THE SOVIET ECONOMY AND THE SUMMIT - AN INTELLIGENCE ASSESSMENT

Created: 6/1/1979

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The Soviet Economy And the Summit (u)

An Intelligence Assessment

Research/or this report was completed

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paperoint effort of ihe Office ofResearch and the Office of Political Analysis Comments and queries are welcome and should be directed io|

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paper has been coordinated with the Office of Strategic Research and National Intelligence Officer for USSR/EE.

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The Soviet Economy And the Summit (U)

Inhe Soviet leadership is concerned about the economic dilemmas that confront the USSR and about finding measures that would alleviate economic pressures without weakening political control at home or generating unrest in Eastern Europe. At the same time, however, the leadership remains dedicated to projecting Soviel powerwhich it sees economic as well as other benefits. Unhappy with impediments to trade with the United States. President Brezhnev probably comes to Vienna with expectations of economic gain that arc more modest than those he harbored at23 summits. Nevertheless, he might have hopesajor breakthrough in trade between the superpowers based on credits and compensation deals^

As the Summit approaches, the outlook for Soviet economic growth is bleak. In the short run, poor industrial performance will impede the investment programs that underlie Moscow's efforts to turn the economy around. In addition, the large drop in grain production expected this year means that the gap between production and domestic requirements for grain will be roughlyillion tons. Longer term prospects are even worse. Our forecasts on energy production seem to be holding. The USSR's oil industry is likely too-growth stageollowed by steady production declines in the. This, together wiih manpower stringencies, slower growth of new plant and equipment, and little or no gain in productivity will push economic growth down toercent per year in

Faced with ihese prospects. President Brezhnev and his colleagues musi soon make some hard choices regarding resource allocation. Fundamental policy decisions must be made over the next year as the economic plans being formulated and as measures looking0 are approved. These decisions are further complicated by Ihe necessity to consider the needs and potential of the East European client states, whose dependence on the USSR for energy and other raw materials is likely io increase in. The leaders must also lake account of the future

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trade-offs in allocating smaller est- increments among consumption, investment, and defense:

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Because of resource constraints on both Eastern Europe and the USSR. Moscow cannot do more to helpurope without seriously hurling its own economic interests, while to do lets might well endanger political stability there.

From Ihe standpoint of economic trade-offs, the importance of arms limitation agreements Mich as salt ll is noi in immediate savings, which arc small relative to total mililary spending, hut in future cost avoidanccHH

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the present stale of ihe economy. Soviet leaders may see their economic and mililary aspirations bcsi servedolicy of increasing commercial relations with the West and encouraging an influx of Western machinery and technology. Because of the prospective decline in Soviet oil production, the impetus to obtain assistance in energy exploration and development will be especially mm^I

In approaching ihe Summit, the Soviet leadership would undoubtedly like loS-Soviet dialogue leadingredictable, sustained, and growing economic relationship Although the USSR can find most of ihe equipment, technology, and credits il needs in Western Europe and Japan. Soviet policymakers slill have high regard for US technology and believe thai ihe LS:market has the potential to absorb substantia! amounts or Soviet expomi^l

Soviet leaders would like lo be able lo count on the participation of the US private sector as they formulaic economic plansnd beyond; they believe such participation couldifference in how the USSR copes with its economic problems in.inimum. Ihe USSR would like assurances thai it can count on substantial US Government-backed financing over (he next few years. This means repeal (or waiver) of the Jackson-Vanik and Stevenson Amendments. In addition, the Sovieis might possibly ask the United Stales lo raiseillion-ton ceiling on ihe amount of US grain ihey can purchase underthe Long Term Agreement without further US Government approvalM

We do not believe, however, thai economic difficulties will force Soviet leaders to make significant coo cessions in areas ihey consider centra! lo the USSR's economic, political, and military security interests, or to its global

hey probably feel that they have substantial capacity toleverage in the economic sphere and that this capacity will permitminimize any non economic concessions they might have to makereater access to US technology, goods, and credit. They think, not

reason, that they can count on considerable pressure from US

business circleselaxation of trade restraints. And they observe that Congress and the administration now appear activetyintercsled in resolving the issues of most-favored-nation status and credils.M

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In It

The Suvici Economy on the Eve of the

Shon Run

Longer Term

Economic Policy

Impact of Economic Problems on Arms Limitation and Soviet Defense Spending 4

The Soviet Atlitude Toward Defense"

Momentum of the Soviel Arms

Economic Problems and Defense

Impact of Economic Problems on Trade with Ihe

Soviet Inlernaiional Financial

ImportanccofTradcandCrcditsinthc

Role of Ihe United

Impacl of Economic Problems on Sovici Foreign

Eastern"f"

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The Economy and ihe

What Ihc Soviets

What Ihe Soviets Will

Tabic*

USSR: Average Annual Rates of Growth in Inpuls. GNP, and Factor Productivity

USSR: Disiribuiion of Orders for Wesiern Machinery and Equipmeni

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Vienna the Soviel Union's economic problems will probably loom larger lh.in they have at previous summit meetings. This memorandum reviews the USSR's economic situation and discusses thcimpact that deteriorating economic prospects havemightSoviet defense spending. Sovietrelations with the West, and Soviet foreign policy. Finally, the memorandum suggests how cco-sues mighi figure in this month's Summit

Tfce Soviet Economy on the Kit of Ihe Summit

The long-term outlook for the Soviet economy remains bleak, and the disappointing performance over Ibe last si* months has further driven home lo the leadership the fact that rising resource costs, impending energy and labor shortages, and sluggish productivity cannot be overcome easily or soon. The winterearly broughi economic growth loa standstill, raising demand for energy while ai the same lime making energy and other raw materials more difficult lo produce and distribute. The resulting disruptions to industrial produclion and high-priority investment projects will befell throughout ihe rest of ihis

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Industry Stagnates. Coming on the heelsery poor performance duringproduction during9 increased by lessercent over the first quarterroduction of key- including steel,nonferrousineral fertilizers, and pesticides dropped well below last year's firsl Quarter levels. Average daily oil production during January-March fell below that of ihe preceding quarter for (he first time inWW

These first-quarler shortfalls were caused in large part by Ihe unusual severity of ihe past winter. Bad weather west of the Urals increased the demand for fuel and hindered transportation of raw materials. Reduced fuel supplies interrupted industrial production;and commercial heat and power were cul back in some areas, The Soviet economy apparently began the winter with low fuel stocksesult of produclion shortfalls in the oil and coal ministries. Fuel shortages will nol be eliminated with the advent of warmer

weather, however. Rationing and conservation will

have to continue to rebuild slocks for next winter.|

Poor industrial performance9 will impede the investment programs thai underlie Moscow's efforts to turn the economy around. Investment growth may fall below plan9 because of shortfalls in construction materials, machinery, and ferrous metals. This, in turn, will hinder efforts lo accelerate additions of new industrial capacity, setting back Moscow's program to modernize the economy's stock of plant and cquip-

Agriculfure Look* Bad. Weather has also taken its loll on the farm sector. After fall-town grain suffered above average winterecent droughtby high winds in the southern pan of European Russia has reduced the potential Soviet gram harvest toillion tons. If average weatherprevail for Ihe balance of Ihe season, the crop could fallillion lornropillion tonsleave the Soviets roughlyillion tons snort of domestic requirements for grain in the coming marketing. Although part ofhortfall could be offset by drawing downarge increase in grain imports fromrmllion-lon average of the past three years would beill

Longer Term Outlook

Wniie iheerm outlook Tor ihe economy itonger icrm prospects arc worse. Our forecasts on energy production seem to be holding true. The USSR's oil industry is likefy too-growth stageollowed by steady production declines in tbeest Siberia, which accounted for more lhan two-fifths of Soviet oil productions the key to oil prospects for the foreseeable future because rising output in this region is currently offsetting progressively steep declines in the remainder of the USSR We believe thatoderate decline in West Siberian production would leadharp drop in national product

West Siberia, however, faces serious difficultiesrobable decline in output in theas come primarily fromarge oilfields, but the Soviets predict that0 half of these fields, will be in decline, the rest producing at their maximum level. Growth from many smaller, less productive, and more remoie fields will be required to offset these declines and provide any growth0 Yet, theof these fields is lagging behind plan because of acute transportation bottlenecks, soaring drillingand failure to provide the necessary equipment and infrastructure (roads, pipeline, electric power, androwth from these smaller fields probably will be insufficient to offset declines in Ihe larger fields. Especially significant is the anticipated drop in oil produciion at the supcrgiant Samotlor oilfieldhis field currently accounts for more than half of West Siberian oil production and one-fourth of total Soviet output^

Soviet officials also acknowledge the challenge to policy implicit in the adverse demographic trends expected in. The natural increase in the workmg-agc population will drop off toer year by theoreover, from now until the, increments to the labor force will come almost exclusively from the less-skilled and less-mobile Turkic populations of Central Asia and the Transcaucus republics ^(

Forced migration of labor from the Turkic republics of Central Asia to the labor-short areas of Siberia and the western USSR isractical option.umber of reasons, the Turkic population is probably unwilling to move in sufficient numbers, and the "boat" Slavic population would not welcome such migration. First, the orientation of these people toward irrigation agriculture, warm climates, and large familiesjgga unlikely thai Ihey could adapt readily to the living i|<jjyfj conditions and vocational demands in either the |y( European or Siberian regions of the country. Second, accommodations for immigrants are badlyparticularly in Siberia but also in the western USSR. Housing would be particularly troublesomeotential source of friction between the Slavicand the newcomers, since il is already in short supply and generally not sailed to large families. Finally, differences in language, culture, andwould be an impediment toj

Thus, the critical policy issue will be theinvestment resourcesentralmost of the growth in labor will occur.where the infrastructure and industrialneeded to exploit energy and other rawsorely lacking,he European USSR,short of labor, raw materials, and energy, butcan be carried out more cheaplyand expanding existing facilitiesbuilding new plants. In any case. CentralSiberian development will preempt an increasingof total investment, while the growth of total continues lo dec!

The immediate development of Siberian energymaterial sources is essential. But extractingSiberian resources, as well asto urban-industrial regions in theis extremely costly, andsomenot technically feasible. For example, thefor long-disiance transmission of large amouniselectric power from Siberia is still at leastawaymi

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Meanwhile agricultureajor economic IUI headache for the Soviet leadership. Although Soviet farm production has climbed well above the level of a

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fluo. neverc shortages of meat and quality food persist. Some of the rise in farm outputassive infusion of investment, but relatively good weather has been responsible for roughly half of the increase in grain production between ihend Ihe. This situation could change inf weather conditions become morethatjs. harsher. While the outlook for agricultural production is uncertain at best, consumer incomes and expetiaiions will continue to rise and with them the demand for more and better quality food. Sovici leaders will probably have to continue buying large quantities of grain and other agricultural products. |

The impact of impending resource constraints on the USSR's economic growth cannot be softened unless tbe Soviets are more successful in using labor, capital, and natural resources more efficiently than in the past Soviet development it distinguished from thai of other modern industrial nations in its failure toajor share of its economic growth through increased efficiency Now, however, the policy of (extensive) growth based on abundant resources must give way to one of (intensive) growth based largely onprogress. I

Although the leadership recognizes (he need for change, the Soviel system is not designed to make this transition easily. The foundations of the systemdirective planning, central allocation of resources, administratively set prices, and incentives oriented toward quantitative productionand encourage redundancy and waste in ihe use of resources. Thus, the productivity gainv from additional labor and capital arc low and have slumped innd planned improvemenls have not occurred. Rising costs of extracting,and delivering raw maierials. together with slower growth of fiicd capitalebound in productivity unlikely under the present system. |

As for reforming the existing managerial andarrangements. Soviet leaders have beento make radical changes in an orginiunonal structure which centralizes decisionmaking at the highest levels and stifles the initiative and managerial flexibility required by enterprise managersodern complex economy. Instead. Ihe leadership believes it can alleviate the system-based barriers to innovation

Table 1

Annual Rales

Of Growth in Inputs,

CMP. and Factor Productivity

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efficacy without jeopardizing strong central control. Wc do not think half-hcaried reforms will be any more successful in generating technical progress and production efficiency than ihey have in the past. On balance, we expect growth in gross national product (gnh) toercent per year for ihc next few years and then dropping to little moreercent in theecause of increasing energy and manpower coast rairt

Economic Policy Choices

Faced wiih these prospects. President Brezhnev and his colleagues must come to grips with hard choices over resource allocation in the very near future.policy decisions must be taken over the next year as the economic plans being formulated and as measures looking forward0 are approved. These decisions are further complicated by theto consider the future needs and potential ofst European client states, whose dependence on the USSR for energy and other raw materials is likely to increase in

In reaching decisions about. Soviet leaders will be under greater pressure than ever before to reconcile national objectives and economic consiraints. President Brezhnev has publicly hinted that aimprovement in consumer welfare is notrecondition for raising labor productivity but is also related io the maintenance of political stability. This view is implicitly challenged by other leaders who urge that less emphasis be placed on material rewards and more on discipline and self-sacrifice

Here. the debate carries over into the issue ofthe high rate of investment in agriculture long championed by Presidentercent of total investment in the current five-yearemands for greater investment in heavy industry, which inyears could be viewed as an expression of the parochial interest of dominant elements of the party-economic bureaucracy, arc now justified by (he real need to speed capital renewal in such lagging key sectors as the steel and machine-tool industries.H

A new factor that is likely to Intensify political conflict is the rapidly escalating cost of extraction andOf fuel and raw materials.f the planned incrementillion rubles to total capital investment,illion rubles have been allocated to energy, while almost all the rest is going to agriculture. This remarkable retardation of investment growth inhighof the economy probably foreshadows painful adjustments in (he overall pattern of resource allocation

So far there is no evidence that the Soviet leadership has settledong-term strategy for coping with its economic dilemmas. Instead, it has been temporizing on policy decisions; reacting rather than redressing. Arguments over allocation decisions and management of the economy reveal conflicting claims and divided advice at tbe middle levels of government, and caution verging on immobility in the Politbunt.H

Impact of Economic Problems on Arms Limitation and Soviet Defense Spending

The Sotirt Attitude Toward Defense Spending

President Bre/hncv and Premier Kosygin havealluded to the weight of the arms Burden on the economy, and the Soviets obviously recognize (hat high levels of defense spending impose serious economicin investment, but also in consumption. Although Brezhnev is likely to deplore these costs at the Summit, the perceived benefits derived from military spending have made Soviet leaders less resentful than wc arc of high defense budgets and more willing so far to make the economic tradeoff They accept the economic sacrifice because they believe it does in fact enhance Soviet military security^

economic costs and political benefits of continuing growth in military spccdin^BB

They also accept it because making substantialgains against the United Statesoundation for demanding acceptance of all the other claims of superpower status and for projecting Soviet influence across the globe They realize that the Sovietolereat power has its origin far more inht than in economic efficiency or in the attractiveness of the Soviet political modelthe deteriorating economic situation could well lead the Politburo toew balance between ja$a

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Momentum of the Soviet Arms Buildup If the Soviets follow through fully on programs now in train, overallocontinue toaleercent annually through the earlyifs*lt ii enters into force.esult, growth in defense spending would exceed growth in cnpualitative factors alone will tend to push up Soviet defense spending inhe requirement for high-technology solutions to current force deficiencies and future US threats. High-technology weapons systems projected forill be particularly costly. Advanced aerodynamic weapons, high-technologyradars, submarine detection andadvanced nuclear weaponswill accountarge share of procurement expenditures. Thesewithrapid growth in research, development, testing, andshape the trend of total defense expenditures. BJ

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Economic Problems and Defense Spending Decisions regarding military programs no* in train were reached some time ago and probably would be altered only at theby stretching out and some selecijve pruning if mounting economic pressures forced action on this front. However,made from now on, which will affect resource allocations for defense in the, may

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greater concern for the military drain on the economy:

We expect the leadership to recognize increasingly that the slowdown in economic growth cannot be reversed by administrative measures or superficial reforms; resource reallocation will thus become more templing.

The manpower and energy shortages are likely to worsen during, so restraints on mililary spending that take holdould betractive.

The Sovietstrong interest in avoiding an acceleration in mililaryin new and sophisticated weapon systems where they may have difficulty competing and where the costs to them arc probably significantly higher than to us.

At the sameeduction in the growth of defense spending would notorresponding reduction in the growth of mililary power. The present level of investment in military hardware is so high (hateducedindeed, with no growth atforce modernization would continue at an impressive

From the economic standpoint, the importance of sait it to the Soviets therefore lies not in immediate savings, which are small in relation to the total level of military spending, but in ihe avoidance of future costs, which Salt ii makes politically conceivable. Ratification of the salt ii Treaty by the US Senate would make it easier for those Soviet leaders inclined to do so to argue that the danger from the West has slackened and that more resources can be directed lo meet civilian economic needs. Such an argument would also come into play in justifying further arms limitationexample Salt hi or Mutual and Balanced Forcebi rI

salt ii and followup arms talks would alsoolitical basis forexpansion of trade lies with the West. Given the present state of (he economy, Sovie( leaders may see their economic and military aspirations best servedolicy of increasing commercial relations with the West and encouraging an influx of Western machinery and technology. Advanced Western equipment and

technology imporied by Ihe USSR often has both civilian and military-related applications,reater flow of such technology inevitably helps mililary-relaicd production; it already touches sensitive areas in computer technology and

Warmer relations, especially with the US. would also encourage the West to grant more credits on better terms to the USSR in, when wc expect an economic crunch.ime, such credits wouldelcome inflow of resources, which, however, would have to be repaid by an excess of Soviet exports overin(

Impact of Economic Problems on Trade with tbe West

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In Ihe. the Sovietwith rising hard currency debt, difficulties inWestern technology, and perhaps some domestic opposition to squandering the national patrimony- -seems to haveore cau(ious attitude toward commercial relations with (he West. It has learned that, even under detente. Western governments cannol commit the private sectors of their economies to increased trade with the USSR. In addition, the cyclical behavior of Western markets has made export planning difficult, and Soviet manufactured goods have made little headway in these markets. The conservative stance on trade takenill, however, probably yield inoa policy of exploiting East-West trade for all possible help in surmounting domestic economic problems.

Sotiel International Financial Position Alter running large trade and current account deficits5he Sovic( Government took steps to restrain the growth of its hard currency debt. The USSR substantially improved its current account position78 by expanding exports and gold sales and limiting import growth. Its strong payments position should be maintainedue to the turnaround in the current account balance, net debt has grown by slightly less thanillion in the last two years after increasing2 billion1 billion36

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ihe next few years, ihc USSR should have liulc difficulty borrowing in the Weal if it chooses to do so. Bankers and governments consider the Sovietood credit risk, and bank liquidity is high. As domestic oil production tails off. however, oil exports for hard currency are likely to fall as Moscow balances the requirements of Eastern Europe against the growing needs of the Soviet economy. We believe ihat the USSR mayjiavc to import Western oilet basis by thehift that will limit Moscow's capacityuy grain and import Wesiern machinery and technology. Maintenance and expansion of Soviet trade wiih the developed West will depend increasingly on (I) its success in negotiating compensationwith Western firms so as to assure an expansion of exportsts willingness and ability to increase markedly Soviet medium- and long-term debt to the

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Importance of Trade and Credits inhe expected economic slowdown and the energy situation make commercial and scientific relations with the Wcsl all ihe more valuable lo the USSR. First of all, the USSR will need imports from the West to deal with particular domestic shortfalls:

The leadership's policy of improving the consumer diet is expected to require betweenillion andillion tons of imported grain annually for Ihe nexl several years.

Wc do nol expect Ihc Soviets lo overcome rapidly Ihe difficulties in steel production thai have led to large purchases of Western steel products in recenl years. In particular, planned Sovici natural gas and oil pipeline construction will require substantial imports oflarge-diameter pipe.

, Ihc USSR probably will have to spend hard currency to import oil. |

Because of the prospective decline in Soviel oil production, the impetus to obtain assistance in energy exploration and development will be especially strong. The Soviet petroleum equipmeni industry has serious technological shortcomings. Moscow consequently has lurncd io the West,8 billion worth of oil and gas equipment and technology. The largestlo West Germany

in6 for compressor stations for the Orenburg pipeline; Ihe largesl Order from the US8 million contract awarded to Dresser Industries in8 for modernization and expansion of the Kuybyshev rock bit plant. The remaining orders ranged from submersible pumps and equipmeni for lifting and delivering natural gas to modern equipment for exploratory drilling, enhanced recovery, andoperations

If Ihe USSR is to reverse its oil fortunes by the, however, it must broaden the scope of its technology purchases and do so quickly.ule, uil discovered today will not be produced until five lo eight years hence. The technology transfers that ihe Soviet petroleum industry now needs involve large-scale,n tensive projects with long leadtimes. For example, the USSR must begin to convert ils rig park from turbo to roiary drilling since il must drill deeper and begin exploring more difficult geologic formations in the hostile environment of East Siberia, and il must begin lo explore and develop deep basins in the Caspian and Black Seas and in offshore Arctic waters. For the next few years at least, Ihe USSR will not have the know-how or equipmeni io carry out theseaciivi-ties without Western help and technology H

While energy-rclalcd technology probably will be given priority in Soviel foreign trade plans, the declining growth of cnp will underline to thethe importance of boosting productivityihe economy. Modernization ofthe economy in turn depends in part on obtaining Western technology and equipmeniroad range of sectors. But Soviet imports will be held down by ihe corrpeuibn with oil and grain for available hard currency H

Role ofthe United States

Although the USSR can find most of the equipment, technology and credits that il needs in Western Europe and Japan. Soviet policymakers stilligh regard for US technology and believe that the US market has the potential io absorb substantial amounts of Soviet exports. Moscow seeks, above all, loustained and secure trading relationship with the USby unhampered access to long-term govcrn-

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USSR views US participation in Soviel projects as highly desirable for several reasons. US firms are often uniquely suited to provide the technology, equipment and services needed for the large projects envisioned by the USSR. This is particularly true in energyand development. At the momeni only the USompletely integrated petroleum industry that can provide Ihe necessary engineering know-how.equipment, services, and. perhaps mostcapital to putomplete technology packagecale beneficial the Soviet petroleum industry!!

Given current Soviet economic and energy problems. Moscow may well view this as an opportune timeroad technical assistance program beiween ihe US and the USSR in which US firms would become more aciively involved in Soviet oil exploration andand other large-scale energy development projects. US firms for their part arc likely to become increasingly interested in sucjirarticipalion as the world oil supplies tighten I

In recent years trade with the US has been restricted by the lack of Exim Bank financing and the reluctance of the USSR toroad trade expansion in what it considers lo be an unfavorable political climate. The8 decisionontrol exports of petroleum equipment probably added to this rcli.ci.mci-.ij

Because of technological superiorly. US firms have, nonetheless, enjoyed some success in winning Soviet contracts and will continue to do so, even in the absenceovernment-to-govcrnmcnt framework for US-Sovict tradeoviet buyers have sought US bids on technology and equipment knowing that Exim Bank credits would not be available. Western Europe and Japan will probably continue to capture the lion's share of Soviet contracts, but US firms will stillespectable portion of (I) contracts for oil and gas equipmenthe technology portion of contracts for many other sectors

Impact of Economic Problems on Soviel Foreign Policy Eastern Europe

Soviet foreign policy toward Eastern Europe mustareful balance belween helping political and military allies and reaping the economic benefils of trade. Because of resource consiraints"wi(hin both Eastern Europe and the USSR, Moscow cannot do more lo help Eastern Europe without seriously hurting its own economic interests. But to do less for hastcrn Europe might well endanger political stability in these countries JJJI

Under Soviel direction, cciMa (ihe Council Tor Mutual Economic Assistance) is now elaborating five long-term multilateral target program* in the fields of energy and rawgriculture, machineconsumer goods, and transportation that will maintain East European investment in andupon the Soviet Union, but will at the same lime limit Sovici leeway in satisfying or not satisfying East European requirements The long-term target program for energy and raw materials does not deal, however, with Soviet oil deliveries, which are negotiatedtrictly bilateral baiis.H

The Soviet Union is meeting lis commitments for delivery of energy to Eastern Europerotocols. The Soviet-supplied share of tola! East European energy consumption has continued lo rise, althoughlower pace ihun, mainly becauselowdown in the growth of Soviet oil9 percent annuallyomparedear. Fast European countries have been under pressure to increase their imports of one oil in recent years, but because of the sharp rise in oil prices and East European lack of hard currency they have not been able lo buy enough to reduce the drain on Soviel tupplicsH

Responding to (he increases in world oil prices, the Soviets have raised oil prices to Eastern Europe annually5 and8 were chargingercent ofthe price for benchmark Crude landed in Rotterdam. These deliveries were paid for with East Europeanor supplies greater than those specified in their (rude agreements. East European countries either pay in hard currency, invest further in Soviel resource development, or supply goods that the USSR would have lo buy in the West for hard currency. Limited East European availability of exportable goods and hard currency severelythese options, however. To help ease the financial burden of the higher prices. Moscow has permittee tbe East Europeans to run huge deficits in their bilateralpractice the USSR is trying to bring to an end (chart 6)

East European couniries are already experiencing varying degrees of consumer dissatisfaction, however, and itelicate question how hard the Soviets can squeeze economic growth in this region without

provoking serious internal unresl. To avoid political instability in (he region, Moscow may have lo revise its plan toid on energy deliveries. Bul any likely Increase in Soviel deliveries above prujccicd levels will still leave the East Europeans in the position of having lo buy more opfc oil. Under the circumstances, Moscow cannot easilyutback in East European economic relations with tbe West. In faci. the USSR might welcome an expansion of these tieseans of increasing East European hard currency exports and access to Western credits to pay for opcc oil|

The Soviet objective here would be to facilitate East-West lies that (I) do not jeopardize the solvency or credit-worthiness ofor individualo not significantly weaken Soviet control over the bloc. In this respect, having their cake and catmg it loo has been an objective of Ihe Soviets inmv negotiations with ihc Common Market and in the discussion of Brezhnev's proposals for conferences on energy, pollution, and transportation in the UN Economic Commission for Europe. Conceivably, the Soviets might use (he SummitOK un occasion to prod the US on these

The Third World

Economic problems at home have not dampened Soviet enthusiasm for involvement in the Middle Fast. Africa, and elsewhere in the Third World. Since Lenin's time, the lets developed countries have been considered to be the soft underbelly of the capitalist West, and this traditional perspective has probably been strengthened by events) Moreover.asa great power, the USSR considers thai itight to extend its influence worldwide and especially in contiguous areas such at the Middle

Although the Soviets have multiple interests inthe Middle East, one of ihem unquestionably is access for themselves and their East European clients to Middle Eastern oil. They have pursued Ihis objective on the economic plane by providing development assistance (hoping, in part, to barter Sovici manufactures and technology forut their key oil-earning export to the region has been armaments. As Soviet oil produc-

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peaks in the near future, maintaining Soviet and East European arms sales in the Middle East will increasingly be directly linked with satisfying critical ccma oil I

generating US business support for the granting of most-favored-nation status, removal of restrictions on Exim Bank credits to the USSR, and relaxation of export controls!

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The USSRnotedthe West asa source of advanced technologyource of commodities to make up for shortfalls in domestic production. Despite recent disappointmentthe benefits achieved, tbe Soviets continue to believe that Western technology and equipment help to raise productivity, the tine qua non for boosting currently lagging economic growth |

Always ready loirtue out of necessity, the USSR has capitalized on Ihe desire of developed Western countries to obtain Soviet business. The USSR has demanded and obtained Westernlong-term credits Also in response to Sovietumber of Western governments have agreed to conclude or renew loot-term trade and cooperation agreements Kosygin said ath Party Congress that "our trade and economic lies will develop faster with countries thaiincere willingness for cooperation and concern for ensuring normal and cquilablc conditions for its development."

The USSR likes ihese agreements because they provide governmental support for Soviet efforts to obtain Western technology and equipment. Thefeel that formal government-to-government agreements reassure and thereby encourageprivaic firms jn their negotiations with the Soviets H

Soviet parly iusc of the bad stale of ihe Soviet economy, more attention must be paid lo the economy in the future and Soviet foreign policy must be used in support of internal economic development. The USSR, of course, has frequently sought lo manipulate foreign interest groups to support Sonet commercial goals. Their recent easing of emigration policy is intended to obtain relief from Jackson-Vanik as well as to promote sai Til They have used the export orientation of American farmers lo fend off Ihe use of leverage by the US in supplying grain to the Soviets. They have also been effective in

The leoitornv mid the Summit

The Soviet leadership is concerned about the economic dilemmas thai confront the USSR, worried about Ihe potential for economically generated political unrest in Eastern Europe, and interested in measures lhai would help alleviate economic pressures without jeopardizing the tenure of office of the present gerontocracy or weakening political controls. At the same time,ihe leadership is interested in actively projecting Soviet powerwhich il sees possible economic as well as other gains. Unhappy wilh Jackson-Vanik and irritated by impediments to trade with the US. Brezhnev probably comes to Vienna with expectations of likely economic gains that are more modest lhan those be harbored at23 summits, although be conceivably might conjure up vistasajor breakthrough in trade between the world's two industrial superpowers based on credits and compensation dcalsfl

What the Soviets Want

General Objectitr. In approaching the Summit, the leadership would undoubtedly like toositive dialogue with the US Government that over time would leadredictable, sustained, and growing economic relationship It would like to be able to count on the participation of tbe US private sector as it formulates its economic plansnd beyond, it believes such participation couldifference in how the USSR copes wlih its economic problems in

Repeal of Jackson-Vanik and Granting ofSuhu. Repeal of Jackson-Vanik is. in tbe firstolitical issue from President Brezhnev's standpoint:t stake isemeaning intrusion thatarticularly sensitive instrument of Soviet political control.lso, now. the issue of the relative status of the USSR us most-favorcd-nationis Chi na H

In economic Icrms. the most immediate hoped-fora repeal (or waiver) of Jackson-Vanik wouldto government-backed credits Passage ofAmendment to Exim-Bank legislationcredits to the USSRear andover four years (without Congressional ap-

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SYrt proval) wa* probably esen more important than the Jackson-Vanik Amendment in leading the Soviets in5 to disavow the trade agreement reached with the Nixon administration. Moscow could hope for large-scale credits only if restrict ionsofthe Stevenson Amendment arc cased substantially^

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Although the Soviets realize most-favored-nationb unlikely to lead to any short-term direct economic gain, Moscow undoubtedly hopes it would improve the long-term prospects for manufactured good* exports to the Uniied States. It would, however,ecade at least for the USSR loignificant US demand for Soviel products currentlyn affected by ihc higher duties. In the end, Soviet

inability to produce competitive manufactured goods and the likelihood ofdumping charges cloud its ultimate ability to take real advantage of most-favored-nation status. Indirectly, (he receipt of most-favored-nation status would be valuable to the extern that it signifies aa improved economic climate and encourages US firms to enter into negotiations with the US8RH

Credits.inimum, the USSR would like asssurancc* th.ii it can count on substantial US government-backed financing over the next five years. Currently. Western credit lines which have been nude available lo Ihc USSR are underutilized; theof US credits would thus not necessarily leadise in overall Soviet purchases under credits but would enable the USSR todiverisome of its purchases to the United Slates Moscow would like to include more US corporations among the firms it selects to bid on Soviet project

A Trade Agreement. According lo the Trade Actrade agreement must be signed before most-fa vorcd-nalion status may be extended to any given country. Consequently the Soviets would almostlike to conclude an updated version of2 trade pact, whichathe most-favored-nation and credit issue

A long-Term Cooperation Agreement. The Soviets would probably like to set the groundworkore comprehensive US Government involvement in trade issues. Aside from obtaining Credits and most-fjvorcd-ution status. Moscow would probably like lo conclude an overall cecperation agreement similar to the trade and cooperation pacts it has signed elsewhere in the West.act would demonstrate the positive intent of the US Government to encourage trade wiih the USSR and might lead to more positivewithin the US private sector, increasing its willingness to bid on Soviet deals and enter long-term agreements with Moscow, with or without equity participation Pa^H

Renewed Grain Agreement. If grain issues are not resolved in the bilateral talks on this subject scheduled at the end of May in Moscow, the lopic might arise at tbe Summil. The Soviets possibly might ask Ihe US io raiseillion-ton ceiling on the amount of US grain they can purchase under the Long Term Agreement without further US Government approval, although Ihey realize thatove would probably elicil renewed demands from the US side for more adequate crop data |

Technology Transfer. President Brezhnev might stress the importance for detente of continuation of the bilateral exchanges on science and technology. The major issue outstanding at the moment Is renewal of the energy agreement, which comes up for resolutionoint Commission meeting in June. The US hashree-year renewal, while the Sovietsull five-year term Tbe access to US work in the energy field provided by the agreement is highly-valued by Soviet scientific leaders and energyalthough the Soviet side has persistently avoided living up to its commitment under the original agreement lo provide the projections of Sovici energy production thai wouldealfrom our Standpoint

Restraint in Military Spending. President Bre/hnev is likely to take an upbcai position on future arms limitation measures because of concern over US advances in military technologyesire to restrain nato modernization. Economic constraints willadded impetus for expediting ongoing jnm negotiations or speeding up salt

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rs iii

the Soviets Will Pay

At the present, economic difficulties will not force the Soviet leaders to make significant concessions to the Uniied Slates in areas considered by them to be central to theconomic, political, and military security interests, or to its global great-powerThe debate on the Soviet side is likely to be over concessions at the margin. Here it is probable thai the

Perceptions of Leverage. The Soviets probably fee! that theyubstantial capacity lo resist US leverage in the economic sphere and lhat this capacity will permit them to minimize any noneconomicwc might seek at Vienna in return for greater access to US technology, goods, and credits. They think, with justification, lhat their importthe exception of grain and to some extent petroleumif necessary, be largely satisfied outside the United Stales. In this respect they see themselves having gained ground, when, in all probability, they felt US participation was crucial lo their foreign trade aspirations. Theirof playing one Western country againsi the olher in the trade sphere has been quite successful, and they will continue iih

The Soviets also see certain political forces within the US working in their favor. They arc fully aware of the obstacles thai constrain US manipulation of grain exports for political ends. They think, not without reason, lhat they can count on considerable pressure from US business circleselaxation of trade restraints. And in Washington they observe that Congress and the administration now appear actively inlercstcd in resolving the issues of most favored nation and credit

"Good Behavior- in the Third World. On the basis of experience to date, Ihc Soviets have no good reason to believe that what they do in Africa, the Middle East.or elsewhere in the Third World significantly affects their economic relations with Western industrializedother than the US. and they must seriously doubt whether it even has any lasting impact on eeoriomic tics with tbe US. The Soviets count upon the need of Western countries for their business, and competition among these countries, to counter any tendency toward collective Western attempts to use trade to inhibit an aggressive Soviet foreign policy in Third World countries. What inhibitions there may be in promoting Soviel objectives in these regions arise more from political and military than

Human Rights. The USSR's behavior since ihendicates that the Soviet leadership will make certain concessions with regard to emigration in the hope of promoting Irade. Soviet willingness to make meaningful concessions in other human rights areas, which impinge even more seriously on domeslic political controls, has been minimal. The hope of improving the atmosphere for Salt ii passage is one factor explaining Ihe Soviet policy decision in recent months toignificantly larger number of Jews lo emigrate; but Ihe desire to smooth Ihc way for improved trade relations is also importanl|

j cmigrati

President Brezhnev doubtless expects the US to regard the present high rates of Jewish emigration asa gesture designed to open Ihe way for improved trade and commercial relations. However, the Soviets,ariety of ways, have strongly indicated Ihcirlo link explicitly trade and emigration. State Bank Chairman Alkbimov and Deputy Minister of Foreign Trade Vladimir Sushkov have recentlyhowever, lhat President Brezhnev might be agreeable to an approach lhat discussed emigration and trade in separate pans of the agenda

They seemed lo suggest that President Carter could raise the emigration issue in the contextuestion about Soviet views on implementation ofthe Helsinki accords, which would give President Brezhnev an

opening lo observe lhat Soviet emigration policy was in line with Helsinki, that large numbers of people were current I) emigrating, and thai ibis level of emigration would be maintained in the future provided that there were sufficient applicant lo maintain Ihe (low. This Soviet formula would seem designed to provide the assurance President Carter needed, without aunacceptable explicit obligation on the Soviet side. Following such an exchange, the trade issue could be treated completely on its own. wilh no reference to cmigrationH

Theprobably would not denounce afinding that ihey are in compliance with Jackson-Vanik, if this finding and Congressional action on it are presented in temperate terms and as discretely asin tandem with authorization of most-favored-nation status for China.aiver or repeal of Jackson-Vgnik were not forthcoming or were not followed by guaranteed large and continuing credits, then the incentive to permit continued large-scale emigration would be reduced. Granting most-favored-nalion statushina but not the USSR would reinforce Ihe Soviet's worst suspicions of the United States and possiblyorcefuland demonstrate cutbacks of contracts wherever possibi c. f

ncessioas. President Brezhnev will almost certainly dwell upon the bright prospects for compensation deals and is unlikely to raise the question of forms of US participation inside the USSR lhat involve equity, production sharing, or even quality

control. However, what he would say if pressed on these issues is uncertain. Lenin himself encouraged concessionary deals when the young Soviet economy was in serious trouble, and there were many of them. Poland and Hungary (not lo mention Romania and Yugoslavia) today permit equity partici-pation in their economics by Wesicrn firms, such as Volvo inwith SovietMore flexibility in Ihis matter could be very beneficial to the Soviets, especially in offshore oil exploration and development and in the energy field in general There is strong evidence that some Soviet official* wouldofter line here, although the issue is controversial H

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