Recent Developments in Soviet Hard Currency Trade
Recent Developments in Soviet Hard Currency Trade
RECENT DEVELOPMENTS IN SOVIET HARD CURRENCY TRADE
CONCLUSIONS
arked improvement in its trade balancehe USSR faces record hard currency trade deficits5ut Moscow's hard currency payments position should remain healthy.
Soviet hard currency trade4 was strongly affected by the Western recession and inflation. High world prices for Soviet primary product exports generated, asoviet hard currency trade surplus for most of the year. But,4hole, the USSRoderate hard currency trade deficit of2 million. Declines in primary product prices, coupled with lower Western demand for Soviet goodsreater availability of Western goods to fill Soviet orders, changed the trade balanceeficit in the fourth quarter, and the deficit continued in the first three quarters
Soviet hard currency exportsith prices almost doubling and volume declining. The value of exports declined after October because of slack demand and lower prices. Importsrimarily because of larger volume of imports of steel and machinery products. Imports spurted in the fourth quarter and have since remained high.
The severity of the Western recession in the first half5 and the slowness of recovery in the second half of the year will make It difficult for the USSR to increase its5 exports over4 level. Imports, on the other hand, are bound to increase substantiallyesult of already placed contracts for machinery and equipmentimports of which are
Note: This report was prepared by the Office of Economic Research, Central Intelligence Agency. Questions on the report should be addressed to the Director of Economic Research, Central Intelligence.
expected to increase by more5 billionand additional grain imports, which could double in value toillion or more.ecord hard currency trade deficit of nearlyillion can be expected. Soviet contracts for grain, equipment, and steelontinued increase in imports6arge deficit as well. The size of6 deficit will depend on Soviet export performance and the extent to which Moscow trims or postpones hard currency imports.
eak gold market5 has forced Moscow to borrow heavily in Western money markets, but the Soviets have had no difficulty in arranging financing to take care of this year's deficit. They also appear to be finding credit facilities to help finance the expected deficit
DISCUSSION
Background
oviet hard currency imports traditionally have exceeded exports, but poor grain harvests have from time to time ledapid, unplanned increase in imports and to substantially greater deficits. For example, the USSR had trade deficits4 billion7 billionnd an7 billionoviet export earnings improved considerably4esult of the rapid rise in world market prices for many Soviet raw materials. Soviet exports6 billion, imports5 billion, and the hard currency trade deficit declined2 million, as shown in the accompanying tabulation and inn the Appendix.
Million US $
4
est.)
0
3
0
Soviet hard currency tradeeflected Western inflation and recession. The economic downswing in the West had little effect on world trade during the first halfs inflation was boosted to record levels by soaring prices for oil and other commodities. Pear of shortages and expectations of still higher prices brought continued growth in trade volume. This speculative boom set the stage for the sharp fall in world trade volume which began in the final quarterith economic activity contracting, firms in many industrial countries had built up excessive inventories, and the stock overhang considerably worsened the trade slump in the fourth quarter. This slump has continued wellnd only recently have Western nationslow recovery.
Soviet exports mirrored world tradeising rapidly in the first three quarters, but fell sharply in November and remained low in December when Western demand and prices for Soviet raw materials declined rapidly (see theoviet exports remained depressed during the first three quartersho steady rise in prices for many Soviet imports and increased purchases of capital goods and steel also led to rising imports during the first nine monthsut the sharp gain in Soviet imports from its major trading partners during the last quarter was made possible, in part, by the growing recession in the West. Western firms, caught with high inventories and declining demand, were eager to meet standing Soviet requests for increased importsparticularly for steel products.esult, Soviet imports of steel products climbed dramatically during November and December. The high level of Soviet imports has continued during the first three quartersnd for the year imports should rise65 rise has resultedecord level of capital goods importsontinued high level of imports of Western steel products.
The USSR has traditionally covered its balancc-of-trade deficitombination of drawings on Western credits and gold sales. Both drawings and sales, for example, rose rapidlyn response to the highereak gold market lias forced the USSR to rely relatively more
J
heavily on Western credits in financing the7 billion trade deficithe Soviets, however, appear to have obtained adequate financing to meet this year's obligations, and current efforts to raise additional loans are probably aimed at financing next year's anticipated deficit.
erformance
igher world market prices for major Soviet exports, principally oil and wood, ledarge rise in Soviet export earnings4 (see
Table 1
Bated on official So net foreign daik- did.
Baaed on aprice index and uitn* Weitern Uidc data
Estimated.
On the average, Soviet export prices almost doubled, with nearly the entire change occurring in the first halfhe prices of such commodities as oil, copper, and diamonds fell during the latter part of the year in response to recession-induced decline in demand. Soviet prices did not closely follow overall price trends because of special factors or because responses were lagged.
USSR: Changes in the Price uid Quantity of Selected Export*1
from
Change
4
US $)
exports
which:
and oil products
and coke
timber
10
lumber
30
fiber
and platinum
metals1
oviet receipts from the sale of crude oil end petroleum products more than doubled44 million and accounted for almost half of the total rise in Soviet export earnings. The average price of crude roughly tripled, but product prices in some markets increasedesser degree. Despite the rapid rise in world market prices for oil and record domestic crude oil production, the volume of Soviet crude oil and petroleum products exported to hard currency countries fellarrels per day
The drop in sales volume was almost entirely attributable to the decision of French and Italian importers to reduce imports from previously negotiated levels. The exact cause of the reductions is unclear, but it probably was the result of the high prices charged by the USSR while the embargo remained in effect, of increased availability of oil from other sources as the year progressed, andeneral cutback in French and Italian consumption. Soviet oil was priced above market levels during the first quarterut soon fell to market levels or below.
Other Soviet export commoditiesajor role in Soviet trade
Soviet earnings from the sale of wood and wood products roseo4 on the strength of substantially higher prices. Prices for Soviet saw logssold mainly toigher thannd prices for lumbermarketed primarily in the United Kingdomwere more than double the previous year's levels, in both cases the rapid rise occurred In the first quarter, with prices remaining at the higher levels for the balance of the year. Although initially lower, prices charged British and West German buyers for lumber rose foster than those charged by competitors, and by the end of the quarter Soviet prices caught up to those of other suppliers. The volume of log and lumber exports were3 levels. In both cases, deliveries4 were concentrated in tho
second and third quarters; substantial falloffs in exports which occurred in November and Deoember were probably connected to slumps in British and Japanese housing starts.
Higher world prices contributedncrease in Soviet earnings from cotton exports47 million,ecline in volume. Cotton prices in major markets rose sharply inut have fallen sinceoviet prices to Japan, which tookf Soviet cotton exports to hard currency countriesagged behind the increase in world prices, but caught upew contract doubling prices apparently was signed in
Earnings from coal and coke exports45 million with average prices. Soviet prices more or less followed world price trends during the year.
Natural gas earnings wereillions deliveries to Italy were just beginning and those to West Germany remained small. Although prices. much larger price increases are yet to come. Soviet agreements with Austria, Italy, and West Germany call for natural gas prices to be tied tobutiscount fromthe cost of home heating oil. By mutual agrecemcnt. however, the rise in prices resulting from the rapid price increase for alternative fuels has been spread out over aof two to three years.
Higher prices accounted for more than halfise in Soviet earnings from copper sales. Soviet prices followed world market levels closely, rising rapidly during the first half of the year and falling sharply thereafter.
Strong world demand, fueled in part by speculation, led to higher prices for Soviet platinum and platinum group metals
Despite anrop in4 earnings rose by anillionto more0 million. Sales to Japan remained strong throughout the year, while sales to the United StatesMoscow's other major consumerwere largelyin the first six months.alloff in world demand, Soviet diamond sales picked up during the last six months4 and0 million for the year. Soviet sales are tiedarketing agreement with the DeBeer's Corporation, and the rising Soviet sales in the face of declining world demandag in this arrangement.
Soviet Imports
Soviet imports from the West rose byillion4 in spite0 million decline in grain purchases. Larger volume and higher prices were both important factors in9 billion increase in non-grain imports (seeor example, the volume of nontubular steel imports more than doubled,ncrease in price; and imports of machinery and equipment, plastics, rubber, and pipe also rose both in volume and price. In other cases, particularly chemicals, higher prices accounted for most of the increase in imports.
Steel shortages have long plagued the Soviet economy, but they have become more acuteesult of Soviet decisions to accelerate domestic construction activity, such as the speed-up in building the Baikal-Amur Magistral rail line. Soviet importers have relied on the West for most of their import needs.estern firms accountedf the total volume of steel imports, and Soviet imports of steel products from the West doubled in value9 billion.
Soviet efforts to procure steel for delivery4 beganoincidingigh level of demand for steel in world markets, reflected in rising prices and full order books for most steel producers. Thearginal buyer of steel in the West, was hard pressed to place orders that
Tabic 2
1 Hivd on Sum mtitlnt 1 KlpmrAtitnf
1 Not unpolled lhii
year but, by its willingness to pay premium prices, gained acceptance from some producers for increased deliveries in the first halfven wells the deepening recession weakened demand from thc automotive and construction industries, steel producers remained busy, bolstered by strong demand for investment goods, particularly equipment for energy-related industries. Late in the year, however, as orders dropped off, the Soviets were able to obtain deliveries of steel before the end of the year. Paradoxically, the Soviets paid more for their steel at thc end of thc year than earlier because contracts were concluded at prices existing when demand was high. For the yearhole, the average price of steel imported by the Soviets
USSR: Quota in the Price and Quantity of Sowel Hard
from
J4
US S>
Import*
ind equipment
oil
which;
and tolled (tecIt
rclilcd nutrmh
chemkiW
tubbei
iiw material
aemlmanulacturei
upr
foods
contutnrt goodi
import!
impotii
17. Imports4 also featured the following:
Soviet imports of machinery and equipment from the West rose3 billionp0 million over3 level. This gain was anticipated because of the increased number of Soviet equipment orders placed in the West23 (see Appendix.rders for4 deliveries were placed before3 oil embargo, when prices were relatively stable. Prices wereajor factor in the increase. Available information indicates an average price increase ofncrease in volume. Machine tools, mainly for the automotive industry, registered the largest increase, followed by oil and gas field equipment.
Soviet imports of chemical products, particularly plastics and material to produce plastics, increased rapidly4esult of higher prices being charged in the West. For the yearhole, prices of plastics and related materials almost tripled, while imports rose onlyn volume. Tho price rise for imports of other chemicals, whilcnot as great (up an. led2 million increase in imports despite anrop in volume. Available data do not indicate clearly the timing of these price variations.
Other Soviet imports showed mixed results. Grains fell sharply.3ut Moscow paid an averageore, comparedoviet sugar imports0mports of meat were renewed, however, as Moscow took advantage of Western surpluses and accompanying low prices to6 million worth of meat during the year. Although Soviet purchases of textile raw materials and related semimanufactures rose byillionheyajor component of Soviet hard currency imports at almostillion dollars.
Hard Currency Balance
considerably smaller than3 deficit,eficit2 millionurprise. Much ofrom the rapid rise in Soviet imports that occurred in theAccording to partner country statistics, the USSR ransurpluses ofillion with OECD countries during theof the year and surplusesillion during the third quarter. Inquarter, the balance shifted as the USSR incurred anillion. Transactions with several of the USSR's majorshow an even more pronounced reversalfrom ansurplus7 million in the third quarter to anillion during the fourth.
Financing4 Deficit
Moscow easily covered4 trade deficit by selling gold and drawing on Western credits.4 the USSR's basic balancethe balance of current and long-term capital transactionswas in surplus by more thanillion (see
The Soviets sold less than half of their4 production of goldearning0 million. Sales volume was considerably less thanut estimated earnings fell by only0 million because market pricesigher4 (an averageer troy ounce).
The USSR was able to draw an7 billion in medium-and long-term credits lo finance imports, most of which are government
t. Official trade statistics of the United States, Japan, France, West Germany, Italy, and the United Kingdom. Western trade statisticsdiffer from those provided by the USSR, particularly with respect to Soviet exports which are reported on. basis by the USSR and. basis in the West. Trends in Soviet trade, however, are similar, regardless of which statistics are used.
Tible 3
USSR; Hud Currency Balance of Payments
Million USS
. Merchandise imports,orunonetajy gold Services and private transfers, net1 Official transfers, net
Current account balance
Long-term capital net
Baoc balance
Change in Eurocurrency position on the London market, net3 Errors and omissions, net*
1
403
Derived from Sonet Satntk*.
t Interest payment* and receipts on short-term loans are not included. Estimated receipt) from transportation rate been recently revised.
TV Sonets' position with continental banks it not known; their position wllh London banks maysome medium-term liibllitiei.
Inctudint chances In bard currency hotdingt, tbori-term capital movements other than In London, and hard currency repayments from less developed countries lot Soviet credits and arms tales.
guaranteed and made available at subsidized interest rates. An4 billion worth of machinery and equipment imports was financed in this manner. West Germany, France, and Japan were the major sources of credit; Soviet imports from the United States, backed by Eximbank credits,7 millionecause repayments on past drawings rose faster than additional credits received, net credits2 fell by moreillion (seeonetheless, earnings from exports increased even faster than repayments on interest and principal, and the debt service ratio fell.
et credits represent the addition to Soviet hard currency receipts after repayments of interest and principal on past drawings have been accounted for.
he several gas-for-pipe agreements signed in recent years with West Germany, France, Italy, and Austria also call for long-term credit support for Soviet purchases of large-diameter pipes.0
from the Westime when export growth continues to be limited by recession in the West (see
USSR:
Hard Currency Trade
US $
exports
West
developed West
imports
West
developed West
minus imports
Sonet statistics.
rotections are based on partner country data for January-August trade with the United Slates. West Germany. Japan, France. Italy, and the United Kingdom. Januiry to May data were Dssd tor smaller hud cu/iency developed countries. These data were extrapolated separately through the end5 and Oicn summed. Second half exports wtie adjusted upward because Soviet exports have in recent year*reater in the second half than in the rirsl six months. Soviet Imposts ui the second half were adjusted upward by tor the same reason. Grain expoHs were mated separately on ihe batn or known and estimated shrpmenis-
ur reporting o) Soviet trade Is traditionally based on Soviet data Linear regressions uerc used to estimate Soviet uade data from she projections derived fiom partner country data. These regressions, wnich compared Soviet with Western trade data foreriod, yielded eoefjlclcnii of determination greater thanreporting of exportsS are projectedf the level projected from Western daia; Soviet nong/un importrotected% ol Ihe lots projected from Western data.
ard currency imports5 are expected toillion,igher thann the first nine months, imports from the USSR's six major Western trading partners were runningbove the monthly average4 (secoviet imports of Western machinery and equipment should be on the order ofillion, compared3 billion4 (see Appendix,uring the first six months, Soviet machinery imports from major suppliers were up by an average of
TaMe6
USSR: Trade wilh Ihe Big Six'
Monthly. Averages in Million US S
Total
West Germany Japan France Italy
United Slates United Kingdom Trade balance
Qtr
On
Qtr'
West Germany Japan France Italy
United States United Kingdom Trade balance
roughlyillion in Western grains scheduled to be deliveredost will come in the seoond half of the year.
hard currency exports may rise slightlyoThe USSR's exports to its six major Western trading partners innine months5 wereelow the January-September figuresSoviet exports have traditionally been higher in the secondthe year4 anddespite the lack of evidence of any such growth inquarterwe feel that this trend will be repeatedhereduced prices on several commoditlWi iskd tin has contracted tooil than in the first half of the year. Moscow is known to begovernments to increase imports of Soviet products totrade imbalances. Western economic recovery should raiseexports in the last quarter, but the largest Soviet marketsthoseEuroperemain very sluggish.
Financing5 Deficit
USSR will finance5 deficitombinationrevenues, gold sales, drawings on Western credits (see
T.ecession-related drop in the fourth quarter. Soviet exports rosen the second half of the year.
USSR: Financing th* Hard Currency Trade Deficits
Million US S
(Preurninao)
Other current account
Medium- and long-term credits net of principal
a probable reduction in foreign exchange holdings.f thc deficit will be covered by revenues from non-trade sourceslargely from tourism, transportation, and arms sales.
Gold
he USSR may earn aboutillion from gold salesoscows ability to sell gold in response to the growing trade imbalance5 has been affected by tho weakening market during recent months. The Soviets probably sold gold in some quantity during January-August and were rumored to have sold gold directly to Middle East buyers in July. Sales probably were small during September, when gold prices plunged following the International Monetary Fund's announcement that it would sell gold. Given the USSR's trade deficit, it would not be surprising if Moscowthe market in October when gold prices recovered and appeared to stabilize at5 per troy ounce.
Credits
28. The major share of5ill be
financedombination of Soviet borrowing in the West andeduction in foreign exchange holdings.
Soviet Eurocurrency deposits in London almost doubled49 million at year's end, and the Soviets held sizable assets with continental banks as well. Byoviet assets in London had been reduced2 million and very likely have fallen even further since that time.
Medium- and long-term credits extended in earlier years on the basis of contracts placed in the West (largely governmentwillajor share of Soviet imports of Western capital goods and large-diameter pipe. On the basis of anticipated deliveries, Soviet drawings for this purpose should5 billionielding more4 billion in net credits.
Earlier this year, Moscow arranged for two consortium loans0 million. The five-year notes were probably intended to finance anticipated cash purchases.
The Soviets reportedly have arranged additional bank-to-bank credits in Europe and the United States.
ince the middle of the year, Soviet efforts to raise loans in Europe and the United States havearked upswing. These efforts are probably geared more toward meeting next year's obligations.
illion, five-year loan was syndicated in Europe with US participation.
Soviets recently visited US bankers, reportedly to arrange additional large-scale financing for future Soviet purchases in the United States.
Trade6
Despite apparent attempts to trim or postpone expenditures, the USSR willubstantial trade deficitxisting orders should result in perhapsillion in grain imports. If additional orders are placed in the United States, as is now anticipated, grain imports could rise by anotherillion. Machinery and equipment Imports may also5 levels. The USSR will alsoocord value of large-diameter pipe
The size of6 deficit will depend largely upon tho ability of the Soviet Union to revive its hard currency exports to the West. Specifically, recent discussions presage an increase in Soviet oil exportsnd signed contracts callizable increase in Soviet natural gas deliveries to Western Europe. Moscow can also be expected to intensify current efforts to boost export earnings by shaving prices and pressuring Western governments to correct current trade imbalances by taking more Soviet goods.
Implications of the Deficits
inceoscow has securedillion from Canada. Prance. Italy, Japan, the United Kingdom, and West Germany.
Ml
need to use Eurocurrency funds for grain purchasesthe USSRs access to thc Eurocurrency market to financepurchases during the next several years- Moscow may be forced torates for Eurocurrency loans and to be more selective in thethis financing.esult. Moscow may push for evenfrom Western governments for subsidized credit lines lopurchasesho USSR's medium- and long-termgrow substantially5esult of the massive borrowingperhaps to more than S7 billion by
f the Soviet Union is unable to Improve its exports substantially this year, the leadership may be faced with some hard decisions. Theseurther cutback of imports such as consumer goods or plants to produce consumerelay in delivery schedules for equipment already ordered and not covered by long-term government-guaranteed credit,utback in the value of capital goods orders requiring cash payment.
lthough the Soviets appear to be taking the deficits in stride, they are undoubtedly concerned about their current position. Available reporting on Soviet reactions to the deficits is mixed.
Orders placed in the West for machinery and equipment have been on the rise since midyear because the USSR is placing contracts forlan backed by long-term government-guaranteed credits.
There has been no indicationesire to push back deliveries for previously ordered equipment. Negotiations on major projects have continued.
The Soviets continue to open negotiations for major purchases. Over the last few months, for example, the USSR has approached Japanese businessmen about purchasing more5 billion worth of nuclear reactor parts and roughlyillion worth of ships.
Moscow has apparently ordered that, when possible, foreign exchange expenditures be trimmed or postponedhis policy appears to be broadly applied and may even extend into high-priority areas.
Soviet Reaction to the Deficits
APPENDIX
USSR: COMMODITY COMPOSITION OF HARD CURRENCY TRADE'
Million US S
Original document.
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