OA
MEMORANDUM FOR THE.RECORD
SUBJECT: Transmittal of Briefing Paper
The attached briefing paper was delivereduneof National Security,
Department of Treasury for his office's use in preparing for Secretary Simon's trip to Eastern Europe.
Soviet Price Increases and Their Impact on Poland, Romania and Yugoslavia
Background
The Soviet Union raised prices in5 and again in6 to its CEMA trading partners. Poland and Romania, with their fuel and raw material trade with the USSR in relative balance, were less affected by Soviet price increases than other CEMA countries. (Yugoslavia isull member of CEMA and trades with the USSR at world prices). Moscow's decision to raise prices was based in large part on its unwillingness to continue to supply oil and raw materials to Eastern Europe at fixed pricesthe East Europeans paidarrel for Soviet oilime when world prices had risen spectacularly. Moreover, Moscow had long been unhappy over its deliveries of fuel and raw materials to Eastern Europe in return for overvalued machinery, which is often pricod at the level of superior Western models.
The largest price increases5 were for fuels, power and basic materialsitems on which Eastern Europe is heavily dependent on the USSR. Prices of crude oil, natural gas and coal more than doublad and the price of electricity increased by half. The Soviets also raised prices of pig iron, Iron,, and cellulose. Moscow agreed to increases, although smaller ones, for machinery and various manufactured goods, which make up the bulk of the USSR's purchases from Eastern Europe. For example, prices for Polish consumer goods sold to the USSR were increased. he Soviets raised the price of crude oil an additionalnd imposed price hikes smaller than last yearn natural gas, wood, paper, cellulose, and some chemicals.
Despite price hikes5rices ln CEMA trade of many raw materials are still well below world levels. For example, tho East Europeans are now payingarrel for Soviet crude oilhird below the world price. In an attempt to offset its disadvantage, Moscow has pressured the East Europeans to a) buy more Soviet machinery, b) buy more oil in the West, c) invest in Soviet raw material projects and d)ew CEMA pricing formula with annual price changes basedoving five year average of world prices. Despite adjustments stemming from these demands, tho USSR is stillisadvantage in trade with Eastern Europe.
Poland
Poland, with its abundant raw material resources, has not suffered much from higher Soviet prices for oil and other raw materials. Although the country relies on the USSR for -nearly all of its crude oil, pig iron, and natural gas imports and for more than half of its cotton imports, Poland alsosizeable amounts of coal and coke and some zinc and copper to the Soviet Union. Since those Polish exports also benefitted substantially from price increases, Poland's terms of trade with the USSR declined only an estimatedo If, as the Poles claim, this decline is offset byterms of trade with other CEMA countries, Poland may be able to divert some exports from Eastern Europe rather than fr the West to cover the gap resulting from declining terms of trade with the Soviets. In any case, it is expected that the higher Soviet prices will not have much impact on the degree of Polish dependence on the USSR.
To obtain additional deliveries of Soviet fuel and raw materials, the Poles have acceded to Moscow's demands for investment in projects in the USSR. Poland has already become involved in several cooperation projects in the USSR, including the Orenburg natural gas pipeline and tha Kursk metallurgical combine. In return, Poland will receive deliveries of natural gas and of enriched iron ore and ferroalloys. Poland has also agreed to help build an oil pipeline in the USSR in exchange for additional supplies of Soviet crude oil.
Romania
Romania has been less affected than any other East European country by Soviet price increasesprice hikes for imports from the USSR have probably been offset by price increases for Romanian sales to the Soviet Union. In contrast to the rest of Eastern Europe, Romania does not import any Soviet oil andexportedons of oil products to the USSR last year. Because of the close balance on materials trade, Bucharest and Moscow agreed to limit price changes5 to fewerommodities including iron ore, coke,consumer goods and some agricultural products. Prices of machinery, whichelatively small item in trade between the two countries and is also close to balancing, were also unchanged.
Romania has been affected by Soviet unwillingness to boost fuel and raw material deliveries to Eastern Europe withoutin Soviet projects. Moscow has repeatedly rejected Romanian requests to begin purchases of crude oil from the USSR. Bucharest also is concerned about the dependability of Soviet deliveries of iron ore and the Romanians have been shopping in Brazil, India and Gabon for additional supplies. Romania has agreed to make deliveries on credit to the USSR in return for natural gas from the Orenburg pipeline project which is scheduled8 completion. 5 trade surplus with the USSR0 million probably reflects these deliveries.
Yugoslavia
Yugoslavia has not been affected by Soviet price decisions within CEMA because Soviet-Yugoslav trade prices are determined largely by world market trends. Although Soviet-Yugoslav trade protocols indicate rough annual targets for trade volumes and values, commitments oo pricing are made during the year in additional protocols and/or letters of credit and contracts in response to world market trends. esult,hile prices of Soviet exports of oil, rolled steel, cotton fibers, and lumber remained steady for Eastern Europe, they rosefor Yugoslav as for Western customers.
Well-endowed with natural resources, Yugoslavia dependsimited extent on Soviet supplies for basic energy and material needs. Last year, the USSR suppliedf Yugoslav energy importsmostly crude and refined oil and some hard coal. During theears, imports of Soviet natural gas are scheduled to rise sharplys is development of Yugoslavia's extensive domestic hydro-electric potential. The USSR provides substantial supplies of ferrous metals, wood products and chemicals, but this is partly offset by netexports of nonferrous metals and agricultural produce.
Original document.
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