USSR: Hard Currency Trade and
USSR: Hard Currency Trade and Piymenb'
The USSRard currency Iradc deficit of USillion5 because of its need to import massive amounts of Western grainime when Western recession had depressed Soviet export earnings. Moscow's reaction to these unexpected events was to borrow heavily, largely on the short term, from the West.5 alone, Soviet net liabilities to Western commercial banks rose0 billion.
By resorting to heavy borrowing rather than cutting "jack on nongrain imports and/or selling more gold, the Soviets soon found themselves overextended. Cognizant of thb problem, Moscow took several steps6 designed to reduce both thc size of its trade deficit and its need to rely on Western bankers for balancc-of-payments financing. It reduced nongrain imports, increased gold sales (despite falling prices for most of thcnd minimized cash outlays, including deferment of some paymentsespite these moves, continuing heovy imports of grainard currency trade deficit of nearly S5 billion last year. In addition, net Soviet debt to Western commercial bankers rose by another S2 billion despite Moscow's attempts to minimize such borrowing.
When planning foreign trade and paymentshe USSR will have to continue thc cautious approach Institutedebt service continues to grow steadilyesult of heavy post borrowing, while Moscow's ability to obtain substantial, additional credit from Wojtcrn banks will continue to be constrained.
Nevertheless, Soviet prospects appear favorableven without tapping thc Eurocurrency market for short-term financing thc USSR should Increase nongrain Imports by up toercent over6 levels.
1 Tha memorandumovtet eonwirlW* or hard currency trade. tt:hb tokty wRh Ihe WencnrmltQtaa one-lhird of louJ SovMl trade. Theonducted under Mairnl payment! aawmenliCommunal (ountriai and tomt km developed covnirtei (LDCtl
Note: Comments and queries regarding this memorandum arc welcome. Theydirected to f lic Office of Economic Research,
economic recovery in the West will allow Soviet exports to growercent in value.
a 6 harvest should allow Moscow to reduce Its grain imports by up to S2 billion.
from gold and arms sales could3 billion.
Because known contracts with the Writ do notubstantial increase in Soviet imports of equipment or tubular steeloscow will apparently be free to satisfy some pent-up demands for lower priority equipment and nontubularemands created by hard currency stringencies lust year. In addition to increasing nongrain imports, Moscow should have sufficient hard currency to repay some outstanding short-term debt, should it desire, and thus improve its standingis Western bankers.
Prospects are far less ccr*ainontinued economic growth in the Westood domestic harvest7 would allow Moscow to continue to increase nongrain importsombinationoor harvest and an economic downturn beginning late7 or early8 could force Moscow too-growth policy or even reduce nongrain Imports absolutely. Although the USSR would probably attempt to again borrow heavily in the West rather than cut nongrain imports, it would probably find Western bankers far less accommodating than
Soviel Tenth Five-Yearontinuedobtain large quantities of Western technology and equipment, and Moscowto rely on the West for grains to supplement domestic productionanalyzes the ability of the USSR to meet its hard8 by focusing on the likely growih of hard currency inflowsexports, gold and arms sales, and increasedhat will becover Import costs.
The Soviet hard currency balance of trade deteriorated sharply;5 trade deficit4 billion and6 deficit probably was close to S5 billion. Thc USSR undoubtedly had programmed deficits in its hard currency trade for these years, but the magnitude of thc trade imbalances was unexpected. They resulted from depressed Western economic demand for Soviet experts due to economic recessionimeisastrous domestic grain harvest5 forced Moscow to3 billion In grain.
The USSR covered5 trade deficit by heavy borrowing (seche Soviets benefited from an5 billion in medium- and long-term credits, made available by Western governments and exporters, which were arranged in advance to cover imports of equipment and pipe. Thc USSR was forced, however, to borrow substantial amounts of funds from thc Eurocurrency market to cover unanticipated shortfalls In hard currency earnings and to pay for thc unexpectedly high level of grain imports.
Wc estimate that thc Soviets obtained6 billion in commercial loans, largely short-term, from Western bankst tlw same time Soviet assets in Western banks were reduced1 million. With earnings from gold, arms sales, transportation, and tourism totuling overillion, Moscow apparently had no need to tap Western banks so heavily. Thc Soviet decision to do so reportedly resulted partlyigh-level decision to tokc advantage of Western money market liquidity inf heavy grain imports1
USSR: Hard Currency Balance of Pay menu
trade balance1 Gold salesmenu Oiher Invisibles and hard currencyurrent accounl batonca Medium- and long-term credits, net Basic -Change In net Eurocurrency
rrors and omissions
1 OfTkkl luthuci.
Raawttd dimi >mi io iht Middle East could km idCtd tn0
ladadfeafroa mi auci kaown hard earrtrKr trade wider dewtni icrvemtaii, >nd nei receipt* from toumm iM tjtrttrotuitort.
Ba0Mk| "nowrt oitdaim- and lonf-lam Eurocurrency borrowtaa.
he strategy adopted by the USSR for managing6 hard currency trade and payments was strongly Influenced by eventsreviously placed Soviet orders for grain, Western equipment, and steel products6 balance-of-tradeertainly. Moscow could count on large Inflows of Western government backed credits; however, its ability to cover the remaining portion of the expected trade deficit by general purpose borrowing and gold sales was less certain. Heavy general purpose borrowing5 had caused many major Western bonks to approach or reach their lending limitsis the Soviet Union. These banks In particular and the Western banking community In general were becoming far more selective In additional lending. Moscow In all likelihood realized that It would be more difficult to obtain additional short-term credits and more costly to obtain Western participation In any future medium-term syndications. Prospects for gold sales were also rather poor. Western inflation and the expectation of gold sales by the International Monetary Fund (IMF) had substantially depressed world gold prices and. In lum, Soviet earning potential.
lhe endoscow hid apparently decided on the stepsto guide hard currency trade and payments activitieswis made to minimize both the trade deficit per se and Sovietgenera! purpose financing on the Euromarket. Specific goals apparently included
a cutback on hard currency allocations previously granted to some Soviet ministries,
an expansion of exports to tho West,
a tight control over foreign exchange outlays on the current account, Including the postponement of some paymentsnd
a reliance on gold sales despite lower market prices.
Based on official Soviel trade returns for tbeonths, Ihe6 hard currency trade deficit should be nearlyillion. Thc drop in the deficit was due largely to Moscow's ability to restrain import growth. We estimate Soviet hard currency imports6 atillion, upercent In value over last year. Nongrain imports, In fact, probably fell slightly in value and somewhat more in real terms. In contrast, thc USSRapid growth in its exports, which arc expected to rise byercent in value59 billion. Although thc Soviets are known to haveoncerted effort to expand export sales, general economic recovery in thc West was the major factor behind the rapid export growth.
edium* and long-term supplier's credits, largely government backed, fimnccd Soviet Imports of equipment and pipe worth an7 billion. Although Soviet credit drawings were at record levels, their net effect on Moscow's balance of payments fell becuusc of rising debt service After allowing for repayments of principal and interest on past debt,4 billion remained to offset9 billion trade deficit,5 billion to be raised from other sources (sec
The Soviets were understandably loath to return to Western commercial money markets for financial creditsovernment-backed credits were unavailable, thc USSR opted for promissory note financing in lieu of cash
uropean sourcesteady supplyear fixed rate promissory notes being discounted on the nonrecourse market,arge percentage or new equipment orders being placed In thc United States arc apparently being financed by this method, Soviet negotiators, moreover,ercent financing for contracts placednsisting that cash downpayments on new orders be deferred at least until earlyn some cases, the Soviets even attempted to obtain short-term supplier credits for contracts previously concludedash basis.
Althougheavy borrower on Western money markets, the USSR achieved its goal of substantially reducing its reliance on private credits ins hard currency trade deficit. Although4 billion hard currency trade deficit incurred in the first half6 matched the January-June figureet Soviet borrowings on Western private money markets in these comparable periods fell9 billion6 billion. Moreover, there are indicationss commercial borrowing was heavily weighted in favor of meaium-term supplier's credits for grain and equipment purchases.
The USSR almost certainly would have preferred to refrain completely fromeneral purpose Eurocurrency syndicationhere is some indication that its decision to do so In6 was unexpected. Market response to thisillion5 percent over the London Interbank OfferedIBOR) was very poor. Although money markets remained very liquidhe USSR, because of heavy past borrowing, probably would not have been able toecond syndication at thc rates It was willing to
Moscow enmed roughlyillion from the sale of gold In thc Westnd Its commitment to goldoreign exchange corner was evidenced by the decision to twice lower acceptable floor prices in response to deteriorating market conditions. In thconths of thc year the USSRetric tons of gold In Switzerland,5 million. Sales were particularly heavy in March to July, falling off sharply in August, when the price dropped to as low aser troy ounce, Moscow resumed sales in late Septemberloor
romissory note financingorm of supplier credit whereby ihc Western oxpnrteroan In the USSR by accepting medium- or long-term obligation* (promissory noici) from (he Soviet Importer In lieu of cash paymcnu. In moil caret there credit document* ateean duration andominal Interest rate tn lhe rinpoercent. The exporter, with full Soviet knowledge, win often ralie theniereit rote on the loan to roughlyercent by increasing the aellbng prlco ot his exports. The Soviet promissory notes are subsequently discounted by tho Western exporter wllh Western banks. As such, theyiiketabU credit Instrument lhat Ii oden viewed by Western bankers as an nlteinatNe to dlreci lending In tho USSR.
price of SIer ounce end. wilh the gold price having risen to more0 per ounce, reportedly has been selling heavily since then.
ability to finance6 trade deficit was substantiallynet hard currency rcxlpls from invisibles and from arms series. Theof the Soviet merchant murine fleet and Increased revenues fiom thebridge provided the USSRet hard currency inflowevenues from tourism also rose, to0 million. Finally, armsto provide substantial hard currency revenues; estimated receiptsexcess ofillion.
events of theears must have made Soviet officialsabout planning future 'rade with the West.
Western recession demonstrated the vulnerability of Soviet export earnings to Western economic conditions; Mo*cow con no longer countlanned level of export receipts, particularly when continued Western economic recovery remains questionable.
Similarly, the gold market has fluctuated significantly In theears and Moscow cannot count with certainty on Us future ability to market large amounts of gold at acceptable prices,
The rapid rise In Soviet debt over the last few years will require the allocation of increasing amounts of hard currency to debt service. Debt service Is expected to ric toillion this year and almostillion Inomparedillion
Government-backed creditsajor share of Soviet equipment importsave already been arranged. The Sovietsrowing concern, however, among some Western governments over the growth of their debt and, In tho case of Italy, an absolute limitation on tbe amount of new credit that can be made available,
the major factor underlying the need for caution incurrency trade Is that the USSR can no longer count on financingdeficits by Sorrowing from Western commercial bankers. Althoughstill regard the USSR os very credit worthy, Soviet borrowing
brought muny major US and West European banks close to their lending limitsis the USSR. Even under current Euromarket conditions, where the highly liquid position of most Western banks has led to renewed banking competition for loans to many CommunUt borrowers, Mchow would find it difficult to raise Urge amounts of general purpose credits, partlcilarty at rates it is willing to pay.
USSR is extremely sensitive to Its credit standing in the West,
particularly as manifested in tin: Interest rates It must pay for new loans. Onj
recent occasions Moscow has opted to forgo borrowing rather than pay an interest
rate spread of moreS percent over prime money market rates on its general
purpose borrowing, lt will be difficult for thc Soviet Union to continue obtaining
low rates on Its direct borrowing from Western banks as long as potential lendors
are able to fill the remaining portion of (heir lending portfolios with higher yielding
Soviet promissory notes (either purchased direct from Western exporters or in the
secondary nonrecourse market).
Moscow bs aware of its growing borrowing difficulties in Western commercial money markets and has attempted to find other sources of funds. For example, it has tried without much apparent success to obtain funds directly from thc Middle East In addition, the USSR is in all likelihood making useortion of thcillion in credits borrowed by International Investment Bank (lib) of the Council of Mutual Economic Assistance (CEMA) for construction of thr Orenburg gas pipeline.
ome Indication that tlic USSR is using middlemen to obtain funds at acceptable rates. CEMA's International Bank for Fconomic Cooperation (IBEC) recently approached North American hanks for the syndication0 million general purpose loan5 percent Interest rate spread over LIBOR. There Is some speculation that this money Is being borrowed on the USSR's behalf. It hus similarly been rumored in Western financial circles that some of thc recent Czech request0 million general purpose syndication, again5 percent over LIBOR, is for thc USSR's use. While Ihe Soviets will be able to take advantage of Western willingness to lend at low spreads to some East European borrowers, their ability to continue to do so Is limited by the fact that those borrowers would not be able to borrow indefinitely at low rates of interest.
he USSR couldubstantial increase in borrowing potential from thc West should It be willing to pay higher (merest rales and/or sanction new borrowers. Higher rates of interest would certainly attract additional funds from those banks still able to lend as would thc tying of new borrowing to specific
projectsanner similar to Hut currently employed by Poland. Sovici sanctioning of new borrowers, such as specific foreign trade organizations or Cosbunk itself, could also Incrcusc loan potential from those banks whosellng to the USSR Is restricted by legal limitations. Based on past pcirormancc, however, the USSR probably would not resort to such measures unless pressed to do so.
borrowing potential would suffer substantially in the event ofin Western governmental and/or commercial demand for money.from Western banks would be most affected; with major bankunfavorably weighted in favor of the USSR. It is unlikely thatbe able to compote with demands from developed Western borrowersinterest rate Moscow could reasonably bo expected to accept. Thealso probablyreater difficulty In marketing theirnotes, which have taken on an increased importance in financingof Western capital goods.
Sources of Hard
Moscow continues toigh priority to upgrading its domestic economy through the use of Western equipment, technology, and Intermediate products such as finished steel. In the face of the above uncertainties, howevtr, the USSR will probably attempt to keep its trade deficits at levels that can be financed without heavy reliance on commercial borrowing or gold sales from reserves. The USSR moy also wish toiard currency surplus into its baloncc of payments. This would allow for the repaymentortion of Soviet short-term debt now held by Western commercial banks, freeing borrowing capacity, which could be reused in the event of an unexpected future balance-of-payments crisis.
The following sections will examine tho respective Soviet prospects for exports of goods and scrvires, borrowing, and gold end arms sales to derive vorious paths for Soviet Import growthsec
oviet exports should grow rapidly, to perhapsillion7illionhese projections are based on the past correlation between Soviet exports and Western industrial production and alternative projections of the growth In Industrial production.etailed explanation of these projections and their underlying methodologies, seche ranges reflect (I) alternative growth patterns in the West and
USSR: Source* of Hard Currency
Million US $
M<rchindlsc exporti Gold -lei
Medium- and loif term credit! Aimi ukl
Tourlim ind transportation, net
nrtrtointy about small though volatile exports to LDCs. If Western economic growth follows the boom-bust cycle implied tn Chase Econometrics forecast4 for industrial productionercent growth7ercent decline inoviet exports will be ot thc high end of7 range ond low end of8 range. More stoblcth ratesercent7ercentould hold exports to the lower end of7 range and push them to thc high end of8 range.
Wc assume that thc USSR will be able to supply thc West with the volume of exports implicit In these demand projections despite the fact lhat the rote of growth in the volume of oil exports is expected to fall appreciably. The projections imply on annual average growth rate, in value terms, ofercent, which Is consistent with past Soviet export growth. Tho valif exports grew at on annual avcrog3 rate ofercentnd Increased an estimatedercent In value last year.
Soviet ability to Increase oil deliveries to the West ts constrainedlowdown in the rote of growth of domestic oil productionime when domestic requirements continue to rise steadily. Soviet commitments of oil to Eastern Europe. Which have remained firm, limit Increases In the amount of oil available for export to hard currency areas. Nonetheless export volume tc thc West should
h* Ctum Fcoaoroclrlct fwecui hi repreaeiueUvt of other pndlcllorti mad* uritoi. pilotn th* evfmni economic racomy.
grow from en eslimutedillion ions6illion tonsubstantialo oil earnings will be provided by price increases.esult of the recent OPEC price increase, for example, tht Soviets willillion windfall. The volume of natural gas exports, in contrast, will register laxpc gains as deliveries to Western Europe under gas-for-pipc deals increaseillion cubic meters5 toillionarnings from natural gas sales will also benefit from oil price increases.
Soviet selling6 indicates that substantial gainsfrom the export of other commodities can also be expected. Pricepenetration of new markets have been noted for diamonds, timber,metals, and aluminum. The sales strategy Is consistent with thethe export of raw materials to the West acknowledged inyMinister of Foreign Trade Alkhimov. Moscow has obviouslyonly boosts in raw material exports, compared wilh manufactured goods,the large amounts of hard currency it needs for the remainder of
Tbe USSR produces moreons of gold annually and has an estimated gold reserve of moreons. Soviet gold sales policy will continue to be determined by the relationship between the availability and cost of Western credit and the present and expected future price of gold. Because of the expected higher cost of Eurocuncncynd possible limitations on the total amount of credit available to the USSR, Moscow will probably chooc? to market most, if not oil, of its current production (less domestic consumption) In this period.
The recent resurgence in the gold market increases the likelihood of heavy sales. London gold prices roseccen' >eaker ounce onow4 per ounce in August. Although the gold market could be temporarily depressed when the IMF5 million ounces to member countries inany gold dealers are still convincedtrong gold nurkcl for most
Soviet sales out of current productionould amount to an average ofons per month7 andons monthlyt average selling priceser ounce, such sales would respectivelyillion7illionn addition, the USSR can be
expected lo conlinue direct sales to foreign buyers outside of the Swiss and London markets, principally in :hc Middle East.
Other Revenue Sources
Soviet arms sales for hard currency will continue loajor source of hard currency comings; revenues arc estimated atillion annually. This projection is based upon known and probable future contracts the USSR is expected to conclude with its favored clients in the Middle East and North Africa, principally Algeria, Iraq. Syria, and Libya. In addition, the USSR recently concluded an agreement with Iran for the delivery of SSOO mih.on in military equipment for hard currency.
Net Soviet receipts from transportation are also expected to grow steadily,5 million75 millionhe USSR is expected to receive increased foreign exchange ear.iinp from the carriage of Soviet exports andcargoes for foreign shippers, while little increase is ejected in hard currency outlays for Soviet imports moving on foreign ships. Hard currency receipts from the Trons-Siberian land bridge ore also expected to grow steadily. Net receipts from tourism will climb slowly, to0 million70 million
Medium- end Long-Term Credits
Moscow will continue toarge share of its equipment and pipe imports on receiving medium- and long-term credits from Western suppliers, bonks, and governments. The USSR has. in fact, lined up government-backed financingood portion of$illion In equipment and pipe expected to be Imported. The unwillingness (inability In the case of Italy) of some government lenders to conlinue to give carto blanche approval to new Soviet credit demands, however, may depress the level of new equipment orders (and ultimately Imports) from what they otherwise would have been.etailed discussion of the current position of various Western governmentsis additional lending to tho USSR, see Appendix C.
Tho Soviets will undoubtedly attempt lo continue to arrange for mcdium-and long-term private financing for equipmentia the vehicle of promissory nolehenever feasible. Moreover, at least Inoscow will probablyajor medium-term general rurposc syndication to consolidate upcoming debt payments. The Soviets arc known to have postponed
cash payments due6 until thc lint quarternd one major US banker has. In fuct, reported thc distinct possibility Oi*oan. Having been out of the medium-term market for several months, tho Soviets should be able to arrange for the syndicationoan ofillion. Moscow, however, may have to pay an Interest rate spread above5 percent ceiling previously Insistedecent Bank of America syndicationillionear Soviet promissory notes, for example,liding spread8ercent over LIBOR.inimum, tV.oscow probably will botoubstantially higher front end fee II It sticks with Its Insistence5 percent spread. Because of this, most major Western banks appear to be restricting additional general purpose lending to the USSR despite their liquidigher return would be required to elicit additional lending from these major banks or, more likely, to obtain the participation of smaller US and West European banks that have yet to lend heavily to thc USSR. ,
current market conditions (and paying markethebe able toS2 billion annually from Western commercialin thc form of medium-term syndications and via thc discountingnotes. As noted previously, however, should Westerncommercial demand for money Increase os expected. Sovietcould suffer substantially.
Hard Currency Inflows and Import Capacity
Thc USSR, by coordinating its gold sales, borrowing, and export policies, will probably attempt to keep hard currency inflows at or near the upper end of thc projected ranges shown In Tabicccordingly, Moscow should be able to bring total hard currency Inflows to otillion7illion
Imports arc but one of several claimants on hard currency, with actual Import lovels expected to bo well below tolol hard currency Inflows.5
rrinclpal and interest payments on Soviet debt will rise toillion7 and to almostillion
urrent analytical levhntqiMi undtreiilrnaM Soviet hard currencynAcatfcif thai ll* pp between known hard currency InOowj andItnpottiay ba (real" "b" Indicated by tlw analyiii of known component- of the USSrV* balance of. for example, eitlmited Sortel hard currency Inflow* exceeded etiimated ouiHowi by aa ireriae7 bfllbn annuetly. Thk "unknown" componentSox-let balanet^-payrnent' oailaya wai MiaMeS at well.
Moscow may wish loortion of its existing short-term v'ebt -currently estimated at more than S3 billion. By doing so the Soviets would be able to both minimize their susceptibility to changes in money market conditions and free up Western commercial bank portfolios for additional medium- and long-term lending,
The USSR may wish to build hard currency holdings in the Westedge against future unexpected balancc-of-payment problems.
Moscow may find itself required to provide hard currency lo Poland or other East European countries in trouble.
Given estimated debt service requirements and allowing for roughlyillion in additional annual hard currency allocations ton import related areas, we estimate that the USSR will be able to increase total hard currency importsillion6illion75 billion8 (see
USSR: Hard Currency Imports1
Bill Kin US S
Became of rounding, component! miy not idd lo itte louli ihown.
ven If the USSR docs achieve the maximum increase in total hard currency imports, the rate of nominal import growth will be slower than in posi years. In all likelihood, however, Moscow will be better off thann terms of ils ability to satisfy its requirements for Western technology, equipment, and intermediate products, such as finished steels. Two reasons undcrly this seeming contr*dition. First, the reduction in world inflation rates and Ihe absolute fall in Ihc price Moscow will pay for Western grain this year will reduce the inflationary component of nominal import growthecond, the6 Soviet grain harvest will allowubstantial reduction in grain Importsreeing hard currency for increased imports In other areas.
he following section* discuss individually Soviet import requirements for groin, equipment, and steel products.
oviet imports of Western grain will depend, as usual, on many imponderables, including crop prospects, stock maintenance, pressures to export to client states, and world grain prices. The continued commitment to expand the livestock tcctor shouldubstantial amount of Imports In any event, at leastulfillment of theear plan goals for livestock inventories and meat production will require feed supplies above the annual average level available during theears. Evenood crop (moreillion tons) is harvested, imports will0 million tons. Under the US-Soviet grain agreement, the USSR must import atillion tons of US grain each year. Moscow has already contracted for delivery ofillion in Western grains in
8 grain imports also depend on7 harvest.grain production fallillion tons, Soviet imports willin the rangeillion tons.6 prices and an equalfood and feed grains, these purchases wouldillion, withthe deliveries comingood Soviet harvest7 mightillion tons costingillion.
Soviet imports of equipment from the West are expected to level offfter growing rapidly In recent7 billion35 billionased on orders the USSR Is known to have placed in the West In recent years, Moscow Is expected to import roughly SS billion in equipment6 and slightly more than that amount. Equipment importsould rise closer toillion annually, however, should the Soviets shortly sign contracts for major deals now under negotiation or for smaller deals deferred.
The slowdown in the growth of equipment imports Is presaged by the declining growth of equipment orders placed In the West (seenown orders grew rapidly early In the decade,6 billion23 billionhe growth In equipment orders56 has been much6 billion In orders was recorded5 and orders6 arc estimated at more0 billion.
S^RET Table 4
USSR: Equipment Ordm and Deliver*!
ton US S
Known orders placed
In the Weil hard currency
The slowdown in the rate of growth of equipment Importsesult of several factors. Soviet ability to continue to rapidly increase equipment imports for high-priority sectors (gas and oilfield development and chemical plants) is probably limitedombination of Soviet absorptive capacity and Western supply constraints. Although Imports of Western equipment to assist Soviet development in other sectors (food processing, ship and marine equipment, and equipment to produce consumer goods) could be increased substantially, these areas have proved particularly susceptible io cutbacks in times of hard currency shortages.
Hard currency shortagesronounced effect on the level of Soviet orders placedhe reduction In hard currency allocations was widespread, affecting purchase decisions in the area of medical equipment, computers, consumer goods production equipment, and ship construction (seen addition to outright cancellation of negotiations, the USSR is known to have deferred discussions or scaled down the size of contemplated purchases. In some cases, for example, Moscow hasreater blending of Soviet and foreign parts rather than the lurnkey-style purchase originally contemplated. Undoubtedly these cutbacks have only added to the pent-up Soviet demand for Western equipment. While such orders could be placed,ortion would be delivered during this period.
USSR is expected to continue relying heavily on Westernthe large-diameter pipe used In Soviet oil and natural gas pipelines.of these lines will continue for the foreseeable future as willto meet its pipe requirements from domestic sources. It isthat pipe importsill fall below theillion
USSR: Effect of Hard Currency Shortages on Equipment6
of Equipment Rock bit i
Decided to refurbish existing plant Instead ofew turnkey plant.
to defer funding of the Cheboksary Tractor Plant untUlan;, the USSR wfll rely oa purchasci from France under long-term credits.
2 years of negotiations, discussions for the construction2 ships were terminated.
on the CTV Glass Factory were terminated.
to be used for railroad conitructlon
proposal for plant scaled down considerably.
turbines for peaking powerplants
purchase forgone, In faror of domestically produced equipment.
worth importedoscow has been able to secure long-term financing for past pipe imports, largelyesult of gas for pipe commodity payback deals signed with West Germany, France, Italy, and Austria. Soviet ability and/or desire to arrange for additional deals of this nature in the near future Is uncertain; Moscow may be unwilling to continue to import pipe if cash payments arc required.
ased on signed contracts, Soviet pipeline purchases will remain heavymounting to5 billion. New orders will be required, however, if heavy purchases, particularly from Japan, are to continue
imports of nontubular steel seem to depend onavailability. The USSR suffershronic shortage of finishedrolled steel med in producing motor vehicles, equipment, andThe nature of the Wester.imarket allow,ependingsupplyo rapidly adjust the level of itsor example, Moscow wa: able to take advantage of Westernand its own favorable hard currency situation to rapidly increaseof steel. In contrast, Soviet purchases of nontubular steelsharplyresumablyesult of hard currencyonths, combined Soviet nontubular steel Imports from Japan,West Germany were down byercent in valueiththe drop resultingall in quantity. Similarly, total Soviet Importsduring the first three quartershich largely consisted ofwere downercent
picture7 seems relatively clear. Soviet exportbright because of expected continued economic recovery in the West;grain harvest6 'should allow the USSR to significantlyimportshe USSR can be expected to run aon the orderillion this year, depending on actual receiptsgold sales, and medium- and long-term borrowing from thehis projection allows for Soviet repaymentortion ofdebt and does not depend on short-term Eurocurrency borrowing.
6 USSR; luuanca of Trade'
ton US S
rop failureoscow will probably7 grain Imports to less thanoor harvest this year could boost Imports to S2 billion or more. While additional grain Imports are possible, Moscow will probably opt to keep importsinimum In order to better satisfy nongrain importood harvest7 would enable Moscow to Increase nongrain imports by as much asercent In value. Since known contracts do notubstantial increase In Soviet equipment or tubular steel Imports, the USSR will apparently have the freedom to satisfy tome of the pent-up demands caused by bard currency stringencies. We expect to see, for example, in increase In Imports of lower priority machinery and equipment and nontubular steel. Alternatively, the USSR could opt to reduce Its dependence on medium- and long-term supplier's credits by paying cash instead of issuing promissory notes.
Projections8 are far less certain. The pace of Western economic growth willirect bearing on Soviet exportslthough export growth Is expected to continue even under the boom and bust scenario outlined earlier. Soviet ability to augment hard currency receipts from exports by gold sales and/or private commercial medium- and long-term borrowing will depend, In turn, on Western market conditions. Under most foreseeable circumstances we expect the USSRombination of gold sales and medium- and long-term borrowing to be able toalance-of-trade deficit on the order ofillionhe drop in the estimated size of the deficit7 is largely explained by the rapid increase in debt service payments expected
The likely composition of Soviet imports8 is also unclear, Tor it will depend heavily on the tUt of7 harvest. If the USSR has another good croprain imports8 -ould again fall to less thanillion. Nongrain Imports, In turn, could rise by roughlyillion, compared with theillion rise expectedshis increase would probably be channeled into increased imports of equipment and intermedlaie products.
A poor harvest7 would cut heavily Into the hard currency available for nongrain Importsotal grain Imports8 could rise to more than S3 billion. Asowever, Moscow would probably opt to limit grain imports by cutting livestock rations, raising flour extraction rates, and drawing down tlocki (which were rebuilt following Ihe68 groin Imports riseS billion, for example, Moscowepending on other factors such ise forced to reduce nongrain Imports absolutely.
SSR: MEDIUM- AND LONG-TERM CREDITS
Million US J
know* metbura-ienn lynofcaUoni on ihe Eurocurrency market: SSGO millonS
repiyrnenli on medium- and lona-term debt and mtereat repayment! on total dsblharc l
SOVIET HARD CURRENCY EXPORT PROJECTION!
Projections of Soviet hard currency exports8 are based on separate estimates of exports to the developed West and less developed countries. Statistical relationships between Soviet exports and economic activity In the developed West have been established by applying regression analysis to quarterly trade and economic data of the Organization for Economic Cooperation and Development for the period0 toy using two alternative forecasts of Western economic activityorecast for an aggregate Western import priceange of the USSR's hard currency exports to the West was developed. Soviet exports to LDCs are projected to growixed annual rate.
Estimation of Equations
The importance of various factors on Soviet hard currency ?xports to the developed West was tested by running regressions of these Soviet exports on several explanatory variables. Western Industrial productionime trend (historical growth In Soviet exports) were discovered to be best predictors of Soviet exports to the developed West. The use of real exports made it possible to separate price effects from quantity effects. Projections done in nominal terms (althoughroved to be poorer predictors of Soviet exports in recent quarters and yielded unreasonably low projections for Soviet exports. The rapid rise in priceswamping effect on the nonpricc parameters of the estimated equations. Increased production, however, is expected toajor underlying reason for the future growth in the value of Western imports from the USSR.*
The best results were obtained from regressing the logarithm of the index of Soviet real exportsogarithm of an index of Western Industrial production andime trend. The results follow:
A more lophlttkated approach, Inoorpotitini the supply as walltha demand ilda of the market for Soviet port* would probably have produced better renins thin were obtained from the use ofariablca. Unfortunately. Use data needed to estimate supply aqua Bow for Soviet export Industries are not KiiliNis.
where Inlogarithm of the index of real Soviet exports to the West In quarter t
Inhe logarithm of the index of Industrial production In the West In quarter t.
T" an index of time.
The coefficients of both explanatory variables are significant at theercent confidence level
Several sets of data were adjusted for use in estimating thc equations. Real hard currency exports of the USSR were constructed by deflating nominal hard currency Imports ofajor OECD countries* from the Soviet Union by the IMF Index of Western Import prices. Deflated hard currency exports were then convertedeal Import Index, with0 average equal.
The Industrial production Index was computedeighted average of the seasonally unadjusted Index ofajor OECDThe weights were the country shares of Ihe0 gross national product.
Test for Accuracy
The accuracy of the model was tested by running the regression on quarterly data. Thc resulting regression coefficients were used to predict Soviet exports5 and the first two quarters6 on the basis of the actual change in thc industrial production index.emonstrates the percentage difference, by quarter, between the predicted and actual level of Soviet exports to the developed West. The quarterly differencesare judged to have resulted from
" Awtrie. Baltlum-Uiirnbovri. Qrta4a, Denmark,reland. Ilaly. Japan, Ik* NerhcrUndt. Norway. Spam. Sweden. Sw frier land. Ik* United Ungdorn, tba United Steiea. and Wen Germany. Denmark dot* not report an Mduettlal produciion Me*.
Deviation of Predicted Soviet Exports from ActueJ Exporti
minus prcdk'cd exports) divided by ^j
Ex por ij
the inability of the model to account for changes in Western Inventories ai well as from seasonal factors in Soviet exports to the West Over the six-quarter period, however, the net difference between predicted and actual Soviet exports1 million, or lessercent of the total value of actual exports.
lot of an index of actual Soviet exports based on Western datalot of the Index of such exports predicted from the final regression equation using data0 to
Two scenarios were used ino forecast Soviet hard currency exports to the West.eflects Chase Econometrics forecastoom and bust business cycle in the West, with annual Industrial production growth rates,2 percent. Our modification. Scenario II, envisions steadier grow4h, withercent per year for Industrial production. Chase's average import price change projectionsercentere deemed reasonable and were also used In Scenario II. Chase0 percent rise In the price of crude oil7 In Its Import price predictions,
Once projections of the oxogeneous variables were made, the equation 'as used to compute Imports of theajor OECD countries from the Soviet Union through the fourth quartero make the projections compatiblestimates of Soviet hard currency trade with the less developed countries and with past OERecond .egression equation was used to derive
Soviet Exports to thi Wilt
Th* chart above dernonitratei that fairlyprediciloni can ba obtained from tha modal, Tha major variance between actual exporti and thott computad uilng the modal oecurrad, aa expected, during tha tint two oupien
Sovtit Exports to thi Wilt Undtr AltirniUvi Wiitirn Browth Scenarios
radlcti export! according to tha Oiais Economatrlci modal, which Biiurrm annuel Wettern Induitrial productloo growth ratei2 percent. Scenario II asm met mora ruble growth ratal ofarotnt.
predictions of the value of exports thit will be reported by the USSR (compared with those reported by Western trade importers).
Western reporting traditionally overstates the value of Soviet exports because most Western countries report their imports from the USSRLf. basis, while the USSR reports Its. Differences In the data are also caused by alternative methods of reporting Including the problem of handling reexports. The relationship between Western and Soviet trade data was determined by regressing the data against one anotheryear period. The results follow:
wherehe value of Soviet exports to theeveloped Western countries reported In official Soviet foreign trade statistics, and
Westimpthe value of imports from the USSR reported by theeveloped Western countries.
Separate estimates of Soviet hard currency exports to LDCs were made since they did not appear to exhibit asattern as those to the developedurther complication is that the product mix is greater, making reliable estimation of prices and quantities much less feasible. Soviet hard currency exports to LDCs were assumed to grow at roughlyercent annually. This procedure should not unduly upset the estimate of total Soviet hard currency exports, since Soviet sales to LDCs constitute aboutercent of the total.
ontains plots of export Indexes generated by each economic growth scenario. While differences are not great, projected exports under Scenario II eventually surpass those underecause of Its assumed steady growth In Western industrial production.
SenstitvUy of Forecasts
Soviet real hard currency exports to the West were sensitive to changes In Western Industrial productionime trend over the sample.
Forercent increase In the Western industrial production index, Soviet quarterly real exports rose byercent. The export growth rate due to the time trend accountsercent per quarter, orercent peresult, Industrial production would have to riseercent per year to match the rise in real Soviet hard currency exports due to the time trend.
ATTITUDES OF W STERN GOVERNMENTS TOWARD GRANTING ADDITIONAL CREDIT TO THE USSR
Thc French remain anxious for Soviet business and are committed to finance equipment and pipe exports to the USSR. For its part, the USSR has positively responded to French credit availability; by6 Moscow reportedly had placed more than SI billion in contracts against8 billion credit line granted in
French willingness to meet Soviet credit demands, however, is limited. Inor example, Parisoviet requestubstantial Increase in the French credit line, on the groundsajor share of the existing line remained uncommitted. More recently, the USSR was unsuccessful in its request to lengthen grace periods for certain contracts financed under the French credit line
Thc Soviet Union will find it difficult to arrange for additional credits from the Italian government. Although Rome recognizes that exports to the USSR depend heavily on credit availability, domestic economic problems have made it virtually impossible for the Italians to provide additional subsidized credits. Soviet orders for Italian equipment In the lastonths reportedly have6 billion, completely exhausting0 million credit line extended by Rome inuring the6 discussionsoviet requestillion in additional credits, Italians stated that Italy,arge borrower in its own right, would haveie new credit extensions to Soviet repayments on past loansnsist that the credit instruments issued by the USSR be freely negotiable.
In the past, Rome has always ultimately met Soviet credit demands; current Italian financial difficulties, however, may prevent It from doing so this time around. In this context, the Italians recentlyestern bank to lead the syndication0 million In Soviet promissory notes issued to cover purchases of Italian capital goods, and areurope-wide export credit bank, which would discount Soviet obligations currently held by Rome.
The USSR also receives medium- and long-term credits from other Western countries, including Austria, Sweden, and the Netherlands. For the most part, however, these credits are tied to individual deals andmall portion of Soviet medium- and long-term boiTOwing,