SOVIET HARD CURRENCY DEFICIT MAY EXCEED $5 BILLION IN 1975 (S-09109)

Created: 11/18/1975

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Soviet Hard Currency Deficit May Exceedillion in

The USSR's hard currency trade deficit5 may be on the order of SS billion. eak gold market has forced Moscow to rely heavily on Western credits to cover the deficit, and those will carry the Soviets through the year. The Soviets probably will alsoeficitut an improved export performance should^keep it significantly below5 level. Soviet Trade5

Based on Western trado data through August, we nowoviet hard currency deficit5 on the order of SS billion. Soviet imports probably will rise by5 billion5 toillion. This increase comes largely from higher imports of equipment and large diameter pipe; estimated imports of grains are expected to rise by only SI billion55 billion.

Soviet exports to hard currency countries are expected to rise by5 to roughlyillion in spite of the poor Soviet export performance thus far. Soviet exports to the developed West during the second half of tho year are typically larger than in the first half. This trend should be reinforcedodest economic recovery in the West and, in particular, by known planned increases in Soviet oil

5 (estimated)

USSR: Hard Currency TradeOS $

Soviet Exports Devolopcd West Less Developed Countries

Soviet Imports

Developed West

Less Developed Countries Balance of Trade

NOTE: Totals may not add'because of rounding.

JiEGRfT

exports during the last parttho year. Little information is available on Soviet exports to the less developed hard currency countries,5 exports were assumed to bo close4 levels. Financing the Deficit

wo continue to believe that the USSR will manage the projected trade deficit. Soviet earnings from tourism, transportation, and arms sales.could total SI billion, leaving roughlyillion to be financedombination of gold sales and drawings on Western credits.

Moscow's ability to sell gold, however, is currently limited by poor market conditions. While the USSR appears ready to enter the market if conditions improve, sales have apparently remained light since the end of August and are expected to rise only moderately during the balance of the year. Tho USSR is believed to havo sold more0 million in gold in the first seven monthsotal sales forear could reachillion, however.

Most of5 deficit will have to be covered by drawings on Western creditsprobably fromillion5 billion not of repayment on past debt. The Soviets reportedly are concerned over their ability to secure sufficient credits in the West and areumber of

banks in Europe and in the US for additional loans. Western bankers, howover, continue to regard the USSR as an excellent credit risk, and Moscow should be able to raise the necessary funds on the money market.

Moscow appears to have lined up sufficient credits to cover5 obligations and some recent Soviet activitie seem related astand current negotiations are summarized below.

An5 billion in Soviet imports of Western equipmant will be financed by long-term creditset credits should4 billion.

The USSR had3 billion in Eurocurrency deposits in London at

end During tho first

half5 these assets wore drawn down by more0 million. Since midyear, the USSR apparently has arrangedvia three separate syndications3 billion in five-year Eurocurrency credits. The Soviets are known to have arranged

for the syndi.Crtt.ionotal0 million in Eurocurrency credits earlier this year, bringing total known and suspected consortium credits7 billion.

Now York bankers haveubstantial increase in the value of bank-to-bank credit lines extended to the USSR to finance Soviet equipment and grain purchases from the US. In Addition, Soviet negotiators reportedly visited US banks recently, asking for sizable credit lines to finance future Soviet equipment purchases in the US. Trade6

The USSR will alsorade deficit Imports of grains already ordered should5 billion, andimports of capital goods should remain, high. There has been no indication of major cutbacks in orders of equipment] in5 orders should exceed theillion recorded

The size of6 deficit will depend largely upon the ability of the USSR to revive its hard currency exports to the Wast. Continued Western economic recovery, higher

oil prices, and increased natural gas deliveries should

boost Soviet export performance in

Implications

The size of the Soviet deficits5 and the prospects for another fairly sizable one6 may give the normally fiscally conservative Soviets pause. Extensive borrowing will bring the expected debt service ratiopnd continued large deficits could force it even higher. Continued Soviet difficulty in improving export performance couldutback in imports, particularly consumer goods. The Soviets havo been arguing, with some success, with Western trade partners for increased Western imports of Soviet products. They have been particularly insistent on Western buy-back provisions in contracts for large Soviet purchases of capital equipment. The Soviets may .also wish to roll over some of their credits.

Comparison ofR and PER Projections5 Soviet Hard Currency Trade

Methodology

INR's projections arc basedonth trade data from theajor hard currency trading partners. Projections were made for the year by strict extrapolation of first half performance and by assuming that hard currency trade with other partners represents tho same proportion of total trade as in recent years. Another set of projections is made on the assumptionhift in trade performance in the second half,ange of projections.

OER's projections are basedonth trade data from the USSR'sajor hard currencyonth data from smaller tradeeconciliation of Soviet and Western trade data. Trade with the smaller countries is examined to determine if the proportion of Soviet trade with these countries is the same this year as historically. Estimates of Western data are made by extrapolation of available data and then adjusting for seasonal patterns. These projections are then adjusted for expected differences between Western and Soviet data. Past experience shows that western data overstate Soviet exports (since the West includes shipping charges and the Soviets do not) by lit and understate Soviet imports by about 41

Soviet. Exports

INU's projection of Soviet exportsS8 billion, CIA's S9 billion, making the INR midpoint5 billion less than CIA's. CIA's is higher because oxports to the smaller OECD countries (not examined by INR) are running0 million greater than last year. In addition, CIAeasonal adjustment: Soviet exports in the second half of the year are traditionallyreater than in the first half, and it is assumed that an increase in Western economic activity in5 will guarantee this increase.

SoviQt Imports

INR's and CIA's projections of imports, based on extrapolations of Western trade data, areillion. CIA finds that thu share of imports from smaller developed countries is the same in5 as CIA's adjustment to approximate Soviet data raise importsillion* INR's range is based on possible changes in second-half imports which CIA does not expect.

Original document.

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