CIA HISTORICAL REVIEW PROGRAM RELEASE AS8
Soviet Efforts to Increase Exports of Manufactured Products to the West
6 JEC Paper
Analyst
SOVIET EFFORTS TO INCSEASK KXPORTS OF MANUFACTURED PRODUCTS TO
Table of Contents
PAGE
Economic Rationale for Expanding Export of
Manufactured
Evolution of
The Economic Setting in
First Period of
Reorganization within the Foreign Trado
Foreign Commercial
Export
Second Drive to Increase Exports,
Compensation
Joint
Actual Growth in Manufactured Goods Exports,
Factors Behind Sales
Table ofCor.tin-jedl
TABLES
Table 1: USSR: Distribution of Manufactured Goods Exports by Purchaser
Table 2: USSR: Distribution of Manufactured Goods Exports by Type
Table 3: USSR: Sample Soviet Prices for Manufactured
CHART
USSR: Measures Taken to Stimulate Export Sales of Manufactured Products
FIGURE
USSR: Exports of Manufactured Goods to the West
a
INTRODUCTION
he Soviet Union has attempted toits exports of manufactured products toWest. This paper analyses theecision and the steps taken by the USSR into spur export sales. The problems encounteredin detail, with particular attention paid toconflict between the highly planned Sovietand tho flexibility ond innovation required toin Western markets. Actual performanceand areas of relative success discussed. Thewith an assessment of the potential forduring the balance of tho decade, with emphasis ondecisions which must be made before the USSR
significantly upgrade its ability to export manufactured goods.
Conclusions
Soviet exports to the developed West consist largely of raw materials and semi-manufactured products; manufactured productsl/ constituted less thanf such exportseveral economic factors arguoarked increase in the sale of Soviet manufactured goods to the West. These include the increasing cost of developing raw material resources and the need to expand exports to pay for imported Western technology and equipment.
Soviet leaders have been aware of the need to increase export of manufactured goods for some time. This interest has grown markedly in rocont yearsesult of the Soviet decision to increase tho uso of Western equipment andto upgrade the Soviet economy. Heightened leadership interest has led to the institution of new programs and sales of these products have risen sharply2 in absolute terms. They still representmall share of total exports to the West, however.
TT For the purposes of this study manufactured goods are considered to consist of Soviet products falling under sections seven and eight of the Standard International They include exports of machinery and equipment; transport equipment; consumer goods such asfootwear, and clothing; and other finished goods. Since the study is concerned with the ability of the USSR to manufacture and market highly differentiated finished goods in competitive Western markets, Soviet manufactures falling underndere excluded. For the most part products falling under these two categories are intermediate goodsigher degree of standardization allowsreater role of price respective to other competitive factors.
Despite Moscow's efforts, the manufactured goods export program remains characterized by poor product appearance and quality; inadequate spare parts, servicing, and technicaleparation of Soviet producers from Western buyers; and inflexible production schedules which limit Soviet ability to quickly respond to Western needs. These and related problems must be eliminated if manufactured goods are to occupy an important share of Soviet exports to the West. These problems, however, affect all Soviet economic planning and production, and past attempts at change have been frustrated by the large and conservative politicized bureaucracy which controls Soviet production and sales.
lEtatements by Brezhnev and Kosygin ath Party
Cong-vxcss inuggested the possibility of radical
reorganization of foreign economic activity, including the
of firms and/or industries to produce solely
for btae export market. In this connection the USSR has in
fact tocgun to encourage cenpensation-type agreements for
manufacturednd is in tho final stages of drafting
Compensation agreements are characterized by collateral purchase guarantees signed by the Western firm(s) exporting plant and equipment to the USSR. By this means the USSR is certain of an export market for project-associated production and, in turn, its ability to ropay the long-term credits extended by the West to cover original Soviet imports of plant and equipment. Until recently this type of agreement has been limited to resource development projects where Western firms have agreed to purchase Soviet raw materials, fuels, or chemicals.
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joint-venture Legislation allowing for Western participation in Soviet production.
If the USSR follows up on the recent leadershipwith meaningful change, the large Soviet industrial base could eventually provide the basisubstantial growth in sales. It would take time, however, for changes to work their way through the system. For the balance of the decade, Soviet manufactured goods should continue to account for lessf exports to the West.
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Economic Kdtionale for Expanding Export of Manufactured Products
Key economic factors which arguereater share of manufactured products in Soviet exports to the Westeed to expand total export earnings to finance growing import requirements,he increasing cost of developing natural resources, he benefits which accrue to domestic productioneveloped export program. Over the long run, import capacity is tied to the growth in export earnings. To the extent that Soviet manufactured goods exports add to rattver than supplant exports of raw materials Soviet import capacity from the West will be increased.1/
The development of new raw material deposits and efforts to increase production from existing sites have prcAuen increasingly costly in recent years. Many of the undereloped raw material deposits are located in remote areasclimate, terrain, and working conditions are difficult. The USSR not only faces the costs of developing the new deposits per se, but must also bear the costs of developing
a supporting infrastructurerail lines, housing, roads, and power. Also, expensive Western technology and equipment must often be acquired if Moscow is to exploit the new deposits efficiently or increase production from existing projects. This is particularly true in the case of crude oil.
See also Inozemtsov, N. "Socialism and International Economicravda,p..
y
production for domestic use will alsoan expansion of manufactured goods exports to thein Western markets depend on competitivethan on the production targets which govern To expand exports, Soviet producers will bemake their products more competitive by placingon quality control, spare parts production,design and production. Although this would bacase of the tail wagging the dog, if suchincorporated into products for the domestic market ajor improvement over currentsuch as shoddy workmanship, poor qualityloag lags between technological advances andinto actual production. Expanded exportsisncrease the efficiency of domestic investment bylonger production runs. ignificant share of the cost
of producing an aircraft, for example, results form the initial investment inrototype andlant to produce the aircraft. Longer production runs made possible by export sales would significantly increase the rate of return on such investments. Evolution of Policy
Soviet commitment to increasingexports was first evident in directives issued6
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byd Party Congress. The Congress recommended reforms in those areaspoor appearance, advertising, technical documentation, spare parts, and servicingwhere the Soviet export program was particularly deficient. Reports from the Congress also indicated the desire to increase contacts between the Soviet Foreign Trade Organizations (FTOs)nd producing ministries and to encourage initiative within the FTOs to seek additional export sales. 1/
6. Changes implementederein nature and did little to spur sales. In any event, there was apparently insufficient impetus from the leadership to overcome bureaucratic inertia, especially in the MinistryForeign Trade. oviet leaders began to recognize thie necessity for basic changes within the system. In histoh Party Congressrezhnev stated the need to iciprove the management of foreign economic activity and tonarrowly departmental approach to this important matter." The Central Committee Report of the Congress stressed the need to combine production and commercial functions in order to bc more responsive to
TheTOs are the operational elements of the Ministry of Foreign Trade. As such they have total responsibility for all commercial negotiations in their respective areas ofower equipment, chemical products. By their direct control over all negotiations they oftena substantial barrier to needed dialogue betwoen potential buyers and sellers.
atolichov, Ha 'Soviet Foreign Trade in the Hew Five-Year Plan' Foreign Trade, (English.
Brezhnev LI, 'Report of. Central Committee toh CPSU; Kovosti Press Agency Publishing House, Moscow,.
Western requirements.Jy 8/ if the Soviet leadership was now more aware of the basic obstacles to expanding exports little was done about it.
level concern over tho need to expandgoods to the West mounted during the earlyas the Soviets realized that anrucial prerequisite to Brezhnev's commitment to
an increased use of Western technology and equipment in Soviet economic development. The USSR's export effortajor topic addressed at the3 Party Congress plenum.
decisions reached by the April plenum becameSoviet articles and statements une speechbusinessmen in, Brezhnev criticizedtrade operators for "lack of initiative, timidity,
outmoded ideas and for deficiencies in their performance."
In an3 paper and address given at the Stanford
Research Institute, Dr. Ivan D. Ivanov of the Institute of US Studies
discussed the role of foreign trade ineriod.
He stated that foreign trade was becoming an important
component of growth policy rather thaneans of covering
temporary shortages in domostic production. He stressed the
Soviot determination to become an important exporter of
The directives also emphasized the need to increase the
initiative and responsibilities of ministries and enterprises
in tho development of foreign economic tics.
8. Kovan, I, 'The Leninist Principle of the Soviet States
Economic Relations with Other countries'. Foreign Trade,. 8.
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machinery and equipment regardless of the rapid rise of raw material prices, and spoke of the need to expand export specialization in hte most advanced industries, and to orient industrial capacities to export production.2/
views were expressed byeputy chairman of Gosplanlong-term planning of foreign trade, stated in Junea top priority campaign had been set to bringup to world quality standards and to updatepractices and institutions. Inozemtsev spoke ofimprovement in three main areas: eorganizationthe need for closer relations between the FTOsindustries,eed for increasedproducing industries and Western firms- 3 reforms called for industrial producers togreater responsibilities in generating exportsthat producers would be given control overfor the production of high-quality goods for
4 IZVESTIYA article by Olegof the Institute of Economics of the Worldrevealed continued leadership concern. Thethat specific reforms related to questions of improving
the planning of foreign economic relations and of assessing
9 Ivanov, "Foreign Trade Factors in the USSR's Economic Growth and Some Perspectives for the US-Soviet economic Cooperation"
Michael, "Russia Prepares for Trade
Theodore, ^Soviet Considers Shift on
their impact on the domestic economy were under active consideration. The article critized the parochial concept of the HFT, which views foreign trade solely in terms of Moscow's commitments to other socialist states and developing countries and relegates trade with the Westecondary position. Bogomolov refcred to the basic nature of future changes, stating that the process of change in the foreign trade sector will require "much effort" andertain psychological reorientation" within the economic
11. Tho concerns raised in the3 plenum culminated in the new directives issued earlier this year ath Party Congress. The Brezhnev and Kosygin speeches and the draft directives forlan alla commitment to improve exports of manufactured proioacts. Brezhnev spoke of the need to expand the production of ^oods which are in demand on foreign markets and the need to wake these same goods more competitive. Ho also called for the expansion of compensation agreements to include the production of manufactured products and for the search for new approaches to production cooperation.il/ Koaygin's speech touched on the need for new forms of cooperation and greater involvement of the producing ministries. The speech specifically called for an examination of the possibility pf organizing special production facilities to be oriented toward export markets.ii/
A Demandzvestiya,. 4.
pening remarks toh CPSU Congress,eb 76 ol. Ill, No. upplement p. .
Kosygin, A, Address beforeh CPSUol. Ill, No. pp.
The Economic Sotting
he Soviet economic system was singularly ill-equipped to make the changes required to manufacture products that could compete in sophisticated Western markets. Designed toast internal market in an autocratic fashion, the Soviet economy was totally isolated from the competitive forces pervailing in the West. The highly structured and politicalized system of central planning which governed Soviet economic decisionmaking was to prove particularly resistant to change.
13. FTOs dealing in manufactured products had little perception of what was required to establish marketing and sales-service organizations capable of supporting export expansion. Thoy also did not appreciate the importance of such factors as product reliability and appearance, and spare parts availability which are important elements in the sale of manufactured products in the West. Soviet sales of manufactured goods traditionally had been largely confined to the developing nationswhere equipment exports were backed by low-interest credits or outright grantsor to other Communist nations in accordance with plan targets. Equipment exported to the West was often partarger deal involving Soviet purchaso of Western equipment. Western firms accepting Soviet equipment in this fashion often resold or discarded the equipment.
FTOs not only had little perception of in expanding exports but had little incentive
to do so. The quality of personnel employed by the export
organizations was often poor; the brighter graduates of the
Soviet Foreign Trade Institute gravitated toward importing FTOs.
The concept of businessmen, moreover, had long held an unfavorable
connotation in theand priorersonnel employed
by the FTOs were paid substandard wages. FTOs were judged
by their ability to disposeargeted amount of goods
Any
rather than on their ability to expand export markets, /attempts
at expansion were difficult because of inelasticities
either
and the unwillingness of producers to/alter products to Western standards or to provide forider range of types and sizes. Host production was geared to the domestic and East European markets where sales were guaranteed. Promotions and other incentives wore based on management's abiitty to meet or exceed planned targets.
of producing enterprises also tended toavoid charge.
Innovations were considered risky because they could endanger
current plan fulfillment, and they carried little potential for
future reward because output targets or quality standards would
simply be ratcheted upward if tho innovations were successful. Producer avoidance was further encouragedonus system that
produced no rewards for underfulfillment but substantial rewards for exceeding plan'targets
15. Discovers'the Businessman; BI/Eastern Europe
Report, arch p.
P. andoviet. Economicow, New.
This risk aversion was most pronounced in areas where technological advances are incorporated into production.
dditional problems faced Soviet producers who attempted to upgrade their production or otherwise alter their output to meet Western standards. Since they had little contact with potential buyers it was difficult to ascertain what changes were needed. Attempts to alter product design or upgrade quality were also inhibited by the suppliers of component parts. These suppliers, lacking sufficient capacity or incentive to produce the new parts, would neither agree to the application of their products in additional modols nor listen to any talk concerning tho upgrading of quality or the creation of new models of the items theya final problem stems from the material balances approach and full production targeting used in the soviet Union. While Western firms often attract businessesult of their ability to guarantee deliverieshort amount of time, Soviet producers are often forced to make delivery commitments contingent upon future production plans leading to long delivery lags.
eavy Machine Tool Ministryhe Current Digest of Soviot Press, Vol, No. 3,
First Period of
Reorganization within the Foreign Trade Ministry
Duringhe MFT made several bureaucratic changes designed to place increased emphasis on manufactured goods exports (see chart). As late2 there were only two main export administrations, one for raw materialsecond for machinery and equipment. he main export administration for machinery and equipment had been split into four main export administrations, one each for the export of industrial equipment, transportation equipment, road-building and agricultural machinery, and manufactured and consumer goods.
The FTOs dealing in manufactured goods were also
expanded in an effort toreater parallelism with
tfre producing industries. Inashinoexport, for
example, was reorganized into three separate FTOsMashinoexport,
Ttekmashexport, and Energomashoxporteach concentrating on
specific lines of equipment. Other FTOs were subsequently
created in support of Soviet efforts to expand exports of
particular product lines. or example, Electronogtechnica
(ELORG) was founded to handle the export sales of Soviot
computers. The MFT also established two FTOs to support the
entire export program: Zapchastexport/to handle the export of
spare parts and Vneshtorgreklama/to undertake the advertising requirements of Soviet export organizations.
13
Chare
DSSRi Measures Taken to Stimulate Export Sales of Manufactured Products
3
Raise salaries of workers in the Ministry of Foreign Trado
Allow for form of accelerated depreciation
Formationoreign Trade Organization to handle sparo parts
Formation of additional Foreign Trado Organizations and Main Export Administrations
m
Formation of Export Councils by Foreign Trade Organizations
Formation of new Soviet-controlled firm* in the West
Formation of zagranpostavkas by producing ninisterios
Increase in bonuses for export production
Formation of leasing companies
Application of compensation agreements to manufactured goods industries
Soal
To encourage higher quality personnel into foreign trade sector-To encourage increased use of new equipment in production.
To centralize, and thus improve, spare parts availibility.
To place increased emphasis on exportsmanufactured products.
To increase producer-exporter contactn
To give Soviet exports direct access to Western markets and to establish sales/service centers.
To centralize control over export activities,
To encourage production for export.
To take advantage of widely used method for manufactured goods sales.
To encourago production for export.
Foreign Comnercial Operations
19. Theapid expansion in the number of Soviet-controlled commercial outlets established in developed Western countries which dealt with manufacturedoviet FTOs organizeduch firms, bringing the number of Soviet-controlled establishments In some cases, the FTOsajority interest in Western firms already dealing in the sale of Soviet products; in other instances new firms were created to handle the sale of Soviet manufactured goods. The FTOs have allowed for minority equity participation by Western firms or businessmen who were alsoajor role in the management of the new firms. Stantemimport, Avtoexport, and Mashpriborintorg have participated in the formation of five firms and Machinooxport, Tractarexport, Aviaexport, and Tochnashexport have also established outlets in the West.
The new firms gave the FTOs direct control over sales efforts and allowed for badly needed exposure to the marketing techniques and competitive conditions existing in Western markets. Showrooms, spare parts depots, and service facilities were usually established by the now firms and, where required, those firms also sought to organize branch dealerships and repair facilities. Foreign workers designated to service Soviet products were given specialized training, often in Soviet-based facilities.
lTI Duringeriod the USSR also rapidly expanded the number of banks in tho West, opening commercial banks in West Ccrrony, Switzerland, and the Netherlands. Several firms were also established which deal in raw materials or intermediate goods, and the USSReries of firms to service itsrole in international shipping.
16-
. The FTOs were not fully committed, however, to providing the initial investment and subsequent marketing environment which was required to support the export expansion they desired. Merchandising outlets and service facilities were often limited to one or two locationsiven country and Soviet firms were often unable to obtain the amounts or typos of equipment which could most readily be sold. Even the ability of the Soviet-owned firms to operate within
their respective Western markets was limited by the rigid control exercised by the parent FTOs over their day to day operations.
Spare Parts
22. The Ministry of Foreign Trade reacted to the problem of insufficient spare partsypically bureaucratic fashion.ew foreign trade organization, zapchastcxport, was organized to centralize spare parts storage and delivery to foreign customers. By the endapchastexport accountedf all Soviet spare parts exports. arge central warehouse was established in Moscow and smaller consignment depots were set up in the West. Spare parts inventories were also maintained by most of the Soviet-controlled firms operating in the West.
23. While this reorganization has ledreater centralization in the handling of spore parts and has been supported by specialized associations within tho production ministries and by special production bonuses, spare part shortages continue to plague Soviet export efforts. Many producers romain unwilling to commit production facilities to spare parts production. Moreover, Zapchas(.export's spare parts suppliesnd hence the amount of parts which are made available abroadare determined by tho productionstimates of spare parts needs rather than by foreign demand.
problem of spare parts is compounded byof some PTO personnel who find it hard to acceptpotential, buyers' attach to assured spareand tho efforts Western firms make to insureresponse to boyer requests for needed parts. state that Western buyers should bear themanufacturing their own spare parts fromprovided by tho producer, arguing that this isin which Soviet importers handle their spare
Export Councils
response to6 directives, the FTOS began
to consult more regularly with industry representatives in the planning and implementation of foreign trade. Industry participation in FTO decision making was formalized in late
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ith the establishment of permanent Export Councils. The Export Councils consist of high level representation from the production ministries, exporting enterprises, and the FTOs handling their products. The Councilsorum for tho discussion of export-related problems and serveehicle for producing enterprises to acquaint the FTOs with the possibility of now export products or of additional production of existing export lines.
tangible results have resulted from the workcouncils including improved packaging,to Western standards, and the introductiondocumentation and advertising. However, theto effect more basic changes is limited. Designedas consultants they can only suggest, notin production or sales techniques.
Zagranpostavkas
the, the decision was madethe foreign trade operations of individual production
ministries by establishing specialized associations or
19/
zagranpostavkas.- The zagranpostavkas wore given nain departmental status and in some cases the ministries created the office deputy minister for export to head the newly-formed association. It was hoped that the zagranpostavkas would
in Zagranpostavkas {delivery to foreign countries) are known to have been created by the Ministries of Aircraft Industry, Hon Ferrous Metallurgy, Machine Tools, and Instrument Making.
relieve the FTOs of some areas of responsibilities not strictly connected with commercial negotiations. Staffing of the zagranpostavkas is financed by the FTOs dealing in the products produced by the parent ministry.
are responsible for theof export contracts, the observance ofafter-sales service, and installation work. they have usually assumed industry-widemaintenance and spare parts supplies for exportedsome cases, the zagranpostavkas have been assignedroles similar to those normally assigned to the
FTOs. The zagranpostavka for the ministry of non-ferrous metals is responsible for compensation negotiations with Westernirms, while members of the Ministry of Aviation's zagranpostavka have taken leading roles in discussion involving demonstration flights of the
ministries which have formed zagranpostavkas
view them, in part, as an alternative to the FTOspersonnel not onlyested interestparent ministry's operations and capabilities, butgained increasing knowledge of world marketpotential markets for Soviet exports. Apparently out offor losing centralized control over foreign indicated that the zagranpostavka
would continue to serve solely in an advisory capacity to the FTO dealing in the ministry's products.
20
Incentives
30. The incentives provided for in the directives followingd Party Congress did little to increase producer desire to expand exports of manufactured products. They proved too negligible to compensate producers for the extra efforts required for export production. Tho bonus system in effect duringrovided producing enterprises with foreign exchange allocations based on export receipts which, in turn, could be used for the purchase of imported machinery and equipment. Managers were also rewarded on the basis of the share of exported goods in total production. Soviot disappointment over the failure of the bonus system led8 to an increase in the hard currency allocationf the value of exported As Deputy Foreign Trad Ministca SmelyaXov commented3 article on Soviet exports
to tho 'West, however, the new incentives failed to solve the problem.
of all we must provide incentive forof machinery and equipment. Thethe sixties was characterized by thethere was practically no sucheven until quite recentlyof machinery, equipment, andhas been considered by some plants asof punishment... Financial,other responsibility for exportexport unpopular in the Sovietis difficult to recall an instancemanagementroposal to thefor additional above-target
Economic Stimulation of Production for Export"(Translated in5.
21. Soviet Deputy Foreign Trade Minister Discusses East-Westovyy Mir,3 (Translated in
31> The bonus was made even less attractive by being tied to Western acceptance of the exported equipment. Moreover, the production ministries were not given discretion over the use of the bonus funds; desired purchases had to be channeled through {and were contingent on) FTOecent policy statements indicate that, as part of
a proposed reorganization of foreign economic activity, industries producing for export will receive hard-currency allocations and considerable independence in making purchases with those funds. Penalty clauses for faulty production will bve
StfiTond Drive to Increaste Exports,
32- Thu high-level concern evidenced at tho3 pasrty plenum has been deflected in new approaches taken by Sioviet planners and exporters attempting to increase the estport of manufactured ooods. eriodarkedly increased Soviet interest in Western market conditions and requirements. Soviet producers and FTO officials began to more seriously examine potential markets for their products and the changes in production required to sell in the West. Interest was largely directed at the US market where Moscow felt Soviet goods could be sold in quantity once the USSR was
granted most favored nation (MFN) status.
v
.
23. See also all article by Yu. Samokhin in EKONOMICHESKAYA GAZETA, No.hich explains additional steps taken to increase producer incentive.
33. Soviet officials touring the US3 were most interested in recommendations for marketing their products. They sought to determine those changes required in their products, which products would be of greatest interest to US buyers, the proper advertising and retailing techniques, and the best method of distributing and servicing the goods they wished to sell, in many cases they sought US companies to act as distributors for their products or otherwise assist future sale efforts. Although the subsequent failure to achieve MFN status muted Soviet attempts, Moscow's newest approach to theg problem was unique and demonstrated growing Soviet awareiMtfis of the need to tailor production and merchandising to Western markets.
3*it, The Soviets enlisted US marketing andto assist in their efforts. In Novemberan agreement with the industrial design firm
of Raymond Loewy/William Snaith Inc. to design selected Soviet products for the US market.ll/ In addition, the US firm was to undertake studies of consumer-requirements for Soviet products and to exercise some quality control over any Soviet productions advertised as being designed by Raymond Loewy. The Soviet contract was forears and recovered the design
(or redesign) of automobiles, motorcycles, cameras, watches
24, Farnsworth, Clvdc It., *LoewyDA* for Many Consuncr Designs but *Nyet'* onew York
tractors, and hydrofoils Concomitantly, other US consultants were hired to undertake other marketing studies on the USSR's behalf.
Compensation Agreements
35. Soviet expansion of compensation agreements ingoods sector dates backhenfor Science and Technology (SCST)production industries could obtain hard
currency credits for equipment purchases if such credits would bo covered by subsequent hard currency exports. At the same time, an IMEMO official indicatedew foreign trade policy waa under discussion which would involve the development of profit oriented industries.designated to manufacture goals for export.
Soviet, exporters began to solicitio compensation agreements whereby thepay for imported Western capital goods with Tho offered to set up specialor to otherwise tailor production to Some compensation-type agreements have Oneproduction of machine-
tools designed with West German assistance. The Westinvolved will produce the initial prototypes andSovietsrequired to set
in the USSR. The West Germans will take
production from these facilities inn most cases, however, potential Western partners have shied away from such deals because of uncertainty over the quality of Soviet-produced products and over the ability of Soviet producers to meet assigned production targets and to supply spare parts. Joint-Ventures
37. The Soviets realizedore comprehensive form of cooperation was needed to entice Western firms into taking production as repayment and, more importantly, into sharing technology and production know-howontinuing basis. Inhe USA Institutetudy of the various forme of ownership and management control commonly employed by Western firms. By querying Western firms directly the USA Institute hoped toorm of cooperation which, while inducing desired Western participation, would result in minir*al conflict with traditional Soviet insistence on complete control over domestic production.
36. nstitute members stated that the concept of joint-ventures was being considered in light of the Hungarian and Romanian experiences and openly discussed those changes which would have to be made in Soviet law to enable foreign equity investment. By the ondS, Soviet planners had decided on the guidelines for such joint-ventures. The USSR would allow Western participation in the management of
7S: 1
Soviet firms involved in the joint venture and would grant special exceptions to cover imports and exports connected with the joint venture. While the USSR will not consider Western equity ownership of Soviet-based production facilities, Soviet officials indicated that Western investment would be guaranteed by Gosbank and that other provisions, amounting in theory to joint-ownership, might be included. Such guidelines aro recognized by the Soviets as being very provisional; the final form of Soviet joint-venture legislation will probably defined after agreements with Western firms have been reached and experience has been gained in operating joint-ventures with the West, teasing
39. Soviet FTOs did not begin leasing operations in their export efforts0 when the Soviet-owned United Machinery Organization began leasing heavy duty construction equipment to British firms. Soviet interest in the potential of leasing resulted in the organization,f two jointly-owned companies to promote and finance leasing operations in Europe. In October, East-West Trading Company was founded by the Soviet Moscow Narodny Bank and the UK's Morgan Grenfell bank, and in December the Soviet-owned Banque Commercialeurope de Nord (BCENJ in Paris joined with France's Credit Lyennais to form Promoloase. The new firms are supervised by the leasing subsidaries of the Western banks involved. While the leasing operations are intended
to assist Soviet imports, theyrincipally concerned with increasing Soviet exports of manufactured goods to the Vfest.
Actual Growth in Manufactured Goods
40. The absolute growth of Soviet exportgoods (albeitmall base) has Annual sales roseillion0 million Growth has
been particularly striking in recent years, rising4 million28 million4 (the last year foe which detailod figures are available). The USSR has beiea unsuccessful, however, in raising the share ofproducts in total exports to the developed West.5 manufactured goods sales accounted for% of total exports;4 the level had risen slightly For most of the intervening years the annual share ranged%igh% 2.
41. Sales of Soviet manufactured goods in the West have been concentrated in Europe (soo More than one-fourth of such exports4 went to Finland reflecting, in part, the special trading arrangements between the two countries. The United Kingdom has alsoajor recipient of Soviet products,
Based on official Soviet foreign trade stastics a3 presented in "Vneshniaia.
mm
particularly automobiles, cameras, and watches. Soviet manufactured good exports to West Germany4 were led by ship sales, while export of manufactures to Italy consisted mainly of machine tools and communication equipment. Despite its special interests in expanding trade with the USSR, France has yet to become the major importer of manufactured products that the Soviets would like it to be. aris accounted
forf total Soviet manufactured goods exports to the Developed West; major items included agricultural and transportation equipment*
the introduction of the Lada (the Soviet Fiat) in Western marketsautomobiles have become the USSR's major manufactured
goods export item (see Sales of power and electrical
equipment have risen rapidly in recent yearsillion Ship sales have continuedajor export item, while sales of metal processing equipmentprimarily metal-cutting machine toolshave grown steadily. In the consumer goods sector, the USSR has steadily increased camera sales and has been able to increase sharply the sale of watches in the West.
Factors Behind Sales Successes
a rule, Soviet prices of manufactured goods areprices of competing goods in the West; in someare quite substantial (see injection-moulding equipment, for example, is being
p
illlljj'l
Table 3
USSR: Sample Soviet Prices for Manufactured
Product
Transformers
Resistors
Tractors
Machine tools
Turbines and compressors
Color television sets
Percentage Discount Prom Western Prices For Comparable Goods
30%
32-
offered to UK buyerselow prices charged by British manufacturers; Soviet machine tool and agricultural equipment prices are routinelyelow the prices of comparable models produced in the West.
44. Discount pricing has undoubtedly ledreat number of orders, particularly when Soviet sales have involved component parts such as electrical resistors or other manufactured goods where other competitive factorsappearance, technical docirrentation,epair/spare parts networkare of minimal importance. Low prices have also
served as sufficient stimulus when as in hydroelectric generating equipment, Moscow was able totate-of-the-art product and integrate its sales effortarger dealestern producer whom buyers could rely upon to rectify any subsequent problems.
45. The USSR also has resorted to collateralits attempts to expand
exports of manufactured products. Soviet importers of Western "capital equipment have often insisted that the Western supplier accept Soviet equipment in lieu of cash payment forf the contract value. While this effort was traditionally employed only in the context of Soviet equipment purchases, more recently Moscow has predicated some agricultural purchases on counterpurchases of Soviet equipment. Inor example, the Soviets indicated that purchases of agricultural products from New Zealand were contingent on New Zealand's buying of Soviet equipment.
33
In addition to establishing their own firms, many FTOs have sought to initiate marketing and distributing agreements with Western companies. Low prices, deliveries on consignment, and easy payment terms have made such proposals attractiveumber of Western firms. The Soviets, in turn, are able to penetrate established markets by relying on Western companies familiar with retailing in established Western markets. In some casesmachine tools and watchesthe arrangements havelending of Soviet with Western components and marketing under the Western firms' trademarks. Soviet watch sales are concentrated in France and the UK where such arrangements are in effect.
47* The Soviets have also been active in establishing networks of dealerships to assist in the sales and servicing of automobiles and tractors sold in the West. ealers have been appointed in the UK to support Satra Corporation's sales of Soviet automobiles, and Soviet automobile sales efforts in Norway, Sweden, and Finland are also backedetwork of local dealerships. Soviet tractor sales in France are supported byocal outlets, and Belarus Equipment of Canadaa Soviet controlled company specializing in tractor salesis in the process of expanding its dealerships in both Canada and the US.
34-
Another factor behind Soviet sales successes has been the willingness of some Soviet exporters to tailor their products to Western specifications. Such alterations often call for only minor changes in Soviet production, such as the painting of Soviet resistors to Wostern/ The USSR has also sought
to combine Soviet and Western components to make the product more attractive to Western buyers. Soviet-produced machine tools are often coupled with Western numerical controls and Soviet aircraft with Western avionic equipment. Most recently, the USSR signed an agreement with Italy's Worthington Italiana SPA for the joint production of pumps for use in tho chemical and hydrochemical sectors. Prospects
:"We cannot enter the world marketplace straitjneketed by our domestic habits and traditions of planning, manufacture, and transport, basing our actions and decisions solely on the lavs of the domestic market. Wc oust bc up to the level of the demands of tha world market. Attainment of this level will not cause damage to our planned economy, nor to the lavs of socialist production, nor particularly to Communist Ideology. On the contrary, this principle will teach us much and will maketronger competitor vith
N.3
everal problems must be resolved before the Soviet Union can expoct manufactured goods to bocome an important share of Soviet exports to the West. Recently instituted changesaccomodation to Western requirements, joint-production, and use of Western marketing expertiseepresent a
27. push sales of products in West Germany, Per
Spiegel, .
Smclyakov, "Soviet Foreign Trade Minister Discusses East-West
distinct improvement over the superficial and largely organizational measures undertaken, The new programs, however, leave untouched the more basic problems related to the traditional approach to foreign trade production and sales.
50. If exports are to be expanded meaningfully, Soviet producers must be made directly accountable, and compensated accordingly, for the success or failure of their sales efforts in the West. To be effective this change would involve providing the producer with:
direct access to potential buyers, including participation in Soviet-owned companies in the Westirect say in marketing efforts associated with the product.
the ability to import Western technology and equipment needed to make his output more competitive,
the authority to have component parts produced in the quantity and quality necessary to meet his export commitments.
considerable freedom in production, allowing him to be responsive to changes in Western demands.
3b
Producing ministries have become increasingly aware of Western needs and competitive conditions in recent years by their increased participation in negotiations with Western firms. As noted earlier, the establishment of zagranpostavkas, in particular, has the potential for greater producer participation in the export process. Compensation agreements currently being advocated for the producing sectors alsotep in the direction of tasking producers with export responsibilities. Yet, the potential for compensation agreements are limited by Western unwillingness to provide state of the art technology and marketing assistanceontinuing basis without some form of management and equity participation.
52. In addition to allowing producers direct access to buyersolding them accountable for sales, other key indicatorsoviet comfsitment to implement changes needed to significantly
improve Moscow's exports of manufactured goods include:
" affirmative action on recent high-level statements calling for the establishment of finns producing solely for
Western export markets,
-<* where required, some allowance for Western
management and possibly equity participation.
greater availability of goods for export and
a irore flexible production schedule allowing for quicker delivery times,
greater emphasis on spare parts production and the establishment of additional outlets in the West.
ho USSR is studying US proposals for joint-venture agreements Involving US participating in Soviet production.5 address. Deputy Minister of Foreign Trade Sushkov discussed some of the proposals forwarded by US firms which were being considered. One firm, for example, hasroposal tolant to produce automobile parts in tho USSR for resale in the West under the US firm's brand name. The proposal provides for joint management of production, with the Western firm's representatives responsible for quality control and the use of state-of-the-art technology and equipment in production. Ths US firm would be paid for its cap&tal investment and services out of Soviet production of tho finished products32/ The USSR, however, has yet to formalize
the requisite joint-venture legislation which would allow for sucfe an arrangement.
oscow will find it difficult to arriveeaningful program, such as joint-ventures, which will bc implemented by the massive and conservative Soviet bureaucracy. Advocates of change, such as N. Smelyakov, appear to beistinct minority. Although their influence on policy seems on tho rise, their past initiatives have been frustrated by widespread bureaucratic resistance any by the failure of the USSR to gain most-favored-nation status from the United States.
29. ddress given15 Symposium on US-Soviet Technological Cooperation.
the final analysis politics rathermay prove to be the major barrier to The Communist party maintains tight controlSoviet economy and the political element playsrole at all levels of economicpolitical element has proven very resistant tochange in the past, particularly when suchto resultiminution of its control. It
is difficult to perceive of an economy responsive both to the needsapitalist market and the party. The creationpecial export sector, which like the military economic sector is distinct from the larger domestic economy, may prove to be the only feasible solution to this dilemma.
the next several years continuedof recently initiated programs should allowto continue to increase sales of manufacturedthe West. Sales will continue to be centered inautomobiles, tractors, power equipment,which have been tho mainstay of pastmore meaningful changes are fullySoviet manufactured goods sales will remainpercentage of total exports to the West; theyfor lessf total exports for atbalance of the decade.
Original document.
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