ONjf
III. B. Soviet and Eastconomic
RolotionaUS ana
1. Svolution and Prospects
Tho driving force behind tho growth in tradoHost hasho mod of tho USSR and Easternacquiro advanced Kestcrn technology and equipmentto spur domestic economic development. The
also has looked to Wostorn countries for the agricultural roducts, intermediate goods, and most recently crude oil which cannot be procured elsewhere.
In the post decode trade with the West has been the fastest growing sector in the Soviet and East European economies. Exports to the West from these countries rose by an average annual ratend by on average. Tho willingness of the West to provide an over incroaoing amount of credit has allowed for an even more impressive annual rate of import.
The constant dollar growth ot East-West trade has also been impressive, particularly when contrasted with the real growth in Soviet and East European GNP. During thin period, the GNP of tho USSR grew at an average annual ratexports to the West by an averagend importe from the West by annnual rate.
micro only.
Exports
of Wiich USSR
Eastern Europe
Poland
Bulgaria
Czechoslovakia
East Germany
Hungary
Romania
0.9
1.4
3.7
2.2
may not aaa to totals shown becauso ot rowxEHgT
The East European experience was similar. Aggregate GNP grew% average annual ratehilo exports to the West grew by annd importsnnually.
;' Soviet and East European trado with tho West has expanded in complexity as well as in volume. The USSR and East European countries have sought trade, scientific and technical cooperation, and credit agreements with Western governments in order to enhance their ability to increase trade. Moreover, with the growth of exports and the need to stimulate export growth even further, these nations have become more
CGN'rteTiAL
nctiva in concluding marketing agreements with Keatern firms or in establishing their own marketing operations in tho Woat. Concomitantly thoy have placed increased pressure on Western governments to eliminate Western quota restrictions and to obtainovored-notion (MFM) status.
The bast has also attempted to establish more complex trading relationships with Western companies to insure their ability to obtain both imports of advanced technology and guaranteed markets for thoir exports. To this end increased stress has been placed on compensationnd co-production agreements.**
Interost on tho part of the USSR and Eastern Europo in expanding East-West trade is stronger than ever; past infusions of Western technology and equipment have only whetted their oppotitioa. For the East Europeans, moreover, cutbacks in the growth of Soviet deliveries are forcing thera to increase imports of oil, grain, and industrial materials from the West. During the next decode tho East can bo expected to intensify its efforts to secure additional Western financing as well as viablo export markets in the West.
* Compensation agreements provide for Eastern imports of Western capital goods often on credit which are ropaid usually by goods produced by the imported equipment. ** Co-production agreements involve production of components by both East and West, with assembly or further processing occurring in the Eastern country.
however. The Soviet and East European economies do not oasily cope with the vagaries associated with trade with the Host.. The recent Westorn recersion highlighted their
vulnerabilities and no doubt raieed questions among the
leadership of tho Communist countries about how to cope with Western business cycles, nonetheless, tho trend points to increased economic interdependence with the West.
The USSR and Eastern Europe will attempt to get
the best of both worldsincreasing the real valuo of imports from the West whilo trying to insulate their export industries from Western market disruptions. To this end, these countries are attempting to secure export markets via the use of compensation agreements andin the case of Eastern Europeco-production agreements and Western equity participation.
The actual growth in Eaot-Woat .rado will be limited by
Soviet and East European oxport capabilities which will constrain the growth in Western imports. Heavier debt, service and increased Western coic.rn over rising debt will limit Soviet and East European ability to continue to run huge trade deficits. Unless tho large current debt overhangsubstantially reduced, import growth in the next decade is likely to be below the rate recorded over the pant decade.
Role of the US
The US economyajor potential source for the advanced technology, agricultural products, and financing desired by tho East as wellotential major market for Soviet and East European exports. The US, however, hasinor-but increasing role In East-West trade. Trade until recently was mainly limited to US exports of agricultural commodities and solected typos of equipment which could not be obtained elsewhere, in exchange for petroleum products, hams and metals. 0 trade between Communist Europe and the US representedf total East-West trade. This share rose to5 and will be higher
Mutual awareness regarding trado possibilities grew with
the US-Soviet detente. Since that time Soviet and East European orders for US equipment have increased markedly. Their exports to tho US hove also risen although significantly slowor than imports. Inter-govornmontal agreements, including the awarding of Eximbank, MFN, and CCC privileges to some East European countries, havoupportive role in the expansion of this trade. ood trading environment, Soviet and East Buropoon trade with the US would probably increasehare of total East-West trado over the next decade. Until credit facilities and other benefits now accorded to Poland and
Romania are provided to tho other East European countries and the USSR, however, therereater likelihood that the US role in East-West trade will decline
USSR
Although Moscow wod previously able to roly hoavilyapid growth in tho labor force end tho stock of plant and
equipment to spur economic growth, Soviet leaders recognize that further rapid growth can only bo achieved by accelerating technological progress. Tho problem is that theector has lagged in developing ond applying new technology. Tho USSR has been forced to turn increasingly to imported technology, via the purchase of machinery and equipment,oans of accelerating technological progress and economiche need for an expansion of trade with the West has received priority attention at the last two Party Congresses and the value of Soviot two-way trade with tho West has, in fact,old over the past decadeillion
Although the volume of Soviet imports of machinery from the West comprised onlyf total domestic investment in machinery5 imported equipment is crucial to tho development of key Soviet industries including oil ond gasfield development, the chemical industry and the automotive industry. In addition Western equipment and capital provides the basis for significant Soviet raw material dovolopment programs including coal, timber, and aluminum. The USSR also relies on Western suppliers to redress domestic shortfalls, most notably in tho areas of agricultural product* and finished steel.
CONFlbSiNTIAL
-6-
CCNFltpM
Moscow's intontion to continuepand trade with the West ia clear. illion in Soviet orders lor Western equipment and pipe have been placed in the lastears, and discussions continue on several other major deals. Moscow obviously hopes to elicit Western participation in additional development projecto including offshore oil and gas deposits, Siberian natural gae development, and wood and iron ore processing facilities. Eastern Europe
Increased trade with the West has been even moro critical for Eastern Europe, which is more trado dependent and resource poor than tho OSSR.
Like the Soviets, the East Europoano decided ino import sophisticated machinery and equipment from the Wost to attack problems of slow growth, low labor productivity and decreasing additions to the labor force.n real terms, imports of machinery and equipment from the Westimes and total imports from theimes5 level; GNP grew by only two-thirds during tho same period. Major machinery import categories have boon chemical equipment, oil refineries and petrochemical plants, and equipment for the food and light industries.
In contrast to tho USSR, howovor, Eastern Eoropo hoa also become moro dependent on tho Wost for materialsot only for high quality industrial materials unavailable elsewhere
COrlrWfiAL
such aa special steels, synthetics, and pla&ticn, but also for groin, oil, and ntuials formerly supplied by tho USSR. Although still providing the lion's share of fuels and metals to Eastern Europe, Soviet supply constraints have resultedlowdown in tho growth of oil deliveries in thend ferrous metals in the. Crop disasters in the USSR ledharp cutback in grain deliveries from2 harvestancellation of deliverios after5 harvest, forcing the East Europeans to buy additional amounts of grain in tlie Wast.
With East European populations more aware of Western
living standards. East European leaderships have also been
more attentive to consumer intorests than the Soviets.
After the Polish riotseveral East European regimes
boosted imports of consumer goods from the west. Although
Romania and Bulgaria refrained from these purchases and the
remaining countries have cut them back in time of austerity,
consumer goods purchases remain an important, if email, share
of total imports from the West.
Trade with tho West began to falter4 as soaring
world prices, the ECE ban on boef and cattlo imports, and tho
beginning of Western recession took their toll. The East
Europeans, however, did not bogin to cut back on imports until
the spring5 and the deficit7 billion, topping
the previous rocord4 billion incurred
Romania, by cutting imports sharply, was the only
country able to reduce its deficit On tho othor hand, Poland's importsled by machinery and
and its deficit jumped4 billion0 billion.
^ca^gnaLiiiLi
Efforts to hold Imports down and somo recovery in exports should permit the East Europeans to pare their cumulative deficit to5 billion Bulgaria, Hungary, and Romania are cutting back on imports and should bo able to reduce their deficits significantly. Czechoslovakia, East Germany, and Polandneeding extraordinary imports of. grain and fodderwill have difficulties in trimming their deficits.
Given their already heavy debt burden, the East Europeans
will hovo to continue to curtail import growth over the next
*
few years. The extent will depend on the degree of recovery in their Western exportconstraints on their ability to export, and the availability of financing. In addition, some of the countriesespecially Bulgaria, Czechoslovakia, East Germany, and Hungarymay well have to divert some exports to the Soviets in order to make up for the deterioration in their terms of trade. *
In addition to strong efforts to push exports to the West, the East Europeans will continueseek compensation deals end co-production arrangements in an attempt to ease their hard currencyts position. Western reluctance to become involved in such arrangements, however, limits their potential.
't
As long as Western markets arc favorable, most of the Eant European countries sho ild be able to import most of tho agricultural ond induetriol materials they Mod. But thoy can do this only if they are willing to 'Undt their desire for Western equipment and technology. Such imports can be curbedhile without soriously harming economic growth.
difficulties in borrowing as wellestive population and committed to continued rapid economic growth, Poland i3 particularly ind. We project that, given supply constraints, Poland con at best increase its exports to the developed Westeart current prices.
! This would limit overage annual import growth tono growth in real terras) if Poland is to keep its debt within manageable bounds.
Romanians, although also committed to rapid economic growth, areomewhat better position because of their willingnoou to cut imports sharply. But imports will have to pick up sub-
stantially soon if the Romanians are to come close
to realizing their ambitious growth plans.
COitoENim
The Bulgariano elao ore reluctant to slacken their rapid economic growth. They may, however, have to heed the advice of the ussrthe only country apt to bail them out if necessary. The Soviet Ambassador to Sofia recently stated that Bulgaria ought to scale down its grandiose plans for imports from tho West and economic growth.
East Germany, Czechoslovakia, ond Hungary will meet their obligations and keep their deficits under control, but with reduced import growth. This may notajor problem, however, because tho economic growth targets are low.
of detente, economic considerations are extremely important, but not overriding. Such problems an coping with China, 'i'.if'. controlling nuclear risks, and advancing political] in Western Europe and elsewhere are also important factors. Economic considerations complement these other aspects'! detente, offering an alternative to autarkyesponse to changing world conditions.
If detente suffered in important strategic or political areas, Moscow would make great efforts to sustain its foreign economic policy so long as some major Western governments were receptive. The economic considerations that led Moscow to formulate its policy of expanding business ties with tlie West would remain even if certain political considerations supporting detente lost various specific competitions with other Soviet policy priorities.
... Almostears of economic experimentation have failed to deliver the USSR from its relative technological backwardness compared with the industrial states of thethis has been acknowledged by Soviet officials. These Soviets also acknowledge that the gap may widen between East and West in the vital area of economic competition unlcst* vigorous efforts are made to adapt to the demands for technological growth.
'*'"
< *
from the desire to lessen the risk of
global nuclear conflict, probably no oth.jr aspect of Moscow's current detente policy hastrongermong Soviet leaders than its economic policy. However,
there are doubtless greatly differing views on thecations of detente for the structuring of theeconomy. The need for Western technology ando have few serious critics, though there are strongin'Moscow who oppose any fundamental tampering witheconomy in order that it might more effectively absorb
the technology and investments the USSR seeks. There are also influential circles who worry about thomplications of growing economic interdependv.ee.
major* setback for detente would seriously hamper but not stop the Soviet leaders from pursuing their *vforeign economic course. The Kremlin would likely judgehave to forego some of the economic benefits it seeks from the West, but that it would be able to maintain "economic dealings with some major Western governmentsMh fin time restore beneficial relationships with others.
*
. Soviet and East European Debt
The net hard currency debt of tho USSR andhas increased fromillion at theillion at tho endnd it willtoillion by the end arge increase in imports, financedlong-term credits, which were readily available
Western countries. Their debt, therefore, was expected to go up in any event. What pushed up the debt to the current massive proportions was mainly the Wostcrn economic reces-sion, which nearly halted the growth of Soviet and East European hard currency exports. Massive Soviet, East German,
and Polish grain import requirementsesult of last
year's disastrous Soviet harvest added to their hard currency
deficit and increased their borrowing
The prospective hard currency deficitr,6
likely to raise the USSR's debt toillion and
Eastern Europe's to as muchillion. Although
I
Soviet or East European borrower has boon turned down, tho
cost of Western credit and the difficulty of obtaining
are increasing. Many Western bankers have reached legal
or self-imposed ceilings on Soviet and East European debt.
In addition, the international banking community is becoming
increasingly concernod about the debt problem and the per-
siotoncc of hard currency deficits. Western bankers hove
I
SECRE"
Tabic!
USSR ami Ea^ern Europt: Total Hard Currency Debt
DeWat '
Service
at
Service
at
.-.
US S)
US S)
USS)
Europa :
Germany
.
22
Hungaiy.
'
Romania.'.
34)
Projected.
' .Estimated.'
| Repayments of principal and interestercentageerchandise exports. Total' hard currency exports are used
in the Soviet case; exportseveloped West for the
long viewed the USSR and East European countries as excellent credit rinks. The absencedefaults and the minimal amount of refinancing during the entire postwar period for these countries indeed compares very favorably with the experience of many non-Communist governments and firms. Even today, the Communist countries have higher credit ratings than almost any LDC.
The high credit ratings of the USSR and Eastern Europe are also based on the assumptionigh degree of political stability. It has been assumed that Communist governments were strong enough to make the economicnecessary to cope with any debt problem, including sharp cuts in imports. For most East European countries, it has also been assumed that Moscow was the banker of last resort, as has sometimes been the case in the past, for Bulgaria. Tho assumption of political stability has been somewhat undermined by the cave-in of the Polish government in the face of worker demonstrations after the recent attempt to increase food prices. Similarly, various reports indicated that Moscow was generallyower priority to supporting its East European allies' debt. Gierek's recent success in obtaining above-plan Soviet do-liveries of oil ond the resumption of Soviet grain deliveries from the bumper harvest mayofteningbut not an abandoningof the tightfistcd Soviet position.
i.
I!*
Wostorn bonkor.i' concern nbout the Soviet and Kant
Europoan debt problem could snowball, butoes not ccem likoly. The USSR is still viewedood credit risk,
and most Western governments ore continuing to guarantee long-torra credits, although with closer examination than in the pant. Poland's credit status i3 most at rick. West European governments believe theyolitical stake in expanded trado with tho East and ore willing to provide large credits to sustain its growth. , should soviet and East Europoai* hard currency deficits long continue at recent high levels, thosu countries would encounter rapidly increasing difficulty in obtaining ncv; credits. USSR 1
The rapid growth in imports ef Western equipment end
pipe under credit and tho unexpectedly large trade deficitshnve ledubstantial rise in the USSR's hard currency dobtj total net debt rose from rouyhlyillion4 toillion by the end of last year; by tho endG net Soviot indebtedness shouldillion. Roughly three-quarters of this debt in medium- end long-term, largely held or guaranteed by Western governments. Not Soviot liabilities on the Eurocurrency market, representing non-guaranteed indebtedness and mostly short-term in composition, rose from loss0 million at tho end4 tobillion by the end of tho firstC.
Table
USSIlt Ilnrd Currency Ualnnco of Payments and Outstanding Indebtedness
In contract, Moscow's ability to obtain tho non-guarantood credits it needs appears constrained. Tho USSR was forced to borrow roughlyillion from Wontorn commercial bankern over the pastonths findonult many major Wostcrn banks are currently near or at their lending limitsis the USSR. These banks in particular, and the Western banking community in general have become far mora aalcctlve with regard to additional lending. The USSR is finding it more difficult to obtain short-term credits and probably will bo forced to pay highor interest rates and front-end foes to obtain Western participation in medium-term syndications. Most bankers seem to profor supplier's credits whichrofitable return end enhance the lending bank's relationship with the Western exporter.
For its port, the USSR has apparently realized that its heavy borrowing5 has limited its ability to heavily tap tho Euromarket for funds this year. Moreover, Soviet borrowers romain extremoly sonsitlvc to tho nominal interest rates they munt pay and view any rato increasewhich would probobly occur if Moscow were to ceek now syndicationss adversely affecting their credit standing in the West. To protect its credit rating aa well as emaining borrowing capacity, Moscow has takan ooveral atops to reduce its Uopondoncy on the Eurocurrency market for financial credits. Thoso stops have included:
ft tightening of controln "overexpenditures, includingcash down paymentn' on NH ordersand the delay until next year offor some goods alreadygreater use of promissory notoequipment imports which Moscowhave concludedashscurcosteady supplyfixedotes being discounted on thomarket,arge percentageorders in tho US ore alsofinanced by thischannelling of orders on severaltofirms to take
advantage of long-term credits which have been extended but heretofore have boon lnrgoly unused. In mnny cases, this trade diversion has been ot tho expense of competing US companies.
heavy soles of gold In the Host despiteconditions)5 million was eornodsales in Switzerland during the firstof this yenr ond the Soviots reportedlyheavy sellers in recent weeks. TheIn tlie gold price han made this nn:iHr>rnnHvci,
Althougheavy borrower on Western money markets, the USSR has been able to substantially reduco ils reliance on private credits in financing this year's hard currency trade deficit. While4 billion hard currency trade deficit incurred in the first half6 equalled the deficit recorded in January-Juno of lost year, net Soviet borrowings on Western private money markets in those respective periods fell9 billion6 billion.
Tho USSR almost certainly would have proforrod to refrain completely fromurocurrency syndicationhere is some indication that its decision to do so last April was unexpected. Market response to thisillionver the Iondon Interbank Offered Rate) was very poor as evidenced byarticipation by Communist-owhed banks in the West. Since it is highly unlikely that Moscow will accept the higher interest rate spreads Western bankers will insist upon on any futuro syndications, it is doubtful that tho USSR will enter the Eurocurrency marketecond syndication this year.
-.As long as Soviet Eurocurrency indebtedness remains at or above present levels tho USSR will probably attempt to limit trado deficits, and thus import growth from the West, to.levels which can be financed without resorting to general purpose borrowing. In order to maximize tlie growth of imports from the West Moscow can bo expected toeavy, usq of yovcrnment-backed credits. Along with anticipated
revenues from gold and arms nalcs, transportation corningr, and tourist receipts, nuch tied borrowing should allow the USSR to finance annual trade deficits on tho order5 billion toillion for the next few yeax-s.
Should the USSR ugain incur unexpectedly large trado deficits, it will probably have to place greater emphasis on expanding exports ond/or cutting back on non-grain3he USSR is not expected to bo ablo to rely heavily on general purpose borrowing to makeajor portion of the shortfall. In addition to taking the above mentioned steps, high level Soviet officials have stated that hard currency needs hovo caused tha USSR tothe cmphnsin placed on expanding raw material exports in an effort to rapidly boost hard currency receipts.
Poland
eversal of Gomulka's moro cautious approachhas taken maximum advantage of Western credits to import vast amounts of capital equipment to modernize the Polish economy. The very rapid expansion of Poland'n imports from tho West inWarsaw's trade moved into deficit beginningeflects the nationalof tho Gicrck regime to "catchot just with tho West but nlso with otheruropean countries. econd related motive, no less urgent, was to raise the
OL Vim, i
standard of living for urban workers.j The Wostorn recession added greatly to Poland's borrowing needs; trado deficitn climbed4 billion in
0 billion By tho endho hard curroncy debt had9 billion. Although still relying heavily on government guaranteed creditswhich accounted for roughly one-third of the total debt at end
Toland has .been forced2 to greatly boost its Eurofiurr-'ncy borrowing to obtain tho financial credits needed to help cover the unexpectedly largo deficits and meetepayment obligations. By5 known net Eurocurrency liabilities had4 billion. esult of heavy short-term borrowing on tho Euromarket, Poland's debt structureonce the best in Eastern Europedeteriorated. Long-term debt dropped from about two-thirds of tho total in0 to roughly
In spite of Polish efforts to cut back on import growth and some recovery in exports, this year's trode deficit will be about the samo as Thio will bo offset only slightly by an expocted surplus on other current account itemsreflecting the beginning of special pension payments from West Germanynd the debt couldillion by tho end of the year.
Table
Polandt Hard Currency Balance of Payments and Outstanding Indebtedness
Million US S
/
and private transfers,
ACCOUNT BALANCE
and long-term capital,
BALANCE
net indebtedness
balance of payments purposes, official Polish data on exports and iirports were adjusted to correct for errors in thn treaUBMlt of trwir.port.
Reflecting the bofiinninj cf special payments from Kest Cormany.
Sent? of which was used for ccepanpatcdy financing.
Because of the heavy build up of its debt and rising debt service, Poland lo finding it increasingly difficult to arrange for Weotern financial credits. In firstnown net Eurocurrency liabilities roso by9 million, down substantially4 million in firstndicative of tho seriousness of both Poland's payments crunch and its inability to secure sufficient financial credits arei tho
request to tho French that repayments on existing
loans bo extended byearn; and the
unsuccessful recent request to I'elgium that tho balance3 export credit line bo handed over for Poland's immediate use. Poland is also finding it necessary to pay higher interest rates on those loans it is able to obtain.
Poland io in the moot serious predicament among the CEMA countries ond will have serious balance of payments problems Cor the next several years. Reduced Westernin Poland's ability to manage its debt will probably make it impossible for Warsaw to continue to borrow heavily in Western money markets. Poland, however, is not totally without resources. There arc sizable government-guaranteedcredits at Poland's disposal ond special West German payments will help These funds are woefully inadequate, however, to finance the import growth Warsaw considers necessary..
The crucial problem facing the leadership is how to obtain the imports of industrial inputs and of grain and feedstuffo necessary to meet economic growth plans and to permit some rise in personal consumption. Strong popular reaction to austerity measures forced the government to back down on two previous occasions0 and, and the: fear of provoking new disturbances will be an important constraint On Warsaw's freedom of action. Warsaw has already turned to Moscow for help. The USSR has recently agreed to above-plan deliveries of oil and may do the same for grain.
-V2 -ormni "r
j^-If Poland iu unable to cut back on imports sufficiontly to.manageits debt, thoroood chanco that ot somu point in tho next lew years it win seek to refinance orits Wostorn debtolectivc basin. The
pproach to the French may have been tho first step in tills direction. One of the factors affecting refinancingbeong-term loanonsortium of Westernbankersbacked by their governmentsis feasible.est Germany, Poland's major creditor, may be tired ofut front in helping ro.lo.nd with credits and othernd would want to bring in other governments, possibJy
including tho United States. uch larger loan than the : 5 million West German financial credit may be necessary, howover, to bail out Poland.
Romania,
Romania hasarge hard currency debtesult of its long standing policy of importing substantial amounts of Western technology and equipment. Afterts hard currency debt to escalate to disturbing proportions in, Bucharest reacted in theyack on the growth of now borrowing and by greatlyhe debt out.
'. Romanian ability to manage its debt began to go awryowevor, largolyesult of lower Wostorn demand
end the EC ban on beef. Moreover,xports plunged mainly because of shortfalls in agricultural production. Even though Bucharest reacted by cutting back on imports, Romaniaillion trado deficit for the second yearow. The hard currency debt roso0 billion by
Credits backed by Wastern governments representlargest sourco of financing and5 accountedthan ono-fourth of Romania's total debt. Romaniareceived financing from Iran and the IMF. borrowing on Eurocurrency markets has remainednet liabilities totalling6 million by
This year the Romanians are taking stringent measures to bring their trado deficit into line. Tho expected sharp cut in imports, together with gains in exports, should bring trado nearly into balance. But because the deficit onis expected to rise due to growing interest payments, Romania could end up the year with an oven higher debt than last year..
Because Bucharestnot readily postpone Investment or cut back production plans, Romania is expected toapid rise in imports Although prospects for exports are good given then economic activity in the Wast, Romania may well run large deficits for tho next several
SEffiFJ
years. Despite its small expo cure onomania's heavy debt burden will make it difficult to obtain financial credits to help cover tha deficits. Bucharest's credit rating has also suffered from the fact that it has twice sought refinancing from West0nd that on the second occasion refinancing was refused.
On the plus side, Romania has boon granted large long-term development cradits by the World Dank. Conuscscu also haslose relationship with Iran, which already has granted sizable credits. In addition, Romaniaraw on an0 million in gold reserves. On balance, however, thereigh probability that Romania will once again be soeking refinancing in the next few years.
East Germany
In recent years, East Germany's appetite for Western goods has far exceeded its ability to pay. ontinued slow-down in the growth of Soviet deliveries has increased dependence on the West for industrial materials and grain. This in turn has led the leadership to seek,atter of urgency, the technology needed to compete in Western markets.
The heavy borrowing required to cover the large trade deficits incurred in recent years pushed East Germany's hard currency indotcdnoss up8 billion atet liabilities on the Eurocurrency market accounted for
nearly one-half of tho total debt, and indebtedness on government-guaranteed and other supplier credits, mostly from West Germany, accounted for perhaps another two-fifths.
The East Germans wero unable to reduce substantially their trade deficit in the first halfompared with firstnd because of the need for extrnordinary amounts of grain are not expected to do better for the balance of, the year. Thus, the debt could rise7y yearend. The East Germans apparently are againnto the Eurocurrency market having0 million in the first half of tho year. They arc now seeking0 million to finance the largo imports of grain and fodder.
The East German debt burden is likely to risein tho next few years, though not to tho dangerho trade deficit may droput after that is expected to rise gradually as East Germany permits some. imports. The East Germans, however, probably will try to hold average annual deficits below5 level even if large grain import requirements force further cutbacks in other areas. Even so, East Germany will have to resort to large-scale borrowing in the Wost. This poses no immediate problem; although the cost of borrowing is expected to go upj banks are still ready to lend to tlie East Ccrmans.
A-
-
Bulgari a "
jAfter indulgingpending spree in the West in the, Bulgaria was forced to sharply curb the growth of its indebtedness. Sofia, however,etbackuo to Westernew spurt in imports of semi-manufactures, and stagnating exports. The heavy borrowingmostly in financial creditsrequired to cover the resulting trade deficits boosted Bulgaria's net hard currency indebtedness8 billion bycy cutting back sharply on its imports this year, Bulgaria should be able to significantly reduce its trade deficit and its need for new credits. Borrowing on the Euromarket rose by0 million in firstC as compared0 million in first By yearend Bulgaria'3 debt could3 billion.
The Bulgarians are under great pressure to bring their debt burden downanageable level. Unless Sofia can greatly stretch out its debtonly about one-third is in :long-term.it-may well have to accept absolute drops in its imports jfor several years andutback in economic growth. The Soviets, who have bailed the Bulgarians outf necessary will come to their aid again.
Although habitually conservative and pragmatic in its
financial relations with tho West* Hungary hado cover unexpectedly large tradefrom the weakening of Western demand, the ECbeef and cattle, and novorely deteriorating termsEven though Hungary took strong measures toin the second halfhe traae deficitillion. Hungary's net hard currencyrose0 million ato onlyatnly to soar1 Since theho bulk ofhas been in commercial bank loans, whichfor moref the total debt, thein Eastern Europe.
Tho stringent measures taken this year to cut imports, together, with the good recovery in exports, should bring the trade deficit down0 million. But, in the first half of the year at least, not liabilities on the Euromarket rose0 million, tho 3ome as in first Tho. Hungarians, however, apparently do not expect to borrow heavily in the second half of the year, and the debt should not rise to more6 billion by yearend.
Hungary's debt ia expected to rise relatively slowly over the next few years. Because of its decisive action in cutting imports, Budapest isood positionif
ontinue to recoverto allow cone increase in imports Bankers apparently considerood credit risk ond will continue to provide tho funds needed.
Czechoa]ovakia
Tho Czechoslovaks have, if anything, been morethan the Hungarians in their Woatcm borrowing and most likely will continue to be so. Although its debt has risen rapidly0 and it encountered problems inexport markets, Czechoslovakia still has one of the lowest debt service ratios in Eastern Europe. Czccho-Slovakia, however, is tho only East European country that appears to be having difficulties in realizing any gains in its exports this year. Imports are being held down, but not as much as exports. Thus, Czechoslovakia is expected to incut 4ua> deficit about the same as0 million recorded inowever, its debtalthough expected to riseillion at51 billion at should present no problem. ':
' Czechoslovakia has not made much of the Eurocurrency market in the past. Its net liabilities rose0 million in thefirst half.of the year, but Prague apparrently is now stopping
up its Euromarket borrowings it recentlyillion loanonsortium of four Wost German bnnkn.
Because of its low debt, Prague probably will bo able to raise considerably moro from commercial banks.
Constraints racing tho USSK ond
nternal and Structural
One of tho major constraints in tho growth of trade with tho West is Soviet and Kant European inability to rapidly expand exports. These countries have faiJod to improve tho qiiulity and sophistication of their machinery and equipment and are forced to rely upon exports of raw materials, semi-manufactures, andfor so-ie East European countriesfinished consumer goods.
The Soviet-stylo economic syr.tem of planned material balances in singularly ill-equipped to compete in Western markets. Soviet and East European producers have long operatedeller'u market whereby the allocution of all production is guaranteed In advance by tho "plan." Quantity thus takes precedence ovor quality, little attention ic given to providing spare parts over servicing, and there ia little reward for innovation. Most producers attempt to avoid having to produce for the Western market; they have little direct knowledge of Western market conditions and receive insufficient reword for the added care they are expected to toko in export production.
xobleBM nro poxosDunt in thecf finished
goods. Bovlfat and wost East European leaders have boon loath to make the changer, requiredeaningful expansion in exports of manufactured products to tho West. To date most
of tho implemented programs to diversify exports have boon
peripheral to tho real problems of providing export produceru with proper incentives, direct access to Western consumers, ond tho flexibility to rapidly respond to Western market requirements, Hungary, which relics heavily on manufactured goods exports, has recently begun to implement meaningful changes, among the inducements to Hungarian enterprises ore easier access to Western credits, preferential interest ratos, and reimbursement for changes in production lines required to upgrade the quality of export products. It will take some time, however, before theso changes can be translated into rapid export growth. Othor East European countries such as Czechoslovakia and East Germany which also rely heavily on exports of finished manufactured products remain reluctant to alter the traditional system. Tho Scvicts, in particular, have, dono little to spur manufactured goods exports despite leader-ship exhortations to the contrary.
v
Romania, Poland, and tho USSR rely heavily on
raw materials andin their exports to the Kast and hence have been under less pressure to tamper with their traditional economic system. Supply constraints.
however, hinder the ability of these countries to rapidly
expand oxports. With rapidly dwindling reserves, Romaniaow roly on Western crude oil to continue petroleum products oxports. Tho slow growth of Polish coal production, combined with increasing domestic needs, vlll make it similarly difficult for Warsaw to boost coal oxports to tho West.
All the East European countries arc further
constrainod in thoir ability to increase exports by their need to satisfy consumer demands. Although come of the countries have warned their people tolowdown in the growth of consumption, tho leaders, all too aware of the unroot in Poland, must handle their trade inay as to minimize the chances for serious popular discontent. Poland, for example, has already reduced meat exports because of tho serious shortages in the domestic market, and coal is now being exported at tho expense of the consumer, but Warsaw may have to ultimately givo in to tho population's grumbling over insufficient coal for home use. Romanialong relying heavily on exports of moot and grainio running
into problems in Increasingf domestic rcquiromcnts. Tho East Europeans may even have to curtail the growth of consumer manufactures exports in order to provide more goods for tho population.
arge resource bai'creater control over its populace, tho USSR is perhaps in the boat position to expand exports to the West. Nonetheless, thoy too have had and are cxpacted to continue to have problems in this area. Tho Soviets rely on raw materialsoil, natural gas, timberand soni-manufecturcd products such us diamonds and platinum group metals for the major share of hard currency export earnings. Finished manufactured goods exports accounted on tho average for lecs thanf exports to the West.
Soviet ability to expand rater, of extraction of raw materials in the near term appear limited. Many of the largost Soviet raw material deposits are located in Siberia and will remain undeveloped until. Several years of; devblopmont and completion of tho UAMin thoould be required before significant export capabilities.of many miqorals and metals could bo reached.
.During the belanco of the decade, tho USSR will have to rely on exports of raw materials and semi-manufacturesoil,
wood, diomoudo,rom traditional sources. With
the exception of natural yac and possibly timber, their
ability to rapidly expand oxportn from the.to- sources ialimited. Any oubatantinln oil export3 to tho Most
for example, will probably be at tha expense of domestic
consumption or exports to East European and less developed country importorn.
Over the longer term, Soviot raw material resource
development will rest largely on Moscow's ability to obtain Western extraction technology and equipment. To this ond tho USSR has signed major development agreements with Japan (coal and forestryranco (development of aluminum processingest Germany (iron and steol complex) and several countries for chemical plants and natural gas transmission equipment. In all caftcs, Soviet exports from these projects era assured by compensation agreements, and over tirr-c, will provide earnings well in oxceso of the cost of repaying credits.
J::
The USSR ond Eastern Europein economic assistance to tho Third World in the. Of this total6 billion was drawn down: 9 billion from the USSR7 billion from Eastern Europe.
Soviet and East European economic assistance has been provided at relatively little cost. Although aid requirements levied against domestic output of the Communist countries may cause occasional problems in certain sectors, aid deliveries arc trivial when measured against GNP. Thus annual Soviet outlays for aid havo averaged lessalf billion dollars annually, accounting forf GNP. East European deliveries of0 million yearly oyer the same period represented about the same percentage of East European GNP.
Dy tho end5 morehird of6 billion of Soviet-East European aid providod LDCs in the pastears had already been repaid, and net annual aid transfers were running well0 million. In the next few years wo expect the flow to reverse itself in tho Communist favor, as relatively constant aid flows fall below principal and interest
payments that are moving sharply higher. .
Repayments usually are in commodities, or the products of; Communist built plants that normallymaller burden on'LDCs than cash payments. In some cases repayments in commodities are als> advantageous to the donors as theylow of raw materials vital to Communist needs. For example, commodityarc providing:
o All of the USSR's natural gas imports
(from Iran and illion tons of
crude oil from Iraq
O More than half the USSR's bauxite Imports (fromnd, : All Soviet raw cotton imports (largely fromloser economic ties with the Third Worldan important underpinning of Moscow's foreign policyoften has been established and consolidated through theprogram. The growth of Communist-Third World trade relations, for example, is one of the most important corollaries of the economic assistance program. Soviet aid was et first directly responsible for the sharp rise
'
in* trado with tho Third World and is now indirectly responsible for its.continued growth. The USSR has
found aid recipients to bo important capitnl goods markets and supplementary suppliers of raw materials and consumer:goods.
;i Becausa the aid'program is highly visible and heavily concentratedew countries, Communist aid Often hasompetitive edge over Wastern prograna despite its less thanontribution to global "net aid flows. umber of countries (especially Egypt, Afghanistan, and India in some years) Communist countries have provided the bulk of their economic assistance. Moscow also has scored politically in some countries despite relatively small outlays. Its help to the development of public sector industrial complexes, which Western countries would not support, was accompanied by propaganda that often wan convincing. In some cases the aid has contributed significantly to LDC growth potential. In Egypt and India, for example, the USSR contributed importantly to publicly-owned heavy industrial plant capacity; in Syria and Iraq, Moscow was responsible for developing national oil industries. In several instances Moscow gaincd^xtra prestige with aid offers from major installations turned down by otherhe Aswan Dam, tho Bokaro steel mill in India, and the Esfahan steel mill in Iran.
Soviet and East European military sales to LOCs,
estimated ob loss thanillion, also
it
are provided at relatively little cost to Communist countries. Despite Moscow's willingness to supply its most sophisticated weapons systems to LDCs, it often exaots prices that may be nearly comparable to the cost of producing the equipment in the OS. Although earlier agreements may have included concessionary pricing and allowed deferred payments^many agreements in the last few years are believed to bo cash sales. The change to cash sales basically reflects sales to Arab countries receiving financial support from the oil-rich Arab States and sales to OPEC countries. Moscow thus hasew source of hard currency while still concentrating its military program in the strategic Middle Eastern and North African area.
Original document.
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