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Office of Economic Research
USSr.i Balance of Payments
Thc USSR currentlyavorable balance of payments position; hard currency stringencies should not be countedactor behind the downturn in Soviet orders from the West. We currently estimate that the USSR willeficit of roughlyillion in its hard currency trade this year, up from2 billion deficit registered7 but well below the record deficits. Moscow should be able to keep its current account deficit to under SI billion for the second year running and is expected toizeable albeit diminished surplus in its capital account.
Several factors aupport our estimateavorable short-term balance of payments position.
- The USSR has increased its assets in Western banks; at tha and of March they stoodbillion* (
- The bullish gold market has allowed the USSR to sell record amounts of gold this year and we anticipate that sales8 will exceedillion.
- Prospectsecord grain harvest indicate that Soviet demand for Western
grain will be lower than last year. (
is currently in the process ofajor share of its outstanding medium-term Eurocurrency syndications.
nown prepayments0 million. It is unlike Is1 that Mot. cow will attempt to
i ! refinance the entire amount'of prepayments.
Despite an improved balance of payments the USSR has continued toeduced level of equipment orders in
the West. Zn our opinion the USSR could easily affordequipment imports, particularly if orders werefirms in Western Europe or Japan wherelong-term credit remains readily available. influencing the downturn in orders include:
decision to slow the pace of new orders until plant and equipment already delivered or on order has been installed, [
! - ecision to slow orders in view of less
than satisfactory performance of equipment
awareness of the potential problem ofrowing debt inhen export earnings from oil are questionable, and/or :i
tightening of the pursestrings by the
State in order to better regulate
the outflow of foreign exchange.
Soviet Exports Soviet Imports
i >| 1
V. Official USSR trade data. 2. January-June data.
USSR: Grain Production and8
Grain Production^ (July-June)
Imports (Calendar Year)
Non-Feed (wheat &
Feed (corn, oats,
Soviet Foreign Trade Handbook.
using both Western and Soviet trade data,
USSRi DRIVE FOR COMPENSATION AGREEMENTS WITH WEST *
In an effort to ensure long-term hard currency famines, tin- USSR is placi.it: Increased emphasis on compcnvilion agreements with Western firms. &oort earninc*nder the morfgreements signed to date far exceed in value ihe JS billion worth of agreement-related Imports from the West; annual earnlnrs willl? nearlyilliono and will soften the Impact on Soviet foreign trade of llic expected fall-off in oil exports. Despite the intense Soviet Interest in cnmpcrrtulM.iiultitude of problems have slowed the pace of newthr Ineptness of the Soviet bureaucracy and the Inadequacy of Soviet support facilities In handling compensation agreements and the difficulties of absorbing large flows of basic Soviet industilal products in already overcrowded world markets.
. CompensationprotluV forSoviet Imports ofgood's un credit andSoviet exports to the Westortion ofThait b> ihr Oilm ol EcantaucUM Thr
l it- o
production from the imported equipment to repayn ihv L'SSK.are an tfvimoinie.il way to obtain modrrii
eiiui: tM-u: exports will :>
mr Urr*-iirf> tof tie uuipiilj> LAlxurii. j
' li-ii i
H.rd Cmrrney Cuaiptnulkon Eipocl.
Companion agreements also reduce the risk associated with buying Western equipment on credit. The heavy reliance of the Soviet economy on planning makrs reduction of risk important to top Soviet managers, who have found foreign trade with the West particularly difficult to plan.or example, the Western recession practically halted the growth of Soviet hard currency exports, driving home to Moscow the dependence of Soviet exports on Western economic conditions. O'mpen* sation agreements protect Soviet industrial ministries and foreign trade organizations from developments in the West that would otherwise reduce Soviet export earnings and hard currency reserves.
Over the past decade mote thanompensation ac.reemcnts have been signed. Nearly SS billion In Western equipment will be installed In the USSR under these agreements; in turn, Soviet goodsuch larger value will be exported. The most profitable agreements for the USSR are the gai-for-plpe deals'wlth Western Europe which eall for Soviet imports of large-diameter pipe for gas lines and subsequent Soviet delivery of gas lo Western Europe for periods of up toears ami longer. These agreements will generate revenues several times greater than8 billion worth of Soviet pipe Imports.
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1 . 1 i . L (III 1 . * I (I
Agreement* and Total Soviet Exports
Earn!no from compensation deals signed thus far are expected to rise from0 million7 to nearlyillionn analysis of compensation agreements shows that revenues from the dealscosts, yielding Moscow substantial increases in import capacity in.
mp.ict of.pevted tuviiU'mil yriKiutiinn onir.oh' ut-i
.rn tn,ij'tf -i. it
vik ro>.mrtv?t-:atrcetiWIib. whilo SrvkH
learly ctmiiict] with We>lern uVin-nds for equityami.or
management control Even if agreements can he reached In principle,rimitive level of Siberian infrastructure and the difficulties involved in taking onseveral large development projects will slow the proliferation of compensation agreements.
On the Western side, companies are reluctant to accept many Soviet products. Unlikehen fuel and raw material shortages made long-term supplies of Soviet products attractive to Western firms, they now regard compemutinn agree* mentsisagreeable condition lor winning Soviet contracts. The depf-Knil West European chemical industry* is dready worried about the chemical fertilizers and petrochemicals that theill begin to export under compensationDeals involving energy suffer much less from this constraint
Despite these problems the USSR is pushing ahead In several large deals with Western firms. If negotiations can be concluded soon, the associated project* would boost Soviet raw material production and exports appreciablyeals likely in the near term Involve chemicals, wood and wood products, aluminum, and possibly naturalOver the longer term, additional compensation agreements couldiedSiberian natural gas deposits In Yakutsk andajor steel complex, copper deposits, and exploitationof offshore oil reserves.
Moscow has touted compensation acreementsew form of collaUirutlnu with the West. So far. the projects are being carried outurnkey Kims, in which tlie participation ofWestern firm is essentially completed once the equipment Is ins'alied and production is under way. The Soviets have" expressed interest in
Prose acts for Grain Ingres
Unless the USSR grain harvest is considerably largerillion tons, we expect Moscow to purchase between?ons cf foreign trainr. feVi?*J
currentlytrong short-term balance of payments position.
has delayed making its grain purchases this year. To date, confirmed purchases from all sources for delivery to the USSR during the current marketing year stand atillion tons'. Evenarge portion of theillion tons of U5 corn now recorded in the US Department of Agriculture's "unknown destination" categoryas rumored) intended for the USSR, this would still leave the Sovietsoillion tonsstimated needs.* This delay in placing orders differs from past oractice; in recent years, when the USSil has purchasedillion tors cr more of grain at leastercent of the orders have been placedctober. Possible reasons for the delay this year;
The likelihoodorldwide bumper crop allows the USSR to dalay purchases with minimal risk of being frozen out of the market. It appears that this year the Soviet Union could obtain perhapsoillion tons of grain from non-US suppliers without disrupting long-term trading patterns between these suppliers and their non-Soviet customers.
Corn prices, on the decline since June, have only recently bottomed out. Moscow may have been waiting to sea how far prices were gulng to drop before placing the bulk of Its orders.
he fiveeginning -zv'etsuy at
- By withholdingiorders. the USSR m* hop;Us bargaining:pctUiW with the US at the LTA schedilec to begin onctober Jnder
c:nsjl tionsvoUS Department of Agric-.ture for de.ivery vOSSR beginning
tha availability of non-US grain, Moscowcould keep its total purchases from the USillion tons and still import overillion tons during the marketing year. The Soviets are, we think, unlikely to pursueurchasing program. Much of the USSR's grain import demand is for corn and other coarse grains to feed livestock. Even thouyn supplies of other coarse grains (mostly barley) are readily available and far less expensive, we believe that Moscow would like to import aboutillion tons of corn, ofillion tons would have to cose from the US. Consequent).', we agree with market sources that, offered the opportunity, the Soviets would take moreillion tons of US wheat and corn.
The actual level of Soviet imports from the US, ande mix among wheat, corn, and other coarse grains of Soviet grain jimports worldwide, will likely depend upon the outcome of the LTA meetings. The availability of non-US grain could permit the Soviets toard line at these reetings, if for political reasons they should wish to do so, and in thatheir total purchases from the US would be lower than we predict.
USSR: Economic Problems and Prospects
Throughout most of tho postwar period, the Soviet
row at rates comparable to those of "Astern Europe, and considerably faster than the United States.
recently, the USSR was able to realizeobjectivesin consumption,military hardwareby mobilizing everamounts of labor and capital.
necessary resources were allocated via the
massive state planning and administrative apparatus,
which sets prices, production goals, incomenvestment, and other economic activities that are determined by market forces in Western style economies. Now, however, the! Soviet economy faces serious strains
which will slow its rate of progx'.ts appreciably.
A. Increasing dependence on less accessible and lower quality raw materials is driving-up the cost of investment projects and slowing the growth of new plant and equipment.
Exploitation of raw materials to feed the USSR's industrial plant must come increasingly from the climatically harsh Siberian regions, where the cost of operations is nearly double that in the Western USSR.
This, in turn, means that major investment
projects are becoming longer-term and more
costly, requiring large amounts of supporting
infrastructureoads, housing, etc.)
before they can be turned into productive plant
and equipment. The agricultural sector continues to be plagued by inefficient management and the vagaries of weather. esult, Soviet farm production still cannot provide the quality diet that thehas promised.
the regime has invested heavilyagricultural sector, major disruptionsoccur regularly which impact directly
on the lot of the consumer.
the6 harvest, forsupplies fell sharply, resulting inshortages which are still being felt
. in some quarters.
Manpower is another intractable issuethe Kremlin.
A slowdown in labor force growth began this year and will continue through the next decade. This is an inevitable consequence of falling birthrates in.
There is little that the Soviets can do to alleviate this constraint. Stop-gap measures such as keeping older workers on the job longer or reducing the terra of military service would havelight impact on economic growth.
Perhaps the most serious economic problem facing the Soviet leadershipightening energy supply, especially in oil.
1. For the past half century, the availability
of vast energy resources has fueled the USSR's extensive growth model, and Soviet leaders have maximized tho short-terra exploitation of these resources at the expense of lifetime recovery.!
a. In terras of oil, this emphasis onover exploration has resulted inof existing wells and fields and failure to match well depletions with new discoveries.
2. Although tho USSR has abundant potential oil reserves in tho Arctic, Cast Siberian, andhoreareas* development of auch roaervoa ii atocodo away. Thus, during tho
0 years, almost all Soviet oil output trill have to come from existing fields and
from new fields in existing producing regions.
a. Production from fields in the Western part
of the country is already declining, how-ever.
ll growth in outputmust come from West Siberia, where the inhospitable climate, difficult terrain, and vast distances greatly complicate operations.
The USSR has large reserves of coal and natural gas. Development of these reserves, however, will take timerequire large capital investments.
ft* The cost and
physical difficulty of developing the major untapped Soviet gas reserveslocated in norther^Tyumen' oblastis unprecedented in
Ii |' j:
tbe history of the world's oil and gas industries
and poses problems not previously encountered
i I* i i
either in the USSR or in the West.
Deposits of coal scheduled for exploration in the
next decade; are also east of the Urals and will
'.require considerable investment in transport and
ther facilitiesime when investment growth,
oo, is slowing.
power from hydroelectric and nuclear
power plants will makemall contribution for many years to come. Although there are vast
hydroelectric resources in Eastern regions of the
I I; ij i
USSR, the technical problems of long-distance transmission must be solved before such resources can be fullyxifT Thus, in terms of exploitable energy resources in the
, the USSR appears to beifficult situation
at best. When oil production stops growing, and perhaps even before, repercussions will be felt on the domestic economy of the USSR and on its international economic relations.
severe energy shortage could restrict economic
sharply, further complicating the task of allocating resources to meet the growing needs of consumption, investment, and the military.
Shortfalls in oil production at home could
reduce the amount available for export.
1. Sincef the USSR's hard currency
earnings!aro due to oil exports, this would
cut deeply into the USSR's hard currency earn-
ings andimake it difficult for Moscow to main-
tain Itsjhard currency import
2* Eastern Europe is critically dependent on the
USSRost of its oil needs. However, Moscow would be under strong pressure to force
Eastern Europe to share its oil shortage. Any substantial cuts in oil deliveries to Eastern Europe could worsen its already difficult economic situation and could threaten political stability there.Original document.