Created: 3/7/1975

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Dr. Milton Kovner" Deputy Director Oft. of Soviet Un:

Affairs Department of State

Here is the updated version of the briefing on the soviet economy that you requested.



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The Soviet Economy


Soviet economic growth slowed markedly4 becauseercent dip in agricultural output. GNP increasedercent comparedercent growth Nevertheless, Soviet growth compared favorably with that in the recession-hit West.

The Soviets are clearly shiftingore balanced approach to economic growth. Consumption has been placedore equal footing with investment among competing uses for output,arger share of investment resources

is being devoted to consumer related sectors such as agriculture.

trade with the West increased by almostercent last year, compared0 percent increase In contrast to the general increase, agricultural imports were cut back. Moscow's ability to importand equipment has been strengthenedajor turnabout in its hard currency position; price increases for Soviet Oil and other raw materials have far outweighed price increases for imports.


weather conditions last year resultedoviet grain cropillion tons, short of

the plan targetillion tons and much less than

s record harvestillion tons. Nevertheless, it was the second largest crop in Soviet history.

production0 million tons short of domestic requirements and export commitments. Soviet leaders had the option of reducing reserves built up after3 harvest or importing foreign grain. They apparently chose to leave the stocks largely untouched and contracted

to importillion tons of grain for delivery in Fiscal

The agricultural sector is by far the weakest and least productive sector of the Soviet economy.

system of collective and state farms has

proved to bc the worst managed and least efficient organizational form in the country.

only is the agricultural sector hard pressed to increase the supply of food in pace with the needsodernizing and moderately growing population, but it tiesery large percentage of the labor force.

Forty million people, aboutercent of itsis engaged in meeting the nation's foodthe USpercent of the labor force is on the



of labor is much higher in the US, partly because the US farmer uses mineral fertilizers much more intensively, and the ratio of farm equipment to cultivated acreage is far higher in the US. For example, one farm laborer in the USSR feeds seve^ people; in the

US, one farm laborer

recognition of the serious problems in Soviet agriculture, we expect continued high priority accorded to this sector, with increased deliveries of equipment and fertilizer, extensive land reclamation programs and the development of the recently announced Brezhnev plan to improve agricultural land in the northern European areas, the so-called non-black-soil zone. The entire program is clearly designed to reduce the large fluctuations in farm outputparticularly grainwhich have plagued Soviet agriculture.


Industrial output grew by anercentho largest annual increase Adequate supplies of raw materials and energy were major factors in this growth as well as larger than planned additions of new workers ond the highest rise in labor productivity in the five-year plan period. The leading industrial sectorsenergy, producer durables, chemicals ond processed foods -


reflect the leadership's priority for technological growth ond expansion of agricultural output.

onger-run perspective, Soviet industryiminishing supply of those inputs of capital and labor which in the past have been the main contributors to high growth rates, slow progress in the application of modernow level of productivity, and concern that the technological gapis the West may in fact be widening.

If the growth record of the Soviet Union is compared to the principal markettriking feature is the particular dependence of the USSR on rapid additions to its active labor force and to its productive plant and equipment, as distinguished from its ability to use its basic productive resources efficiently. In othor words, past high rates of growth could be sustained mainly by stepping up inputs of labor and capital.

However, in recent years, there hasuiiked slowdown in the pace at which new modern plant and equipment were introduced. Much of the disappointing performance, in turn, stems from inferior and outdated technology.

The need therefore isualitativeare efficient use of the labor and capital available. olume of industrial output almost two


thirds that of the US, industrial labor productivity in the USSR is roughlyercent that in the US and this comparison, moreover, does not take into account thepoorer quality of most Soviet products.

burden ofilitaryroughly equal to that of the US falls heavily on Soviet industry. The defense program diverts industrial output from investment programs, preempts the services

of the best managerial, scientific and engineeringand orientsrograms heavily toward military objectives.

help boost productivity, the regime, while continuing to tinker with organizational and managerial reforms, is relying increasingly on foreign contacts, particularly with the West. It believes that the shortcut to technological progress and accelerated growth inlies in improving western machinery and technology. Consumer Welfare

It has been the Soviet consumer who has paid tlie price for the high priority accorded by Soviet leaders to defense needs and providing for rapid industrial growth. Mis per capita consumption is only one-third that of the average US citizen.


Material conditions have been improving and now that the demand for many basic consumer items has been satisfied, growing emphasis is being placed on catering to consumer demand for improved quality and variety.

The area in which unsatisfied demand is the greatesthousinghas been among the slowest to improve.

- although the USSR has built urban housingery rapid rate during the last decade, housing space per capita is only about one-third that in the US and half that in West Germany. Even if the five year plan housing goal is reached, it would still leave per capita housing space aboutercent short of the minimum standards set for health and decency by Soviet officials.

Soviet Government has shown increasing sensitivity to the needs of the consumer. While it is still premature to apeak of "consumer sovereignty" in the USSR, recent improvements in consumer welfare have whetted the appetite for further gains. And the visible satisfaction of rising expectations elsewhere will bo noted increasingly in the USSR, stimulating pressures from technocrats for advanced productivity methods and demands from consumers

for more and better goods and services.


In this connection, the Soviets are looking increasingly to tho Western countries for modem equipment and technology to produce consumer goods. US-Soviet Trace

US-Sovict trade has developed rapidly since the trade agreement and the lend lease accord were concludedilateral tradeecordillion3 and almost SI billionhe drop attributable to smaller grain imports. Moscow's renunciation of2 trade agreement should not substantially affect the volume of US-Sovict trade US exports are expected to exceed4 level bocuase of deliveries of capital goods ordered by the USSRhen Eximbank credits were available. In the long-terra, US-Sovict economic relations will depend on overall progress in detente and on tho extent to which recent US legislative restrictions are modified.

In assessing the potential for US-Soviet trade, several factors must be borne in mind.

Even at the record levelaccounted forercent of all Sovietand imports from the US represented less thanof one percent of the Soviet GNP. Conversely,trade3 amountedercent of ourand less than one-tenth of one percent of our GNP.

Although the historic doctrine of autarky has


windling number of adherents in the USSR, Soviet leaders icay not yet have coire to the point of accepting international economic cooperation with the US or the West as an unqualified good, either on economic or political grounds.

he Soviet trade profile with the US and the West inattern ot machinery and equipment imports and raw materials exports more nearly resembles thatess developed country than an economy second in size only to that of the US. And the Soviet export pattern does not yet show any indication of the diversity of exports whichrerequisite for anyexpansion of trade with the West.

Soviet trade with Eastern Europe has accounted for about half of total Soviet foreign trade and the economicsand politicsof this trade pattern is not likely to change in the short run.

hile it can be argued that the Soviets stand to gain technologically from expanded cOBEktrcial relations with us than the quantitative dala on trade volume would suggest, this too should not be over-emphasized. Imports of plant and equipment from the US, even under the most optimistic assumptions, will constituteraction of the total value of equipment invested in Soviet industry

and these will be operated in the Soviet institutional milieu with all its endemic inhibitions to the rapid diffusion and utilization of even domestically generated technology. Perhaps the most that can be said is that US technology will raise technological levels in certain hey sectors of the Soviet economy, but the barriers to rapid assimilation will ensure that the overall diffusion of foreign technology in the USSR will be slow and uneven.

Finally, although the current Soviet BOP position is better than it has been in decadesthanxs to augmented hard currency earnings from higher prices for its oil and gold exportsmuch of the projected growth in trade with the West will be credit financed. Soviet hard-currency indebtedness grew to2 billion lost year and debt service payments of1 billion represented aboutercent of its hard currency exports. Credits have to be repaid and the level of Soviet indebtedness willonstraint on Soviet import capabilities.

Inhink the Secretary was perfectly correct when he told the Senate Foreign Relations Committee that while economic relations with the USSR cannot be separated from the politicalense of proportion must be maintained about the leverage our econoniic relations give us with the USSR.



Trade with the Soviet Military

Imports of Western machinery and equipment aremall share of total Soviet investment in plant and equipment and therefore will notignificant growth dividend.

Furthermore, to fill military requirements from resources freed from civilian industry wouldeversal of traditional resource allocation policy. Generous allocations have been made to military porgrams regardless of shortages elsewhere in the economy.

The problem is that practically all sophisticatedhether in the area of automotive technology, electronics, electronic instruments, metallurgy or in otherave some potential application in military production.

Given our export controls, however, the exports of even these goods do not mean that military refinements to these technologies would be transferred to the USSR along with the basic civilian technology.

Oil and Natural Gas Oil

USSRet exporter of oil.

he USSR is less affected by the energy crisis than any of the other industrialized nations.

"Hie Eastern European countries overall getercent of their imported oil from the USSR. They pay less than the world market price even though the Soviets recently more than doubled the price.

After supplying EE, the USS3 has left about nine percent of its production for Western Europe and Japan. This oil is sold at world market prices.

Tne USSR faces problems in increasing oil Present production is at the rateay. Upoviet oil production is expected to increase from the present level of nine million barrels

a day to7 millionay.

Soviet domestic consumption is rising at the rate of aboutear but is expected to taper off toear.

In setting future oil export policy, the USSR mustalance between maintaining its political influence in Eastern Europe and earning nore foreign exchange from sales in Western Europe.

Natural Gas

USSR is looking to natural gas to take up the slack as oil production tapers off. They are concentrating on gas development. ontract with West

Germany provides for deliveryons of pipe. This contract would give the Soviets an additional illion cubic feet ofear forears.

Even if tho North Star project falls through, the USSR willipeline on its own from that area.

Soviet supply of natural gas to western Europe now is proportionately small, but0 it could amount toercent of total supply in West Germany and Italy.

Original document.

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