbe operating require menu of projected capital stock overeriod would be very high indeed. Preliminary calculations suggest lhat if Soviet oil deliveries for theS5 were stabilized at0 level, and East European energy consumption were to continue io rise at rates experienced in. Eastern Europe would need io importf oil from the Weilhis volume might costillionin excess of anyEast European import capacity Thus the East European slates will have io settle for less energy, lowci capital utilisation rales, and lower rates of growth ofGNP,

Table 8

last European ('roc* Oil Imports

1

without Romania

-i-

mUW Ul<ia4>

Unportatacrctnil

1

5

wautawhaajala

*

1

7

! *

"

'

5

Germany

3

3

0

6

I

1

3

.'

J

1

1

.OI'FC

:

:

t

.'

79

4

Germany

7

1

1

i

1

.iic

:

1

1

i

.mi

1.

ElUMl

in

"i- Sovielo the Ii European Dilemma. Soviet attitudes toward the Fast European hard currency oil import dilemma appear to be ambivalent *nd dependent on specific situations. To some extent, the Soviets mayat leastIhc CEMA energy strategy outlined above willcope with the dilemma, and privately, many Soviet officials probably feel that the East European need for lard currency oil is an Fast Furopean problem. Ycl Soviet policy toward CEMA relations with Western irading partners and with oil-producing nations docs affect how the dilemma is likely to be resolved |

ISVrs

In general terms, and in line with the whole CEMA integration drive, Soviet leaders- especiallycontinually spoken in favor ofthe relative share of inira-CEMA trade and of reducing depersdence on trade with the capitalist West. At ihc9 CEMA session, for example, Kosygin declared: "The CEMA countries are the only industrially developed zone in the world to have :scapcd the heavy blows which the energy crisis is iealing to the capitalist economy. Our long-term aimhe planned exploitation of, above all. our own energy resources has rustifiedn the speeches of Soviet leaders and in the articles of Soviet specialists there Is no mistaking Ihe autarkic thrust of arguments that stress protection of the Bloc economies from the world economic crisis, stagnation of the capitalist economy, the large and stable Soviet market for East European goods, and so forth. This autarkicwhich rationaltrengthening of bilateral economic ties between the L'SSR and each of its client states In Eastern Europe, is firmly based in Ihc politics of Soviet-East European relations in the entire postwar period; it cannot be ignored^

1Vrs (Ul

rs (SI

Obviously, however. Soviet spokesmen deny any Bloc autarkic intentions, and some olTkials do value the benefits of trade between capitalist and CEMA countries more highly than others All Soviet authorities would probably agree for ibe record with the dialectical proposition that "socialist integration" actually enhances the opportunities for Easi European states to trade with the West by capitalizing on specialization of production and economics of

An important concern of the Soviets has been to exercise control over Easi European trade relations with the West In Ihis connection they have been unyielding in their position on the still-unconsum-mated negotiations between CEMA and the Common Market, in contrast with most of theirof whom except East Germany have already signed nt least one bilateral sectoral agreement with lhe EC. (East German goods gain privileged access to the Common Market through "inner-German" trade with Westhe Soviets have also discouraged East European couniries from joining GATT and the IMF

In practice, the Soviets have been ambivalent about East European trade with Ihc Wesi From an economic standpoint, trade with Eastern Europe al tbe expense of trade with the Weal couldet liability for the USSR, and some Soviet officials for this reason might not object to integration proceedingeisurely pace. Soviet pressure on the Easi Europeans to redirect trade from the West lo lhe USSR is nevertheless well documented

Yrs (SI

European debt lo ihe West ha* been aissue to Soviet policymakers, not leastEuropean borrowing has been only partlySoviet influence or control. The Soviets mightbeen more inclined to regard East Europeandebtotential source of Easton the West and or Westernotential source of Bloc leverage on the West. The

Soviets have been concerned with tbe implicationsEast European indebtedness to the West for

their own hard currency borrowing. They have publicly rejected any responsibility for coming to the rescue of insoSeni East European states (according to tbe so-called "umbrella theory- prevalent in Western bankingul have privately cajoled the East Europeans where necessary to discipline

The same ambivalent Soviet attitude can be observed in regard to Czechoslovakia andoviet Kosygin's visit to Prague. reportfflyTaidajor issue had been the extent to which the Soviet fnion orst would contribute to the modernization of Czechoslovak industry and the renewal or its fixed assets. On the one hand, Czechoslovak relations could not be weighted toward the West; on ihe other, the USSR could not by itself meet Czechoslovak needs, even if it were willing to extend ruble credits. Thus, lo some extent, seeking Wcsicrnhard currency credits was an inescapable course. B|

critical countries from the standpoint of hard currency debt have been Poland and.esser degree, Bulgaria and East Germany. At the end8 ihe Polish debt service ratio wasercent, tbe Bulgarian A6 percent, and the East German SI percent: we5 percent debt service ratio for Poland9 and over lOOrercen:

was concerned (hat Bulgaria mighflUII intobecause of iisoverambiiious economicrepeated requests

n Short, white discouraging ng las; humpcan indebtedness to ihe West in principle, the Soviets have tended when hard pressed to look the oiher way rather than meel East European hard currency borrowing needs themselves. I

frrrnWe^cTg^^iSiicTTarT currency assistance, the USSR had granted Bulgariait hard currcnev aid. with the tuiruibljofl thai this

UI

will happen in the face of increasing Soviet pressure on the East European states to orient their trade toward the Soviet Union is uncertain. Despite the talk about integration, one close observer of trade statistics has concluded thai thedo not appear to have been marked by any dramatic turn toward closer Soviet-East European economic ties, beyond what was already in lite workst is undoubtedly true that at least some East Europeanthe Romanian and,esser extent, the Polish andin, sought to strengthen their trade relations with the West for both economic and political reasons. None of the East European slates have been altogether happy with trading practices in CEMA. and some have clearly felt lhat CEMA prices discriminatede hi.

Yet the East European attitude towardthe USSR is complex, and by no meansof unwilling compliance. The hard truth is thattoday may offer even lessayfor Eastern Europe than the East,pressures to which they were beingat least the Polish. Hungarian,oncludehat the proposaleconomic ties tendered by Brezhnev inwas to be embodiedyear bilateralof specialization and cooperationan offer they could not refuse. Thus in thoseBulgarians themselves took the initiative oftoutually satisfactory long-term

rterccment on cooperation with the Soviets. |

the

summer

need for greater integration of its economy with thai of the USSR. The policy of purchasing Westernagainst the sale of goods to the West was regarded as having failed, and the Poles saw increased trade with the Soviet Union as the only way in which ihcy could market their goods and obtain the raw materials and semifinished products necessary to keep Polish factories running and Polish consumers satisfied. Top Hungarian policymakers reportedly had reached the same conclusion by the first halfhe only way

" Martini. Kohn."Sm-ici-Essiern Europeanonet fceiwnwimeof Change. Vol.

for Hungary to solve her current economic problems was through close cooperation with CEMA J

This policy evolution did not mean that the leaders of these countries had given up all hope for expanded economic tics with the West, bul it didarked shiftore "Eastern" orientation, especially in comparison with expectations of theM

Unfortunately for the Fast Europeans, the terms on which they have wanted to integrate (including the scale and price of oil imports desired) have not been acceptable to the Soviets: it has been the Soviets, in fact, who have held up the signing of agreements lhai would permit the East Europeans to solve their energy and raw materials problems by "turninghat this Soviet posture implies is that the Easi Europeans must attempt to expand exports to both the West and the USSR in order to get oil. Inevitably, consumption will be tightly squeezed as lhe East European states try to expand exports in both directions while struggling to reduce Western im-

ports J

Special Deals With OPEC States? Because of the hard currency difficulties just described. Eastcountries haveoncerted effort over the past five years or so to obtain oil through government-lo-governmcni deals with oil-producing countries. Ideally, the East European countries have wanted to arrange long-term barter agreements, in which oil would be traded for military and other goods, but they have also been keenly interested simply in marketing all lypcs of goods and services for hard currency, which could then be used to purchase uilH

East European relations with the oil-producinghave inevitably laken place in the shadow of Soviet Middle Eastern policy,broadand military strategic reasons as well as short-term calculations of economichad the effect of encouraging the very OPEC price rises lhat have had such disastrous consequences for Eastern Europe. With the partial exception of Romania, the East European regimes have nevertheless accepted OPEC, the oil price rises, and the confrontationist orientation of the more radical OPEC regimes as givens of the

1

Steffi

IU)

that define their own opportunities and strategics. Some East European regimes, notably the East German, appear enlhusiasiic about the potential opportunities that Middle East tensions provide Tor gaining access to oil and hard currency from the more radical Middle Eastern states. Others evidently have deep misgivings about the likely outcome of OPECowever, they have little choice but to play the game on terms defined by the USSI

The idea that (here shouldommon approach by the CEMA countries to the oil-producing states goes back at least io1 Complex Program of CEMA integration. Probably linked to this idea was the creationy CEMA's International Investment Bankpecial Fundillion transferable rubles to promote projects in LDCs.5 CEMA signed cooperation agreements with Iraq and Mexico which called, in the case of Iraq, for multilateral cooperation in tbe spheres of the oil and gas industries, chemicals, agriculture, and foreign trade, and, in the case of Mexico, for cooperation In the utilization of new technologies, geological prospecting, development of

" An arlkar in the Polish press in9 stated: "OPEC was established0 aiaQorcaniiatton lhat. with tbe full suppoil Of the Third World countries, fought to recover thr right to ilt members'own natural itches Thai ttrurck was justified,ndedrilliant victory. Bui as Ihe year* have passed OPEC hasartel for the privileged producers of tawnd the prosperity of Ike res! of the world, to* greater or lesserepend* on that cartel. It is hardly surprising thai il enjoys this privtkf? alihoui moderation. Bui il ii also hardly possible not to ice thai this lack of modernlc* may enderious catastrophe from which even Che OPEC member countries themselves would nolZ>ciein Daily Report, li) Commeuiing on ihe9 OPEC priceungarian observer declared; "These countries (such as Hungary) su (Ter directly from Ihe rise in the price of oil and raw materials, bul (hey arc not yesMition io pais on these increased costs in Iheir export prxes These countriesonsiderable worsening in iheir Irade position aid this is one factor which makes the decision by the OPEC countries moreed thai the coRBeoucrvccB of ihii decision nil] be much more serious thanappreciate al present Thereanger that ihe OPEC couniiics will pot bo able to spend their increased incomes as easily as ihey have done up loThis is another factor lhat makes this decuico very serious,eet lhaiprice increase by OPEC wai overly haiiy and

inflation will acctkrate. The inflation

raie in the developed ci pi taint countries and particularly in tbe United States, already In double digits, will further accelerate and ihe effects of ibis oo Ihe world economy will be extremely leriout. This is one influence thai can be expected. Anotherhat the raic of economic growth will probably decreaseercent. Third, the nunc ill markets of the world -ill once again come inloRadjo Budapest.n Doily1 BJBJ

foreign trade, finances, and construction of joint enterprises. That same year it was proposedEMA symposium hosicd by the USSR Academy of Science's Institute for the Economy of the World Socialist System (directedocal advocate of CEMA integration. Olcg Bogomolov)pecial CEMA organ be established to cooperate with LDCs in the fuel and raw materials sectors,

The notionEMA link with oil-producing stales was elevatedeclared policy objective in8 energy Target Program, which called for "lifting the level of production and mutual deliveries within the CEMA member country community as well asof their cooperation in regard to the needed fuel and raw materials from the Third WorldThe Target Program specifically stipulated that there should be

comprehensive incorporation of the crude oil and natural gas resources of the developing countriesong-range basis through coordination of the common priority of interested countries, theand perfection of utilized forms andof cooperation with these countries (broadening technical and economic assistance to the developing countries on the basis of long-range agreements; organi7ation of joint companies with the petroleum-producing developing countries for searching Tor oil, equipping the oilfields, delivery and export of crude oil on the basis of prorated participation of the CEMA member countries in the nationalccj.B

""In (he course of the discussion the unanimous opinion emerged (hat ceoperaiion in (he fbel-raw materials areas with Ihird counirict should develop primarily oa ihe statc-lo-staie level, drawing into the process Ihe state orxaniraiioea of develceone countries. In this confection, in (he opinion of ihe symposium participants, ii would be expedient io coordinate the actions of (hesocialiii countries through harmoniialion ofisting organ liaticmalof CEMA. bul thai then ii might be necessary for this purpose io create in iniernaiionaleceneniieorGaniiaiionforccor^aiion in Ihe fuel-raw materials branches- Bulgarian scholars, for example, think lhat ibis organisulon couldroad circle of quest ions- -from conducting ecological work lo granting credits in the form of supplies of equipment. Wilh its assttiance there cnuld be provided the collective cooperation of the CEMA countries wiih Ihestales tail are Ibc basic producers of important types of mineral raw materials andvrnjvr AS SSR.'sertyoo.ssjjj

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II

subprogram of the Target Program indicated that thi*ly was intended to "strengthen tbe purchase of oil from Iraq while taking into consideration the Iraqi proposal for cooperation with the CEMAcountries in building plants in Iraq onbe CEMA Permanent Commission for Coordination of Technical Assistance and theof CEMA in the Joint CEMA Commission for Iraq were given ihe task of elaborating concrcic proposals.|

The range of organizational mechanisms that the Soviets publicize to promote CEMA interaction wilh oil-producing countries include mixed tradingmixed companies for the exploration andof natural resources, mixed engineering and consulting and construction firms, loans from OPEC countries for construction of production facilities in Bloc countries, and joint financing by Bloc and OPEC countries of projects in third countries lest there be any question, Soviet publicists inform their readers;

The participation by socialist states in Ihe mixed enterprises of the developing countries differs in principle from the practice of Western monopolies. To begin with, it is carried out on authentic principles of equal rights and mutual benefit, does not pursue political goals and docs not set for itself the task of perpetuating the presence of the socialist partner in the given developing country ad infinitum. One musl particularly stress theof confusing joint enterprises with foreign concessions.

Despite the evidence of Soviet-sponsored CEMA interestoordinated approach to oil-producing countries, it is not clear bow much joint activity there has beer, in practice. Probably the Sovietsmade the greatest effort to coordinate efforts in the lucrative and politically sensitive area of arms trade and military assistance. Here the record suggests that:

There has been some "division of labor" among the East European slates, although this has probably been dictated largely by Ihe historically-evolved production profiles of East European industry (for example, the traditional manufacture of certain types of weapons by Czechoslovakia).

The Soviets on various occasions have suggested, approved, or vetoed the sale of military hardware and training services by East European stales to Middle Eastern governments, and have used East European states to front for them in delicate arms transfers Through licensing or coproduction arrangements the Soviets arc able to prevent sales of major weapons systems if ihey wish. Soviet power in this field t* probably instiiutionall/cd in some fashion, but it is doubtful whether the actual rrtcchanisms usedany genuine multilateral CEMA participation

The proportion of known multilateral military deals involving two or more CEMA members and an oil-producing country, in contrast with straight bilateral deuls, is small.

There is some evidence of latent competition among East European slates for military-relatedhe Middle East, and there is clear evidence in certain instances of the preference of Middle Eastern regimes for deals with East European suppliers rather than the USSR.

the search for military tales. East European states may have attempted lo circumvent Sovietaltogether. For csample, it is possible that89 the Poles negotiated behind Moscow's back to sell replacement engines for Soviet-built tanks to

In other areas, Ihe evidence of joint CEMAwith oil-producing countries is mixed. Aarticle indicated thai "iusi the firstbeen taken in the iradc

Ion CEMA ret"

, gas delegations lo Iraq7bserved that it was "'difficult to perceive to what extent cooperation agreements withCs are multilateral in nature (and thus CEMA-rclatcd) or strictly bilateral.'

If

and Libya, East Germany also imported some oil from Iraq through its membership in the CEMA-Iraq Joint Commission EI1?Hll4llT( ISI

el

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Indeed, there has been outright competition among the East Europeanspecial relationship with OPEC nations. When the Shah visited Eastern Europeproletarian internationalism" gave way to unseemly attempts by East European regimes to seek national advantage through flattering him.

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nern oil deliveries isto some extent inhich unfortunately arc based on incomplete data and do not mirror purchases by some countries (notably Poland) from the multinationals Romania, satisfying its bigmport needs,arge share of the deliveries from til the suppliers listed except Algeria; and78 its share actually increased from four of tbe six suppliers (Iran. Iraq. Libya, and Kuwait) (seehile Iraq is the only Middle East supplier that delivered oil to most or all of the East European countries ineriod (which is the pattern that One might expect to follow from collaboration inspired by3 CEMA agreement withhe shares of individual East European countries except Hungary arc not as stable as one might have(see.

Overall, it appears that Romania has had the mcst stable supply pattern, followed by Hungary- Other East European countrieswhateverthe proportion of imports from various suppliers more frequently, which may portend lessommitment b> suppliers to maintain deliveries in the future. Bulgaria, Czechoslovakia. Romania, and Poland, in that order, were -proportionatelyexposed to an Iranian oil culoffast European countries were very dependent inn Iran, Iraq, and Libya for their supply of OPEC oil. |

From the East European standpoint il has been very important to obtain oil from these countries at less than world bard currency prices, and this will become critical as Eastern Europe becomes more dependent on increasinglyPEC oil. In ihe past the East European states have had some success in bartering arms, military' training, and development assistance for oil, or arranging concessionary prices for tbe oil they receive, and some deliveries now are still taking place on special terms. Bui the preferences of oil uppiiers seem to be moving away from such dcals.|

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Tabk I

EM European Shares ol Known Middle Eastern Oil Export* to Eastern Europe

Atarrb

Germany

of

Iran

Germany

of known oriiin

Ira*

Germany

of known oriiinl

Kuwait

German,

of known origin

0

b/d'

Seafel

llOIO'Wri III

Tabic 9

East European Shares of Known Middle Eastern Oil Export* to Eastern Europe (continued)

Libia

Germany

of known originb/J)

!

Syria

(icrir.in-

ol knrma origin)

4

0

ungarian publication, Hungary has conducted all its trade with Arab countries6 in hard8 Bulgarian article staled thai Bulgarian barter Irade with Iraq terminated6 and lhat it continued only with Algeria and Iran. |

Igerians have shifted from tr tearing accounts io "cash on tbe barrelhead and hard currencynd thai the East Germans, Hungarians. Poles, and Romanians had shifted completely to dollar payment transactions.

,lm

Germany waspaiing

in developing Syrian oilfields, but how long this will continue is unknown. In Ihe summer9 it was known that East Germany had earlier proposed barter deals to Egypt, Iran, and Libya

in January i>

49

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Polish foreign trade publication observed that "events in Iran have unfavorably affected the deliveries from that country to certain European CEMA slates. The new authorities are not inierested in barterwithin the framework of which, forEast Germany counted on the Iranian raw material in exchange for the deliveries of railway0 I

Jwhiic Polish foreign trade officials claim lhat Polandpays hard currency for all non-Soviet oil imports, published projected exports to Iraq0 suggest lhat whatever the formal payment arrangements may be "barter of equipment and construction projects in exchange for oil is the main theme in Polish-Iraqi trade, as it is with

Table

Shares of Middle Eastern Countries in Known Middle Ensl Oil Imports h> Easi European Countries

-

teria

-lit

of known oncin)

of known oriatln)

ot known origin)

i

known origin (trxniundb/d)

IS)

aiiowcdlo drift at the end9 both because of the high price of the oil, and because Warsaw believed that if an agreement were concluded with Nigeria beforegreement was signed with the USSR, the Soviets would conclude that the Poles no longer needed increased supplies from them.

In9 negotiations in IheCommission, the Hungarians sought unIraqi deliveriesillionengthy discourse by the Iraqis onties of friendship and mutual interestIraq to the socialist countries, theturned down flat. This rejection followed an

earlier turndown of an appeal by DeputySicker during his visit to Iraq in

Hungary was also searching at this time for oil from Kuwait. Iran, and Saudiwith no known succcs

icrmans i

toignificant quantity of oil on the

spotC)

was havingut wouldtill harder timemillion tons of crude0 Romanianto Kuwait were being rebuffed, and Romania

had nothing to trade with Iraq that would entice the Iraqis to increase their deliveries. Romania was considering approaching the PLO to ask it to intervene on behalf of Romania with King Khalid of Saudi Arabia, and to intercede with other Persian Gulfatal.es to make oil available to Romania ^

With Iran, however, Romania was luckier than other Last European supplicants. Romania9 contractillion tons. In the9 negotiations, Poland askedillion tons bul settled. East Germany asked

to Ihc USSR and her CEMA alliesittleibon tons5 million tons, downosi of this decline was to be accounted forutback in delis-erics to the USSR, but Poland. East Germany, and Bulgaria were also to be col- All of Ihe CEMA states had soughtoviet oil trading official complained lhat although the CEMA members should enjoy preferential access by virtue of Iheir close political ties to Iraq, they were, nevertheless, being Irealed the same as capitalist oil companies. He was uncertain whether the motives were political or economic. In the case of Bulgaria, at least, the motives were clearly political.lash in Bulgaria between pro-Communitt and Ba'thist Iraqi students in November. Iraq withdrew itsfrom Sofia and reneged on ils agreement lo export oil io Bulgaria At best, the East Europeans appear to face difficult limes ahead in obtaining any substantial increase in oil deliveries from OPEC COumriesJjggi

The Fulure

Energy rxobkrns are only one factor thai will influence the course of Soviet relations wiih Eastern Europe and ihc external world, and the interactions between this factor and others cannot easily be predicted.the poleniial role of energy must be discussed largely with ihc "everything else being equal" proviso. Developments in East/West relations, clile politics in the Easi European regimes and in the USSR, world economic trends, the outcome of events in Iran and Afghanistan, and so on will obviously merge wiih energy issues in Influencing Soviet perceptions and behavior

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East Europeanhe emerg-

ing Soviel response lo lhe problem of Easisupply will help ensure thai growth ratesEurope will be well below the averagend that there will be heavy strains onEast European states will have toincrease exports to both the USSR and the Westto compensate for deteriorating terms ofpay for raw materiats and fuel. Despiteof the need to keep consumption up asfor maintaining political stabilityproductivity. East European leaders willto be compelled by the Soviet posture to reduce

0fficiai targets Tor growth in consumption. Given

rates of Inflation

ISI

percent,

:rnments may be hard put simply to maintain present levels of consumption. Under these conditions, popular resentment toward the USSR and nationalist feelings could well increase, at least in some countries. J

the projected construction by thef ihe two nuclear power plants in the Ukraine linked to East-Central Europe and tbe Balkans, the electric power dependency of Eastern Europe on the USSR will be substantially increased, in addition, the CEMApowerinvolves Sovietconstruction assistance, fuel supply, and wastebuild even more dependency into the East European-Soviet energy relationship.

ore general sense, despite countercurrenu and resistance in both Eastern Europe and tbe USSR. Bloc economic integration has in fact gradually increased in recent years. Given the bleak prospects for Eastern Europe being able to replace imports of energy and raw materials from Ihc USSR with imports from other suppliers, or substantially to expand exports ofgoods to the Western market, it is probable lhat the trend toward integration will continue In. The further till toward lhe Soviet Union in the Eau European economies, if sustained, willjor poltiical achievement for the Soviet leadership.

II]

Actually, "dependency" of Eastern Europe on the USSR is not the issue at all. The real question is, what sort of leverage will continuing strong Easi European dependency give to the Soviets? The answer depends fundamentally noi upon what if anything the East Europeans choose to do, bul upon how ihe Soviets calculate their own economic and poiilical losses or

It hat been argued by some observers that stable or declining oil deliveries by the USSR io Eastern Europe will spell reduced East European "dependency" on the Soviets. Dependency, it is implied, is more or less proportionate to ihe volume of oil deliveries. In fact, the only conditionich dependency might be significantly reduced wouldoviel requirement that most or all of its oil be paid for in hard currency,

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and upon what measures they choose to employ in responding to potential or actual instability.!

While there is some evidence from negotiations with gains in squeezing Eastern Europe, upon how they sire the Poles thai tbe Soviets might be contemplating such up the likelihood of political instability in thisrastic s'.ep. there is little chance lhat Ihey would do so now for all East European coun

even if the USSR were to supply onlyercent of Eastern Europe's oil. iu contribution would still be irreplaceable Moreover, new bonds of energy dependency are already being forged. With tbeof the Orenburg pipeline project. Eastern Europe is even more dependent on the USSR for natural gas than it had been before, and thiswill probably increase in ihe future as gas deliveries are stepped up. With the completion of lhe Vinnilsa-AIbcrtirsa high-voltage iransmission line and

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To complicate the picture,!

_ cutback it: tticiri ol Soviet oil deliveries to Eastern Europe, or an absolute reduction, docs significantly affect GNP in these couniries, the magnitude of the impact is likely to vary quite substantially from one country to another, depending on the extent toountry can count on its own indigenous fuel resources. Thus, economic growth in Poland, the East European country with perhaps the greatest potential for political instability, would probably be least affectedoviet oil cutback, while growih in Hungary, one of Ihe more stable countries politically, would be more severely

fcCtcdB

As wc have seen above, the USSR has made what it regards as major concessions to the interests of its East European clients in the area of energy supply. Il has delivered large and rising volumes of oil to Eastern Europe throughout, plus gas. electricity, and coking coal, at returns well below what these deliveries could have earned in hard currency on ihe world market. It has also committed itself to increase total energy deliveries somewhat inive-year plan period, and lo contributen expensive CEMA nuclear power development program. In addition, it has compensated to some extent for its fuel price hikes5 by allowing East European countries to run balance-of-payments deficits with il. But there arc limits to Soviet beneficence. There has been little "give" so far in Soviet negotiations over oil delivery increases, oil prices, or credits foreriod. Moreover, Ihe CEMA Targe! Program for energy, which embodies Soviet strategy, is predicated on lhe assumption that as far as collective action isthe East Europeans hereafter must bear the primary responsibility for solving their own energy problems.

From this pattern of responses lo the problems of East European energy supply one can draw someinferences about the limits of Soviet responsiveness to political blackmail by Easi European leaders. Obviously, Moscow is concerned about the possibility of political instability in Eastern Europe (especiallynd is prepared ai least io listen to the argument that failure by the USSR to satisfy fuel demand in one or another country couldrisis. PjgTJJ

Soviel leaders have heard this argument in the past, however, and are probably disposed to interpret it in the first instanceign of unwillingness of allies io shoulder their fair share of the burden. Nor does it necessarily follow that the Soviet leaders will be prepared to make concessions on fuel deliveries even if ihcy arc convinced therehreat of instability. There are limits todisposablc Soviet fuel reserves. But. even more important, Soviet leaders are as likely to demand thai East European regimes strengthenand undertake political countcrmcasures aimed at repressing impending instability, as they arc to attempt to defuse il through providing more fuel or credits.M

Under the conditions that arc likely to exist in ihc first half of. Soviel policymakers will probably regard ihe use of military force to suppressin Eastern Europe as undesirable, and they will be concerned lhat intervention in Eastern Europe could provoke unrest in the Soviet ethnicthe Baltic region and ihc Ukraine. Bul Soviet policymakers will not pay an unlimited price to guard against having to use military force. The lesson they arc likely io have drawn from Hungary6 and Czechoslovakia8 is thatarmcd repression plus followup "fraternal assistance" does in fact work, even if it brings with it temporary economic and foreign policy c :

One effect of the changed international environment in ihc wake or ihc invasion of Afghanistan will probably be even more Soviel pressure on Eastern Europe. The Soviet move into Afghanistan is likely to intensify economic strains within the USSR, and generate demands for greater Bloc solidarity. The Eastregimes will probably be asked once again io make greater contributions to Warsaw Pact defenses and to foreign aid recipients favored by the Soviets. In response to Western retaliatory measures and in order to counter attempts to divide Eastern Europe from ihe Soviel Union Over the Afghanistan issue, the Soviets have already begun io clampleastEasi European lies with lhe West, Internally. Afghanistan may strengthen Ihe more conservative elements within the East European Communistthus obstructing the possibility of enactment of

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economic reforms, even though loss of Wesicrn credits would create pressures for effective domestic solutions io economic problems

On balance, ihe coming succession period in the USSR could accentuate the danger of an energy-induced economic/political crisis In one or more of the East European states. It is possible that if jockeying in the success:oc sweepstakes continues for some time, as occurredon lenders for the post of General Secretary' mightidding" for East European support, holding out the possibility of concessions on fuel deliveries. More likely, however, would be bidding by contenders for support from interna] Soviet constituencies that will also want more energy. And there will be no authoritative Soviet "statesman" like Brezhnev capable of personally decreeing Soviet largesse for an East European regime in dire distress

If the decision to invade Afghanistan provides any insight into the casi of mind of the posi-Brcrhncv leadership (and it mayt would suggest that taking care of East European economic difficulties could easilyack seat to the pursuit of broader Soviet military-political strategic aims. As we have already observed, the strategy behind Soviet energy policy toward Eastern Europe has been highly consist-eat inecause the USSR's interests have been clearly identifiable and enduring These interesa will remain the same in the succession period, and there is no reason for any radical shift in Soviet policy. However,ntirely possible that the succession may produce vacillation or indecision in thehis policy, which could encourage factionalism and political conflict within Eaat European leadership groups. Such conflict has usually existed when political instability has occurred in the Bloc countries |

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(CI

The most likely way in which Soviet energy-related behavior could help torisis in Eastern Europe, though, is probably through miscalculation. The biggest miscalculation could welloviet overestimation of the USSR's own oil production in the first half of. If our projection is correct. Soviet oil production will peak al90 and decline lo betweenut Ihe Soviet leadership may not think the prospects are this dismalH

Soviet specialists probably accept the notion lhal oil production will peak in the next year or two. However, they are probably uncertain how long peak production can be maintained before beginning to decline; and they may be reluctant io jeopardize their careers by telling the political leadership that production will decline as soon or as steeply as the CIA forecasts. They know, of course, that Gospian chairman Nikolay Baybakov. considered by the political leadership to be an expert on the oil industry (which he managed for manyas publicly championed the view that vast slocks of oil can still be extracted from older Soviet fields through an extensive program of tertiary recovery. (Thisope that most Western experts on enhanced recovery consider highlyn addition, they may not evenery good estimate of actual Soviet oiloviet specialist.

faulty I

in Septemberto know the truth, wethe faintcs;dea .tn>hethis situation was

TntJOc^Bna Ic

i leu la ting reserves!

The top Soviet leadership may be led toto demand regardless of theoil production can be held steady or even increasedhrough continued crash development of Tyumen Oblast. the acceleration of enhanced recovery in depleted fields, and exploitation of fields still to be discovered tn Eastern Siberia and offshore. Thebaic

hat he was very "of ihe Soviet oil industry, and that without major purchases of US equipment and technology the USSR would not come close lo meeting its projected production gt

Yet. Mal*tsev was being overridden by his own political bosses with respect to purchases of US equipment, and at the same lime pressured to increaseeapon being used against himB analysiswedish firm, Peircaiudies. that claimed the USSR had far greater reserves than the Ministry itself had reported to the leadership and that the USSR could double its crude oil outputal'tsev is said to have stated that he would not be surprised if the KGB

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had produced the Petrostudies analysis just to him. |

The Soviet commitment to keep ch! deliveries to Eastern Europe at least stable at0 level for the periodwhich East Europeanand foreign trade plansill bewell be predicated upon the assumption that Soviet oil production can also be stabilized or even slightly increased over this period.

lion anaountries'together become net importers of oil (which could be as early2. the rise in oil imports wilt be precipitous, so that average annual Bloc oil import requirements arc likely to be high from tbe very onset of the oilritical situation in supplying Eastern Europe with oil could thus arise withoutmuch advance warning, much

iTriadvancc

A second possible Soviet miscalculation lies in ihe entire set of contingencies associated withof the CEMA energy Target Program. These contingencies are integrally related to declining Soviet oil production by virtue of the leadtimcs required for various Target Program measures to take effect. The Soviets have insistedreat deal of energy conservation is possible in Eastern Europe. Yet. while Ihe potential for conservation indeed does exist, it lies primarily in the production sphere, where progress will be costly and time consuming. Obsolete machinery must be replaced, requiring Western imports, greater hard currency debt, and exports to the West; microefficicncy improvements in energy utilization depend ultimately upon price changes and economic reform; and large immediate energy savings are likely to be achieved only at the expense of reductions in volume of output |

The Soviet position lhat Eastern Europe can do more for itself in the short term rests heavily on the assumption that the steady decline in the role played by indigenous coal in the East European energy balance can be rapidly reversed. The economic, environmental, and social costs of bringing offurnaround, however, may have been grosslyby the Soviets. The coal-mining sectors in East

European economics are already laboring understrain, and the possible eruption of discontent on the part of miners should not be discounted: this happened in the Jiu Valley of Romaniand it could happen in Poland. Chechoslovakia, or East Germany. East European planners arc beingto set high future targets for coal production, but industry officials are skeptical they can beenior Polish energy official commented privatelyor example, that in his opinion production of brown coal would reach a*illion ions, rather than theillion tonsillion tonsj

The longer term success of the Target Program depends in Urge part upon the speed with which nuclear power plants can be commissioned. CEMA energy balance calculations anticipate that0 megawatts of nuclear power capacity projected to be installed0 in the CEMA countries (including the Khmclnitskiy and Konslantinovka plants in the USSR) will releaseillion tons of standard fuel. But iherc is little likelihood of schedules being met for the commissioning of nuclear power plants!!

Whatever the longer term prospects, Eastern Europe in the meantime will have to attempt to acquire more oil from OPEC suppliers. The Soviets, however, may have miscalculated the hard currency earning capacity of East European countries in trade with the West, and the objective possibilities of East European countries increasing exports simultaneously to the West and the USSR. It it likely that they have also overestimated the possibilities for CEMA of gaining privileged access to OPEC oil through arms trade and development assistance, while underestimating the rapidny of OPEC price rises

A third possible miscalculation lies In the Soviet reading of energy-induced political developments in Easlern Europe There isredisposition among Soviet policymakers to resent East European appeals for assistance, because of perceived higher standards of living in Eastern Europe and the heavy epportumty costs to the USSR of providing such assistance In fuel supply and bard currency credits. This attitude could lead Soviet policymakers tothe tolerance of East European populations for

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Eastern Europe could benefit in this context through Western participation in gas pipeline construction, the expansion and interconnecting of electric power grids, and acceleration of ihe CEMA nuclear powerThere is also the possibility that Poland might be able to reap substantia! gains through exporting coal and/or electricity to ther>ecially lo West Germany, with which it is already engaged inalong these lines. Finally, lhe Soviets always have the option of sacrificing their own domestic needs,east temporarily, to supply an individual Eastcountry in dire straits with more natural gas (which might depend on the expansion of pipelineil. or credits with which lo purchase oil on the world

Imptui of Imrohememt im the Enu Entopemn Energy Problem on Soviet Behaiior. The most immediate effect on the Soviets of having to cope with the East European energy problem willeduction of available energy in the USSR, with the negative impact this will have on economic growth,utback in the most important hard currency-earning caportitem Despite the Soviethift more cf the burden of energy supply onto the East Europeans, energy deliveries lo Eastern Europe will weigh heavily on the USSR in. The integration strategy, embodied in the CEMA energy Target Program, will to some extent increase the reciprocal dependence of ihe USSR on East European economic performance (for example, in the nuclear equipment field) It will also com plicate and slow down an already overloaded central planning system, in the process reinforcing ihe dominance of directive methods in planning ggggai

Externally, (he strategy adopted by the Sovietsto cope with the East Europeanwill lend lo move the USSR in the directionautarky, although selectively rather lhan inmanner As noted above, thisnot exclude the possibility of large energyWestern Europe, if such deals could be

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Original document.

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