JAPANESE-SOVIET NEGOTIATIONS ON SIBERIAN ECONOMIC DEVELOPEMENT (S-6832)

Created: 3/2/1975

OCR scan of the original document, errors are possible

MEMORANDUM FOR: )

'AM

The attached material was forwarded to Mr. J. Mishell George, Director of Joint Commission Secretariat, Department of Commerce. They will form partriefing book being assembled in support of the Fifth Session of the Joint OS-USSR Commercial Commission, which is to meet in Moscow on

5 (DATE)

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BACKGROUND PAPER

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Japanese-Soviet Negotiations on Siberian Economic Development

The pace of Japanese involvement in Siberian and Far Eastern development picked up markedly with tht recent signing of three separate agreements dealing with (a) forestry development, (b) exploitation of coking coal deposits, and <c) exploration and development of offshore oil and natural gas. Negotiations are alsoor pulp/paper plants costing more than SI billion, /triorhe Japanese had sioned agreementsmall forestry development projectort construction at vrangelood chip processing

Projects Completed and Underway

Timber and Forestry Agreements

8 the USSR and Japanive-year agreement on the development of timber resources in the Sikhoto Alin Mountain area of the Soviet Far East. Under theapanese consortium6 million worth of equipment and consumer goods. econd and larger agreement was signed last July whereby the USSR will0 million in timber cutting and processing equipment, ships, and consumer goods. In both cases, Soviet purchases are covered by Japanese Eximbank credits. Soviet ability to repay the credits was guaranteed by long-term Japanese commitments to purchase Soviet timber. ifferent Japanese consortium concluded an agreement for the constructionood chip plant. The USSRillion in equipment and consumer goods under credit in returndeliveries of wood chips and pulpen-year period.

Port Development

In0 an agreement was signed for constructionew seaport, Vostochny Port, located on Vrangel Bay about nine miles from

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Nakhodka, The Japanese Export-Importillion credit for machinery andnew seaport will be capable of loading coalchips as well as handling containerizedand warehouse facilities, railyards, andspur connecting with theare being built. Vostochny Port couldimportant part in long-termof Siberia since it wouldof goods and raw materials ofto

chul'man Coal Deposits

In4 the USSR signed an agreementonsortium of Japanese firms to develop coking coal deposits near Chul'man in Eastern Siberia. Concomitantly the Soviets concluded an agreement with Japan's Eximbank0 million in long-term credits to finance Soviet purchases of coal mining equipment, railway equipment, and consumer goods.eturn the USSR will supply the Japanese consortiumillion tons of coal, representingf projected Japanese needs. Soviet earnings from the project could exceed foreign exchange costs by several billion dollars, us firms may be asked to supply some of the advanced equipment required by the USSR,

Offshore Exploration for Sakhalin Oil and Natural Gas

In5 the USSR and Japan reached agreement to jointly explore oil and naturaldepositsortion of the continental shelf around Sakhalin Island. apanese-led consortium will extend up tomillion in risk capital over the next five years to cover its share of exploration costs, and the USSR willillion in capital goods under an Eximbank credit. In return Moscow has granted theong-term option to purchase up to one-half of all oil recovered.

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Projects Under Discussion Pulp/Paper Plants

Moscow has requested Japanese firms to submit cost estimates for two pulp/paper plants to be built in the Soviet Far East. Together the plants wouldlanned annual production capacity ofillion tons of newsprint, paper, and bleached pulp and are expected to cost over SI billion. The Japanese would probablyizeable share of the output.

atural Gas Exploration

4 the Japanese Eximbank agreed to0 million in long-term credits to finance the Japanese share of the exploration phase of the Yakutsk natural gas project. The loan was contingent on the availability of matching funds from the US, which have nov yet been granted. (Additional information on Yakutsk is containedeparate paper.)

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Major Credit Needs and Availability for USSR

Need for Credits in Perspective

Moscow has relied heavily on medium and long-term Western credits to finance capital equipment imports from the West since these credits became generally available in the. Credits covered practically the entire hard currency trade deficit incurred by the USSR, Very little gold was sold. , the USSRumulative deficit1 billion, more than double the deficit of the previous six years. In large part the deficit resulted from record imports of Western grain. Even so, the USSRubstantial volume of machinery and equipment thanks to the availability of Western credits. Net Western medium-term and long-term credits3 billion covered less than half of the deficit. Large sales of gold (at rising prices) and short-term borrowing covered the remainder.

Large Soviet Orders Based on Credit

Heavy reliance on Western credits enabled the Soviets to boost orders for machinery and equipment1 billion4 compared3 billion Alsohe USSR contracted for5 billion in large-diameter pipe in Western Europe. The majority of the equipment orders and all of the pipe orders are supported by long-term Western credits which will be drawn down as deliveries are made in the next few years.

Cont inuing Need for Credit

The turnaround in terms of trade with the West and the resulting hard currency surplus ofillion4 does not signal the end to Soviet need for Western credits. For one thing, continuing inflation in the West is eroding the price advantage recently won by Moscow. Secondly, Moscow's

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strategy for increasing trade with the West reliesontinuing stream of long-term credits, especially in connection with its ambitious resource development projects and their commodity pay-back provisions. Thirdly, even if the USSR continued to generate hard currency trade surpluses, Moscow still would profit from using low-interest, long-term credits if the rate of inflation continues to exceed the interest rate.

Ready Availability of Credit

Nearly all major Western countries continue to offer large lines of credit with easy repayment provisions to promote their exports to the USSR. Recent lines of credit include (a) the4 extension by Japan1 billion in support of Siberian development projects, tb) the4 extension by France6 billion, (c) the5 extension of Italy ofmillion, and (d) tha5 extension by the United Kingdom3 billion. In addition, Japan continues to grant low-interest, long-term credits to support other equipment orders. An additionalillion in credits from Japan and Italy seem likely in the near future. The West German government does not subsidize interest rates as do other Western governments) instead, the German financial community continues to come up with substantial long-term credits to support major equipment orders placed by Moscow, notwithstanding the alleged cash deal for the Kursk steeleanwhile, Moscow is able to augment these traditional sources of credit by borrowing in therket and from the newly affluent oil-producing na.ions.

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BACKGROUND PAPER

Current Outlook for the Soviet Economy

The Soviet economy grew by an%hielded from the recession and double-digit inflation plaguing the West by (a) itscontrolled economic mechanism, and (b) its high degree of economic self-sufficiency.

Industrial output4 grew the highest ratehe leading growth sectors were energy, producer durables, chemicals, and processedeflection of tho priority given technological advance and expansion of farm output.

Agricultural production% below the record set3 because of poor weather; nevertheless, grain outputillion tons was the second largest in history, and cotton outputew high. Moscow bought onlyillion tons of Western grain for delivery in fiscalomparedillion tons delivered innd carried over large grain stocks from the3 record harvest.

Consumer welfare continued its steady

rise, featured by increased availability

of meat and dairy products, soft goods, and automobiles.

The hard currency trade surplus reached an estimated SI billionearly S'. billion average deficit; price increases for Soviet oil ond other raw materials far outweighed price increases for imports. Trade with the West boomed, growing bynd accountingf total Soviet foreign trade.

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The Soviet economic plan5 anticipates that GNP will grow at more than double4 rate.

The planned matching of last year's industrial growth will be difficult to fulfill. According to Soviet statistics, industrial output this January grew% compared% in'january of last year.

A jump ofn agricultural output is scheduled. So far this year the weather has been favorable for winter grains,ecord crop possible. Moreover, history shows that good winter crops are usually followed by bumper spring crops.

Many original consumer targets5 will not be met because of disappointing harvests and lackluster performance in housing and the light and food industries. Nonetheless, Moscow remains firm in its commitment to raise living standards,

as witness the continued strong support for agriculture

hard currency trade surplus5 may match the SI billion4 in spiteecline of some raw material prices. This financial cushion will help the Soviets to pay cash for some purchases and to resist high interest rates for Western credits.

onger-run perspective, the Soviet economy continues to be restra:.ned by endemic Moscow cannot readily translate its temporary advantages in dealing with the West into remedies for these problems.

ncreases in productivity remain below expectations, particularly in the farm sector.

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The slow introduction of new techniques and new products into large-scalecontinues to characterize Soviet industry and is unlikely to be remedied by the piecemeal reforms under consideration.

The poor assortment and quality ofgoods, the dismal quality ofservices, and tho housing shortages persist.

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Original document.

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