THE SOVIET ECONOMY IN 1973; PERFORMANCE, PLANS, AND IMPLICATIONS (A (ER) 74-62

Created: 7/1/1974

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The Soviet Economyerformance, Plans, and Implications

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The Sonet Economyerformance, Plans, and Implications

CONTENTS

Introduction

The Economic Performance3 .

Agriculture

Industry

Energy Production

Other Industries

Persistence of Industrial Growth Problems

Capital Investment

Consumer Welfare

Foreign Trade

Plans and Prospects

Implications for Relations with the West

APPENDIXES

AppendixTables

USSH: Selected Economic Indicators

US-USSR: Indicators of the Level of Farm Technology

AppendixCooperative Ventures with the West Second Far East Timber Agreement (KS-II

Kursk Steel Mill

Soviet-Montedison Chemical Plant Contract ..

USSR-Occidental Fertilizer Agreement

North Star LNG Project

Yakutsk LNG Project

Sakhalin Continental

Siberian Coal for Japan

Tyumen Crude Oil Pipeline Project

USSR Natural Cas Agreements with Western Europe

Soviet Aluminum Industry

TABLES

L USSIt: Growth ol GNP by Sector of Origin

Z. USSR: Production of Selected Crops and Livestock Products

USSR: livestock Inventories

USSR: Growth of Industrial Production. Inputs, and Factor

Productivity

Growth of Energy Production

Growth in Selected Industrie*

SSH: Growth inr'

S. USSR: Growth in Per Capita. Comumptton

Machinery and Equipment Orders from Western Coun-

tries, by. .

SSR: Growth of GNP By Sector of Origin .

CHARTS

FigureGNP

FigurePercentage Change of Agricultural Output

FigureImports and Exports

FigureHard Currency Merchandise Trade .

FigureIntended in Siberian Resources

THE SOVIET ECONOMYERFORMANCE, PLANS, AND IMPLICATIONS

introduction

As lhe USSR moves into the, tbe economy continuestate of flux. While the leadeiship feels compelled to keep the economy moving ahead, the traditional approach of achieving growth through massive investment has become too expensive. The leadership now appears firmly committed toconsumerolicy which cannot be satisfied by devoting larger and larger shares of national output to investment

Thus, Soviet leaders are 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. The more balanced approach to economic growth has been prompted by several inter-dependent problem areas, all of long standing;

Decliningales. The economy grew more slowly inhan in; consequently, the goal of overtaking the United States economically is as distant as itecadedollar gap between the national products of the two countries increased inu terms of per capita production, thealso trails many West European countries and Japan.

Agricuiiuro* hackuvrdness. Agriculture, the least productive sector, continues toajor drag on the economy. The system of giant collective and state farms has proved to be the worst managed and least efficient organizational form in the country. More than one-fourth of the labnr force is still employed on the fon:i. and the cost of producing grain and meat is extremely high. Large increasesrm prices and peasant incomes over the last decade have slowed the flight oi labor from the farm but have also raised costs because efficiency has not increased apace

The productivity am! Uxhnoh^ca! gcp. Tlie fact that the USSR pro-duces about half as much as the United State*aborreater suggests the magnitude of thr- Soviet problem in this area. The reasons for the relatively lowhe Soviet Union ;ire partly organizalional and political: inefficient management practices, aplanning system, and the overriding priority given to increasing the quantity of production as quickly as possible loetriment of efficiency and quality. Introductionw technology and the replacement of old methods of production have been slow, jndonsequence, tholevel in many sectors is substantially below Western levels Product quality alsoerious problem. Most Soviet manufactured goods,machinery, cannot compete successfully in Western markets-

1

US-USSR: GNP

Living Xandardi. Allhough much of the Soviet population hasa substantial rise in living standard* since (he, per capita consumption in tho USSR is still only one-third that in the United States, substantially less than in Western Europe, and less than in most Km! European countries. Soviet consumers are increasinglyhere they stand in relation to consumers in other countries, and, while they want to catch up in aU areas, they are particularly interested in improving the quality of their diet and in acquiring more housing. The leadership has committed itself to major programs in the consumption Broa. The most striking evidence of the new policy is (he plan to make more meat nnd consumer durables, particularly passenger cars, available to the people. Efforts to implement this program hav* been particularly visible in tbe icceitt performance of the economy.

This report assesses Soviet economic performance3 in the light of these current policy trends, examines Soviet economic plans and prospectsnd discusses tho implications of performance and plans for Soviet relations with the West.

THE ECONOMIC PERFORMANCE3

The Soviet economy recovered sharply3 from its exceptionally poor perfoirnancc the previous year. According to preliminary estimates, grossproduct (GNP) increased% use1 .Although moit of the upsurge in GNP was due to lhe record performance in farm production, industrial growth also increased (see

TaMc 1

I'm Crowihector ol Origin1

Partem

nation.'! product

2

75

i

Mi-

5 .

a b

' :

Industry

6.8

7J3

raid communication!

fl.2

8.2

A

CalodiW bt factor oil

the rthtivcly poor showing1he economic rcoovwy last yearoost to consumer pro*rams and bought the leadership some time to pursue actions aimed at tTKreasing productivity. Soviet consumersfromi'i.Mii'jj! increases in food suppliesnd production of soft goodsomehack. Tho success in agriculturensured more raw mnlciuls for the processed foods industry and seduced import re-quirvmenli for grain4 Mi jimhilc. the USSR's ihility to import technology and equipment was stiensilKncd by increases in Ltw world prsce* of many of its >aw material export;

ummaiy otrvtuitori ii ikrmi in Apprrdule Al.

I

Butonger term perspective, Soviet economic performance continued to lag behind both the aspirations of Soviet leaden and the performance of some Western countries.2 slumpeveiB blow to thef fulfilling the Ninth Five-Year. and last year's turnaround made up only part of the difference- Tbe chronic problems ol low productivity, slow assimilation of new technology, and delayed completion of new facilities persistednd shortfalls In meeting productionere still common. And.some gains last year, the Soviet consumer still complains of the inferior quality, assortment, and styling of clot lies and durables.

AGRICULTURE

Exceptionally good weather during3 growing season, togetherampaign-driven increase ofn lhe total sown area, resulted in the largest annual rise in farm output In almostumper grain harvest, and record harvests of other major crops, raised total crop output by, following reductions of12 (secivestock

USSR: Percentage Change of Agricultural Output

Total Net Farm Output

|

1 '

| i

| I | I

Crops*

m

1

1 1

1 1

Livestock Production"

3

| i

' 1

1 1

1 i

12 16 20 24 28

grain and pofdtoej used tor seed.

"Gross livestock production less grain, potatoes, veaetablct, ano* mltk ted to livestock ond hatching eggs.

production also roseeflecting large gains In the output of dairyand some increase in livestock herdx.

But the grain crop contained an abnormally high iiercentage of water and trash. High winds and rams in late Julyevere storm in iiud-August flaltenrd grain and hampered harvesting operations in many parts of the western USSR. In some instances, farmers had to resort to hand harvesting, andfitted with caterpillar-type tracks were used to navigate the watcr-iotiked fields. Tlie official estimate of the grain harvest, which includes waste,illion metric tons. Wc estimate the crop of usable grainillion tons (see Tablemore than2 Since supplies of fodder* increased substantially at the same time, the livestock sector found itself with greatly augmented feed stocks at the end

3

USSBlo* Selected Oops and Livestock I'mdncti

Cropi

Potatoes

Vegetables .bwts Sun flower needs 1

1 .if i

Livestock products

Meat (iUuBhtCr weight)

Milk

Wool

Ese>

Annual

Me'rie Tom

i

2

s

Metric Tout

[in

uviet official* been discountedir montutc- and wane in strain ortd by S'Si in Minitower seeds.

J "he harvests of other matot crops also reached new highs3ise in potato output meant tliat more ss*as available for the consumer, for seed, and for livestockin the private sector Sugar beet production was the highest8 The domesticwill yieldillion tons of refinedripected imports of sugar from Cuba should exceed domestic requirements byillion tons, permitting resumption of normal exports lis well as stock replenishment. Production of sunflower seeds, which provides about tliree-fouitlis of Soviet vegetable oil, was uphis will allow the USSR to boost exports of sunflower oil4 Inecord rolton crop and an increase in soybean production will further augment vegetable oil supplies'

' Indwdlnrj imujtrjff Ias hay. ldage. pclare. and straw, wbach duallyiil-iiih* total letJoncentrated tredimilkaf by fWUSILli. and id wrdsupply anouVi third, and the balance (omes from roots, tuberi. milk, and miscellaneous foods.

' Cottonseed oil providesf ttameilk vrgetulA" oil In the USSR and auybean uil

The leadership was determined to save the country's livestock after the

drought and it succeeded (seetate procurements dropped ineducing meat supplier to the population. Bul the key decisions had already been made iny buyingillion tons of grain between May andhe Politburo provided the support necessary toand even increase livestock inventories while at the same time ensuring adequatr supplies toth domestic food requirements and commitments to client states. More than half of the record grain imports In fiscal year (FY)

consisted ofillionpparently lo replace tho low-quality domestic wheat fed to livestock.

To the leadership, the good news from the farm sector must haveartial vindication of the large and growing investments that the Brezhnev programs have allocated to agriculture. Since auuming powerheregime has committed itself Increasinglyolicy of raising consumer welfare, especially through Improvements in the Soviet diet. The extent to which these commitments could be met has depended on lhe regime's ability to stimulate farm production While considerable progress was made in increasing farm output, the lack of progressollowed byrought agricultural production back to about the level

A major part of tbe decline was caused by less favorable growing conditions; the very favorable weather conditions80 were replaced by) or worse-than-normal

Kvrii before the production shortfallowever, it had becomethat the rate of progress achieved by the farm sector was not keeping up with the demands stemming from new consumer programs. Althoughproduction1 remained at the record level achievedhe USSRecord-high volume of farm products in2 to maintain the forward momentum in its program to upgrade the quality of the Soviet diet.

Tlie Brezhnev farm policies have included large infections of industrial products and massive land reclamation programs. Certainly, these contributed to the record performanceeliveries of mineral fertilizer have increased annually by in avenge ofnd deliveries of farm machinery (including tractors and trucks) by ll't. Total investment inlast year roseringing the totalo slightly morebove the goal forear period. These funds have paidhe addition ofillion hectares of newly irrigated and drainedonstruction of grain elevators, vegetable storage lacilities, livestock raising and poultry farms, and repair liases;cquisitions of equipment and machinery.

Si-vcrtheless. in terms of the technology employed in agriculture, the USSR stillr behind the United States. Productivity of labor is much higher in the United States, partly because the US fanner uses mineral fertilizers much

v.st.rtS. Iiivfut'iiiii

Million tleodanuary

Other

Hug*

SimpOOK

I'.Vl

11

il 2

more intensively, and the ratio of farm equipment to cultivated acreage is far higher in the United States. Despite the greater labor intensity of Soviet farming, the US advantage in termsigher proportion of land with fertile soil and adequatetogether with an advantage in fertilizer application, varietal development, livestock breeding, andresultedarked difference in crop and livestock yields. In sum, while US agriculture is capital intensive, Soviet agriculture remains highly labor Intensive.4

INDUSTRY

Industrial output grew by an% inmodest recovery from what in Soviet termslump2 (seeeveral factors contributed to the recovery of industrial production last year.

First, hours workod increased substantially, mainly because of fewer holidays3 and relief from the previous year's above-normal demand for industrial workers to support agriculture. During2 planting and harvest periods, thousands more industrial workers than usual were pulled off their fobs and detailed to support farm operations.

Second, the industrial supply system recovered somewhat from the disruptions caused by the massive roundup of trucks and railroad cars into support the harvest. After drought devastated2 grain crop tn the western USSR, nearly every available vehicle was pressed into service to salvage the grain being harvested in the east.

Finally, industrial output benefited from the combined effectsarge carryover of new capacity commissioned late2 and moreallocations of capital investmentew construction starts were severely restricted last year in favor of concentrating resources on important projects nearing completion.

Table 4

USSR: Growth ot Industrial Production, InputsFactor Productivity

Percent

production .

64

and capital .

ii

8

4

29

!

productivity

hmin and capital ..

U

s

3*

2

9

output trends were relatively more favorablendustry is lacedasic longer runspur the introduction of newIndeed, the rate of growth of factor productivityas slightly lower thanhe regime hopes that by accelerating the introduction of

'SuiiHLC.il indicator! ot the Icvelt of farm tcrhnologv in the United States and Ibe Soviet Union arc shown in Appendix A, Table A2

7

new technology and improving lhe management of research and developmentactor productivity can be returned to the higher growth rates attained inoint decree of the Party and the Council of Ministers in3 attacked this problem byeorganization of industry, to beby the endhe impact of merely redrawing chains of command probably will be minor. But tbe decreetep in the right direction bysome production and RAD units under unified management. Opposition to this reform, however, isindustrial ministers anxious to preserve their bureaucratic empires, enterprise managers who stand to lose their independence, and local Party and government chieftains who fear the loss of local budget revenue as well as the erosion of their powers. Progress toward the reform goab, therefore, has been slow.

Energy Product ion

Energy is very much on the minds of Soviet leaders. Much of the USSR's capacity to sustain economic growth depends on exploiting huge energy resources, both for domestic use and to earn hard currency. But production of energy products3 did not match Soviet expectations.

Although increases in output of fuels and power3 were enough to assure continued selfthe extraction of crude oil ami natural gai fell short of even the reduced goals% growth in production of electric power (sec Tableas less than in cither of the two previous years and below that needed to reach5 production goal.

The Soviet petroleum industry was plaguedumber of serious problems3 that will persist4he lack of adequate drillinghas prevented rapid exploration of oil and gas fields. About half of tbeillion toillion barrels of proved and probable reserves of oil are located in permafiost areas, where exploitation is difficult and costly. The Inability to accomplishetersa seriousin the exploration and development of new oil and gas regions. Moreover,reservoir pressures and the increasing inefficiency of waterflondingIn tho older regions require the imtiilhlion of larger numbers of centrifugal pumps ut oil wells and the use of morn compressors at gas wells lo repiessure gas fields and to increase pressure of gas moved through pipelines. Costs of production have risen substantially, especially in the gas industry

Because large, older fields near consumption centers arc being depleted rnore rapidly than expected, (he USSR must accelerate development of oil and

5

USSR: Growth ut liners. Production

f*MM

Primary energy 1

Coal

Crudeatural gaslectric power

vt-taste Animal

I3firt-70

52

5 :.

0

1

Baaed on conversion of coal, oil.nd hydroelectric- power lo units ol standard fuel, l'roductioii of hydroelectric power3 remained the lame ai

8

gas deposits in West Siberia and Central Asia, far from tbe major consuming centers. The need to connect fields and consuming centers with large-diameter pipelines has pushed the demand for line pipe, pumps, and compressors beyond the available supply.esult, pipeline programs are behind schedule,to the shortfalls in deliveries of oil and gas,

Recently, Soviet petroleum officials have complained about the problems the world energy crisis has given them, They claim that the USSR cannotmeet its own oil requirements, fill the needs of Other socialist countries, and continue to expand deliveries to established markets in capitalist countries. The USSR exports about one-fourth of total domestic oil production,illion barrels per day. About one-half of these exports go to die West,Western Europe (seche USSR has little, if any, uncommitted oi! from domestic sources with which to expand sales to the West and take advantage of the present prices.

Coal productionillion tonsn increase of2 and above3 goal set by theear plan. Meanwhile,isodernization program. An3 resolution called for greater efforts In carrying out plan directives regarding design, production, and use of new types of coal mining equipment, particularly for underground mining.

The coal industry does not use Western equipment to any significant extent. Some interest has been displayed, however, in exchanges of technical information. Inong-term economic-technical agreement was signed with the West German Rrdirkohle Company, and in4 an agreement was reached with Kaiser Industries to cooperate in hydraulic coal mining technology.

Production of electric power3lower than in the previous twohortage of rainfall for Ihe past two years has resultedow water level in the rivers in many regions of the country, causing an underfiilflllment of production at hydroelectric powerplants.illion kilowatt hours (kWh) was produced at these plantsnstead of theillion kWh. Thermal powerplants continue to have trouble in assimilating large new generating units at their full rated capacity because of design and construction defects in the equipment and because of inexperienced operating personnel. The supply of fuel to thermal powerplants in the European region of the USSRerious problem in the latter partcurtailed lighting of streets and public buildings in Moscow, as welllea to consumers to economize in the use of electric power. The Soviet Union has large deposits of fuel in Siberia,f the electric power is produced in European areas, and the Soviets arc having difficulty in transporting fuel to western parts nf the country in sufficient quantities.

The Soviet nuclear power program, which had lagged behind the US effort, Is now beginning to get off the ground. Soviet nuclear powerplants7 billion kWh of electricityn increase of morever the previous year. Although still representing% of the total electricityIn the USSR, nuclear power's contribution will grow rapidlyesult of the construction program now under way.

egawatt (MW) nuclear powerplant went intoon the Kola Peninsula, bringing the total capacity of Soviet nuclear power-plantsW.uclear capacity should double, with the additionW unit at the Kola plant and the planned start-up uf two

9

Figure 3

USSR: Imports and Exports

Oil

L4 ntWoq tMtreli pet day

Natural Gas

3i* Mlion cuOic (eel

Produclion fB Exports to the west CZ Exports lo other communist countries Imports

W unit! at (he Letungrad nuclear powcrpiant. The Sovler plan for nuclear electric generating capacity0t which timef the electricity produced In tbe USSR is expected to be of nuclear origin.

Other lndustrici

Except for some fuels and electric power, mosl branches of industry grew faster3 thann fact, most did belter than Ihey have so far in Iheear plan. But machinery and forest products were the only sectors to equal or exceed the average rate of growthsee

Table 6

USSK: Crowth tn Selected Ir.rfu.tn-.

Percent

metal*

55

metals

80

product!

]

andproduct.

materials .

.

00

goods .

i

foods

for the machinery sector, the output of instruments, agriculturaland some consumerpassenger cars andassenger car outputainlyesult of the continuing expansion of output at the Fiat-built Tolyatti plant. The growth rates of producer and consumer durables were about the sames follows:

ferreftf

max*

Producer

Consumer durables .

' Producer durables Include all machinery except classes of machinery Intended solely for miliUry/spacc use Thus, passenger can and trucks delivered to tlse armed forces are counted in the sample of pioduoei durables, but combat tetitdi ate not.

The producer durables sector was hindered by shortfalls in the manufacture of equipment for the chemical, irvctallurgical. and petroleum industries.

Computers continued to be one of the fastest growing branches of machine building. Despite its problems in manufacturing high-quality advanced electronic ojmpooents in sufficient quantities, the USSR is now firmly cornmitted to the new RYAD family of third -generatioo computers Although prototypes of most

* Nonetheless, goals for higher horsepower barters and rwsv models of grain combines were not reached. Ne* traeton produced3 had an averagecompared svitli llie original plan ofecause of delays in inihaling large-scale production nf new fl/J. i. Ita.hirscpower models In Ihr country's Urges! tractor plant

11

ofAI) computer models have been built,ew of the smaller models in the icrios have been produced. The RYAD computers are copies of the IBM. first introduced in the United Statesnllko the early models of the, liowever, the RYADs do not have high quality and reliability end are poorly equipped with peripheral equipment.esult, the USSR is actively seeking Western (mainly US) manufacturing technology.

The chemical industry posted particularly large gains in the output offibers, plastics, andirly becausearge carryover ofinstalled latemportant basic chemicals such as sulfuriccaustic soda did not do as well Delays in commissioning new capacityinability of Soviet machine builders to keep up with the demands ofindustry continued to bold back chemical production. Orders for Westchemical equipment climbed to an all-time record3

centratcd in such high-priority areas as fertilizers and synthetic materials. The facilities ordered, which are large and incorporate very modern Westernshould contribute substantially to outputlie ammonia plants oidered from the West, for example, incorpoiatedar more advanced than the technology now used tn they the time they are completed, these plants and others now being negotiated will provide additional capacity ofillion tons of ammonia per year. Operating through, these plants would save the USSRillionillion rubles, compared with the cost of building and operating ammonia plants like those they already have.7

Persistence of Industrial Growth Problems

Despite the upturnndustry still lags far behind the expectations of Soviet leaders in terms of tbe variety and technical sophistication of its products. Ferrous metallurgyase in point. The ferrous metals branch has made progress in recent years in improving the overall quabty ofas the production of lighter and small rolledthe quality and variety of steel products is still inadequate. Thus, lhe USSR has been increasing purchases of steel from Western suppliers to help meet growing requirements for speciality and high-quality grades.

To help boost productivity, the leadership has decided to buyuch larger scale. Tlie effectiveness of this program will bein pari by Soviet success inumber of impediments lo the efficient use of foreign technology. For example. Soviet workers arewith complex foreign machinery, spare parts for foreign equipment are often in short supply, and Soviet maintenance programs frequently areSimilarly, the technology acquired outside the trade channel through direct and indirect contacts must be translated into blueprints and brought to scries production.

CAPITAL INVESTMENT

While enjoying success In agriculture, tbe Politburo also had reason forin the results of anotheronehesector. The growth of investment3 because of Ihe decision

Vini eiprrirncednirineerlnrj andlard- nngle train ammonia planU that use centrifugal compressor* and minlmixn unit rnriity trguuenninlt

*hvIiii! Ii muchly equivalent to total recent annual investment In the chemical and petrochemStal liHtixtrsri.

12

taken at the meeting of the Supreme Soviet in2 to concentrate on projects nearing completion, especially those involving the expansion and modernization of already existing assets- This policy succeeded in holding the growth ol unfinished construction to less thanfter average increases ofer yearseeeanwhile, gross additions of new fixed capital, representing new projects going on stream, increased bynshort of the planned goal bul well above the% Increase achieved

Tabfa 7

owlh Innwimwil

fmvnr

rd

Cob* kUHom ofed capital acttof ofibpd contraction

Hetl net ions on new construction starts also curbed the proliferation of "non-centralized"projects funded from enterprise and ministerial profits and by bank credits. Noneentralizedoncept developed in5 economic reforms, was intended to he used primarily for re-equipping enterprises. Introducing modem technology, and other measures to improvepotential at minimum cost- In practice, tliese funds often have been used to divert material ami manpower lesourcn into projects at variance with !he objeilives of the planning authorities.

CONSUMER WELFARE

3 the declared consumer goals oflan seemed to have slipped out ofharp increase fn per capita consumption3 largelyebound in (he growth ol food consumption from near stagnation2 (seehe other major components ofgoods, durables, andahead3 at rates substantially below (hose.

The slowdown in consumption growth rates relied* in part tbe transitioneller'suyer's market Until recently, levels of living were io low thai consumers would purchase practically anything produced. For their part, planners stressed quantity and largely ignored quality arid assortment. Now the demand for many basic consumer Items has been satisfied, and growing

t'SSRi Cre-fh in fit Capita Comumpfion

fVreeM

Total

Food

Soft ifikhI* Durableices

33

.

0

emphasis in being placed on catering to consumer demand for impiovrd quality and variety. Bul Soviet planners are having problems breaking longstanding production bottlenecks. For example,3 production of leather shoes andin highfar short of the goals the planners had set

Although sales of furniture, vacuum cleanen, nnd refrigerators arc keeping pace with production of these items, lags in sales of several other important durables, particularly television sets and washing machines, has resulted in some boildup of excess iirveircOries. The increasingly choosy Soviet public ts refusing to purchase durable goods of outmoded design and poor quality, as it did with soft goods during the earlyAt thatthe leadership jefrd to reduce inventories of soft goods by selectively reducing prices and transferringfrom the cities to rural areas, where extra spending money was becoming available lor the first time. Today, changes in the distribution pattern probably would have little effect on consumption. While some price reductions may be in the offing, the leadership is stressing improved product quality and variety. In this connection, the Soviets are looking increasingly to the Western countries for modern equipment and technology to produce consumer goods.

In response to lower rates of growth in consumption, some features of Brezhnev's extensive 'welfare package" (announced ath Puity Congressave been delayed in an apparent effort to keep incomes in line with available goods and services For example, the increascain the minimum wage fromoonth, which bad been scheduledtill has not been fully implemented.

Those areas in which unsatisfied consumer demand is theand the supply of qualitybeen among the slowest to improve. Ihc fulfillment of goals for increases in the supply of quality foodsouldubstantial decline in the share of dairy calories obtained from tbe starchyand grain. Meat consumption, for example, is slated to risend that of dairy products. Even if the goal for meat production is met. however, supply will fall short of demand (at prevailing02 there were frequent reportsomplete absence of meat in stale stores in many provincial cities. Per capita consumption of meat in the USSB is only about half the level ofest Germanyf that in Czechoslovakia.

Although the housing situation has gradually improved, the fulfillment of the new five-year plan goal would still leave per capita housing spacehort of the minimum standards set for healih and decency by Soviet officials and far short ol the conditions enjoyed by other Kurupeans' Soviet housing plans, moreover, usually have been under fulfilled.

FOREIGN TRADE

Trade with the developed West increased byncreaseargely because of record imports of grain, valued at0 million2 andillionhe United Slates emerged us the USSR's second laigest trading partner oulside of Eastern Europe. US-Soviet tradeamounted6 billion, includingillion in Wt import* from the United States

Ma tbr Ulr IDflOi. for riunpW.Oraurdabout twicemii.li iwiuung ipaee per capita a*Ki?rm ofSSII.

14

Soviet trade with Eastern Europe grewn2oth years brought large Soviet deficits after many years of nearly balanced trade. Soviet exports went2 billion1illion3 and imports rose3 billionillion. Eastern Europe maintained the same share of Soviet trade2 as it had since3hare declined. The deficits resulted primarily from largein Soviel purchases of machinery and equipment and consumer goods from Eastern Europeontinued reduction in Soviel sales of grain to these countries. Soviet-Chinese trade grew relatively slowly, hy32 million; it was exactly balanced in exports and imports.

Overall, Soviet imports from the West increased more than exports, so that hard-cuTTcncy deficits23 set records4 billion and7 billion, respectively {seehe USSR financed these deficits by selling gold worth0 million2 and as much asillionariety of Western medium-term andillion in three-year Commodity Credit Corporation credits from the United States drawn down duringthe balance.esult, the USSR's hard-currency indebtedness grew to6 billion. Debt service payments of0 millionf its hard currency exports

'lhe USSRecord volume of Western machinery and equipmentn addition to its massive purchases of agricultural products. Soviet machinery orders from the West6 billionise over

quipment for the chemicalchronicallyof Sovietf the increaserders for metallurgical and consumer goods equipment also roseof the automotive equipment (second in lolsd value) will be installedgiant Kama Truck Plant. Since most equipment orders are connectedplans for capital expansion, deliveries will stretch out over several years.

Increases in the world prices of several commodity exports, particularly oil, provided Ihe Sovietsubstantial windfall gain in hard currency earnings. For example, the average price of Soviet oil delivered to the United States in

er barrel, compareder barrel

Table 9

USSR: Machinery end Equipment Oder* Own Western Count ile% by Type

Mrffion VS t

nng

55

rehiring and pipeline

goods

30

and wood processing

V!

v.

Ifta

Textiles

w

49

procecstnc

15

nnd construction

PLANS AND PROSPECTS

Ashe USSR's economic plan4 scales down the targets originally set forth in the Ninth Five-Year Plan without disclosing any changes in priorities. The goals for major sectorsrowth% in GNP (seend:

Substantial growth in industry and agriculturc-

Continued large allocations of capital and materials to agriculture.

Renewed emphasis on consumer welfare.

A focus on completing construction projects already begun.

Farm output4 Is slated to increase" This is clearly an ambitious goal because the bumper harvests recorded last year will be difficult to match, let alone to surpass. In fact the plan callsross grain harvestillion tonsell below5 million tons achievedhe continued high priority attached to support for agriculture is reflected in the scheduled rise in deliveries to agriculture ofnd machinerynvestment in agriculture is to% and constitutef total investment in all sectors of the economy.f thein agriculture will finance land reclamation programs designed toillion hectares of irrigated and drained land

Tabic 10

USSR: Growth of GNP by Sector of Origin

Percent

Plan

75

62

.

8

and cornmu nidation*

trad*

M

.i.

Based on Soviet plans for individual sectors.

In contrast to the Khrushchev era, the piesent leadership's concern forseems not to have waned after an exceptionally good harvest. Indeed, Brezhnev recently announced plans to spendillion rublesn the first phaseyear project to improveillion hectares of agricultural land in the northern European area (non-hlack-soil zone) of the Russian republic, includingillion hectares of crop land andillion hectares of grazing land. The crop land, equal tof present sown acreage, is about the size of the "new lands" area of Kazakhstan and Western Siberia that was developed during. The new program is aimed at damping the large fluctuations in farmhave plagued Soviel agriculture.

* Output unadjusted for purchases from nnn-aRrici!liiral secinn.

1"

Theincrease scheduled for industry4 is within reach, although continued shortfalls in energy production areroduction of color television sea. refrigerators "with twond automatic washers is slated to rise considerably. Thencrease in output of cars planned4 probably will be achieved because tbe Tolyatti automobile plant will be operating, for the first time, at or near capacity levebullonths Nearly one out of every two cars produced in the USSR4 will come from this facility. Production of the Soviethich represents nearly one-third of all passenger cars in production, is also likely to make large gains in tbe newly renovated and expanded Moscow and Izhevsk plana.

If plans for industry and agriculture are met, per capita real income4 will grow bynd per capita consumption byoth somewhat more than the average rates for thoears of theear plan. Per capita food consumption, which%s scheduled to grow byespite the slower growth, larger quantities of quality foods, particularly meat and vegetable oil, will Iteola!illion square meters of housing planned for construction4 is ubnutore than the average constructed.

The capital investment program inill attempt to repeat or belter last year's performance In concentrating investment resources on projects nearing completion. Inf all centralized Investment will be directed to this end. Funds will be allocated primarily to agriculture and key industrial branches. Cross additions of new fixed capital arc scheduled tover3 level with major new capacity planned for industries producing fuels and power, ferrous metals, and mineral fertilizers.

On balance, the economy should continue on its present tacknd probablyith growth avengingor the two years In the longer term, the USSR wiU be hard pressed toate of growth as high aser year. Most of the problems which contributed to the slowdownill remain.

IMPUCATIONS FOR RELATIONS WITH THE WEST

The USSR will almost certainly want to trade more with (he United States, especially for high-technology products, bul can find most of what it wants in Western Europe and Japan. The USSR and Japan initialed an agreement earlier this year that could pave the way loi one nf the biggest economic deals between Ihe two countries since the ond of the Second World War (see" The Japanese willredit0 million to helpoal mining project in Yakutsk in eastern Siberia. 'IV Japanese will be repaid by deliveries of coking coal beginning

The USSR has also stressed Increasing its economic relations with West Germany. There base been recenl discussion* on the possible West German construction of nudear powerplanu in the USSR. An agreement has been signed for joint developmentI billion iron ore and steel plant in Kursk. France has actively supported Soviet developmentrench firms have0 million contract for the developmentiberian cellulose plant0 million contract for the design and equipping oftrocherrucal plants In addition, there has been some discussion of French participation inI bdlion aluminum complex.

"Output unadjusted lor punhatK It,mi nlhrt

" Detail* ut recentaftrreinencitbe Wnl an- :in Appendix 8.

18

Japanese Interested In Siberian Resources

Soviet bard currency earnings should rise rapidlyecause of higher prices for oil and raw materialrices remainer barrel, oil exports alone may earn about S3 billion4 and4 billionigher prices for chemicals, wood products, andtogether wilh larger deliveries of natuijlincrease total Soviettoi bilb'on4 {double2old sales arc an additional Urge source of potential foreign exchange earnings. If the USSR market* all of its current gold production in Western countries, it would earnrice0 an ounce) aboutillion4

With expenditures for Western grain4 expected to be half or less3 outlays, these potential hard currency earning* could easdyarge rise in Soviet imports of Western plants, equipment, and other goods. The USSR couldayments surplus of over fl billionn addition the Soviets could sell SI billion in gold out of current production. This would permit the USSR to pay cash for more of it* mnchineiy purchases and to reduce some nt its ilioiMerm debt.

19

TATISTICAL TABLES

Table A

USSR: Selected Economic Indicators

nn*2

PopuUuon rmd-ycarW )

roductionOO).

0

Hl.fi

jrrM^mnr*

Feed ftninh 'mil.toft metric*

Poiaiur* uuillton nm*

Mr*lM (minion metric

^rdodinged fore**)

Jl i I- OS;

Lrmlliro

Agricallunl [nftllllOO peraona)

i! *

cti|HU finCO*HlOI.

Cni'k int'ltOTi

Nitunil (Ullinn cubic frtt)

Elertrie. power (billion

: irirtC

Priiiiirv cwiiy ivixluettofi {million metric ton*

ot coal

I.. llf lOft*) '

Omeal toiilUor. mule

Copper, refined ithwivirtd metric loiw).

Cltron^Cf {million mettle

i

Iron on* {million metric

Fhe.ph.Ufemi!hon toctrie

.

ncludittl now* iihwMd

Elertrte gmeiww* tihoiiMod

MacJiiwr mob, moulcuttinfi (tlwuMnd*

ln*lrgittenU .million rvblotr. IW

Comimter-i. diftM (million rubtai IW

<thoum.d

Writing marhincn iUioumwI

KnJiOi ithwend

THrvWon seta (thousand

Vacuum cleaner* (thoiiMiid

Se-ir* nwhin* (thraud>*"

Cold production fifcotiWH* iroy

Import* million

'million VS

S

4 1

^

5

..wo

(6rt >

^S 5

0

*

5

0

i

9

0

-

7

7

3

6

"

2

0

7

?

2

I

5

0

:

J

.4

1

4

f*

:

*

4

1

,SH

t34U

.ii

>

"

J

j.

,CLo

..,

a

4

.0

1

"

ft

vi

9

1

i

7. !

'

!,

n:.

i

3

2

0

,W6

n

.

IS

.uj'.

.4IKI

v.

J':

.vim

:

IS"

r4M

orottiure.iwwcinb, andv<m

1jl>it pouHry.f!.tl. n'J*i

m^iiH

Table A2

US-USSR: Indicators of the Level of Farm Technology

ladlcXM

Stare ol labor force employed in agriculture ipcreer.tl*

mia worker*

Niioitmi of persons supported by one farm worker*

lcreice per liarlcr (arret)

Grata acreage harvested per combine: (acre*)

Track*arm

Feriiiiier nutrient*lo

poundi per acre!

Pno*phorauttr acrel

Piifaihpound? pec ace)

Livestock yield* Averare ll'-ral slaughter:

Hog* (puuisds)

Fjji per hen

Mill par cc> milked ptr year (puuimI#>

Crop yields

Sp:sng(bushels per-

Winter wheal*cre:

bushel* per

ushels per acre!

bushels per arrn)

buthcls per

Poiaioet ibusheis per acr*;

Suiia: heels (metric Ion! pet anel

cc) i'n'iiiii (pnund* per acre)

as a

of

State*

.fiS2

Itaseii0 data, eioeptnata.

1 fFrom US ampul usang the geometricnr enraperisoii* nf

earned Oat. atlerr.ati'el.v. In dollarnl.lii..-

1I data.

tate procured animal*.

Three-year

APPENDIX li

SOVIET COOPERATIVE VENTURESTHE WEST

The detailsumber of major projects in which the USSR is exchanging raw materials for Western technology and equipment arc presented below. Several projects have been already signed, such as the natural gas deals with Western Europe. Other and much larger ventures are being negotiated now. Direct purchases (equipment for the Kama Truck Plant, for example) arc not included in the listing.

Second Far East Timber Agreement (KS-II Project)

The USSR. Sangyo Company are in the final stages ofecond development agreement for far east Siberian timber reserves. Negotiatioiis on the follow-up project have been in progress for moreear, but final agreement has been stalled by differences over pricing.

As currently envisioned, the USSR will purchase, under long-term credits0 million In timber cutting and hauling equipment and timber carrying ships. The Soviet purchaseillion in Japanese consumer goodsalso be financedcar credits at 7Vi%.

In return, the USSR willillion cubic feet of sawn logs and pulpwood to Japan, with prices likely to be tied to world market levels. At current Soviet export prices, Ihese deliveries will earn the USSR more thanillion. Deliveries under the project would constitute anf all Japanese timber imports from the USSR during the period of the contract.

Kursk Steel Mill

Soviel and West German firms onarch reached preliminary agreement for the development of an iron and steel complex near Kursk. The first stage of the project will take place48 and willclletizing plantapacity ofillion tons per year, an electrical steel plantillion tons per year of bar stock, and rolling mills producingillion tons of rolled steel. Discussions for the second constructionill begin

Negotiations, in progress for moreear, had been blocked over the question of financing. The Soviets hadirm commitment for over SI billion in long-term credils athen informed earlier this year that West Germany would not provide subsidised credits, Ihe Soviets stated that they would pay cash for the nearly Si billion in Western imports required for Iho first stage of the project. By paying cash, the USSR will save several hundred million dollars in interest charges and will .tvoidigh interest rateime when it continues to seek conccssionaiy rates from its other Western trading partners. The Soviets did stale, however, that the second stage ofwill be financedarter basis, with Soviet repayments probably based on output from the first stage of Ihe project.

2d

Soviet Mooted boo rtlllfril Plant Contract

3 the USSR signed an agreement with the Italian firm Montedison whereby the latter is to provide seven large chemical plants to the USSR. Tho deal is valued at at0 million and will be financed under an earlier agreement that made available to the0 million line of credit. The USSR will repay the credit with products manufactured in the plants suppliedons per year forrea, and titanium dioxide.

USSR-Occidental Fertilizer Agreement

In3 the USSR and Occidental Petroleum Corporationyear agreement under which Occidental would supply phosphoric add in exchange for Soviet ammonia, urea, andexchange that was to start8 and expected to5 billion toillion each way. Occidental was also to arrange for supply of equipment and technology forertilizerto produce ammoniaorfor supporting Infrastructure (pipelines from Odessa to Tol'yatti and storage, loading, and porthe fertilizer equipment and technology together with the pipeline and related facilities were originally valued0 millionSoOO million and were to be repaid with fertilizer An Export-Import Bank loan0 million has recently been approved,rivate US banking consortium has been formed toatching amount. The recent approval of the Erimbank loan jhould lead to US contracts for the infrastructure and possibly for technology and equipmentfmmonia plants that came under the Occidental agreement.Petroleum apparently will be responsible for the support facilities.

North Star LNG Project

A consortium of threeexas Eastern Traas-mlssion CorporaUoo. and Broun andbeenooperative venture with (he USSR toillion cubic feet per day of liquefied natural gas (LNG)year period for the US east coast market. All of the gas would come from the large Urengoy deposit in the permafrost areas of North Tyumen Oblast in West Siberia.

The USSR would drill about IflO gas wells in the Urengoy field. The US consortium would participate in comlruction of gatheringinch-diameter gus pipeline to an export terminal in the Murmansk area0arge liquefaction plant, and iclaled terminal and port facilities. Initial deliveries of gas were to start

The original proposal envisaged dollar costs olillion0f7 billion would go for Soviet-based installationsuble costs for construction of these latter facilities were expected to be equivalent lo abouthe proposal specified an fo-b. price0ubic feet of gasanded price of5eet in Philadelphia

Negotiations ore continuing. Several major differences over prices andttttitl be ironed out before the project can go forward.ide gap between what the Soviets want nnd what the US consortium thinks is reasonable, both rides apparently continue lo have hopes of an eventual

G Project

Inccidental Petroleum Cocpoeitkm. El Paw Natural Cmsand Japanese Interests concluded agreements of intent with the USSR to exploit natural gas deposits located in the Yakutsk ASSR In eastern Siberia. Yakutsk gas would be pipediles Io Nakhodka where an LNG plant and export facilities woukl be constructed. Japan and the United Stales would eachillion cubic feetG per day via tankeryear period beginning Inrom the same project, the USSR also expects to obtainillion cubic feet of gas per day for consumption in the Far East.

Tho cost of the gathering system,C plant, and export facilities to be built by US and Japanese firms in the USSR has been estimated at about S3 wlhon0 dollars) Locally incurred ruble costs have been estimated to be roughly equivalent. All LNC tankers would be owned by US and Japanese

inte rests.

The USSR requested supplementary credits0 million to coverequipment needed for seismic work aid npkxafoiy drilling to find and evaluate gai reserves in Ihe Yakutsk area. At present the USSR claims only nboulrillion cubic feet of explored reserves. US and Japanese technician? agree that several years of exploration will be needed to establish the reserves lhat would be required to support the protect

An4 umbrella agreementillion of Japanese credit% interest for three Siberian development pro|ectt (gas. coal, nnd timber)0 million for Yakutsk natural gas exploration. Awas also signed on4 between the USSR and the private Japanese firms involved in the deal

Sakhalin Continental Shelf

The USSR and Jipau have di* mrd the exploration and development of Sakhalin off shore coniinenta'. shelf oil ivserves (or several years More recently, the Soviets have also invited US few to discuss tlie possible exploration ol these reserves. Several ol these firmi are interested Gull ha* been most active, having for some timexploinlion venture with Japan.

Soviet WHireej estimate thee reserves atillionillion Lam-Is olhSirS.6O0 -tqare-BMifl area out to water depths oleet. In water depths up1 fnl, there may lie someillion.in amount equal to the reserves claimedlaska's I'rudhoe Ray fieldl current estimate* of Northrncv Insestiucnt for exploration and dr. velopment of one or two major oilff-diore could amount tollion because walk will he complicatederc lidos and massive ice fW

Discussions hud long been flatten1 by diflVrnicos over production thai ing the provision of risk capital, aadlcr ol iutnit which outlined basic forms of thejest was signedut no additions! progiess was made until ewliri this year.

Under the terms ol tlie Apnlpan will provide tho0 million to cover exploration cost,eriod. Soviet repayment of theapital is tied to tlie successfulh no repayment required if cxptcratwi ihqvcs timuci-evslul In relum for bearing thishe Japanese firms willption Inf all nil recovcied during the lepnymcnl pi-iimlmears lh.Wt.'i.

Tbe Japanese have already arranged for all Ibe risk capital needed. US technology and know-how are crucial to the project, however, and some form of US assistance probably will have to be arrangedinal agreement is signed.

Siberian Coal for Japan

On4 the USSR and Japanese firmsreliminaryfor developmentoking coal deposit near Chulman in the Yakutsk ASSR.he USSH will supply Japanillion tons of coking coal, valued roughly atillion (at projected market0 million in Soviet purchases of Japanese equipment to be used in developing tbe reserves will be financed by long-term creditsn addition, the Soviets will receive shorter term credits at higher interest rates toillion worth of Japanese consumer goods.

If Japan is willing to provide the necessary investment funds, the USSR could provide much larger quantities of coking coal. The Yakutsk coal basin contains atillion tons of explored reserves of coking coal and billions of Ions of coal suitable for metallurgical use.

Tyumen Crude Oil Pipeline Project

This project originally called for constructionilc-long pipeline from the Tyumen oil fields in West Siberia to Nakhodka in the Far East. This line was toarrels per day for export to Japan, and possibly to the United Slatesyear period. The enst of tbe project was estimated atillion. The Soviets requested Japanese credits of at leastillion to purchase the pipe and equipment needed to buildile section between Irkulsk and Nakhodka. Some US companies expressed interest in participating in the project.

Japanese interest was based on the assumption lhal Japan wouldarrels per day. However, inoviet officials told the Japaneseaximumarrels per day would be available for export. No reduction in foreign Investment iu pipeline construction wasJapanese (and US) interest in the project therefore waned.

Inoviet government leaders proposed that ihc Japanese helpecond trans-Siberian rail line insteadipeline to transport Tyumen oil to the Far East. The proposed line would pass north of Lake Baikal to Komosomnl.sk, whence (he oil could be moved to Nakhodka via pips-line Under this new proposal the Soviets would supply Japanarrels per day of crude oil annually forears following the line's completion. In return, lhe USSH wanls Japan lo supply up toillion in loans for construction, railroad, and pipeline equipment. Although the proposed rail line would piovjde access lo important deposits of coal, copper, and iron ore, as well as lo Tyumen oil. the Japanese are reluctant to accept the proposal. They object to the extra time and cost of fonslrucliQii. Whereas the pipeline would be wholly dedicated lo Oil transport, the rail line svould have many alternative uses for Moscow.

USSR Natural Cas Agreements with Western Europe

To date the USSR has concluded six sepaiale agreements with Westnations for the delivery uf natural gas. and by Ihc end ul Ihewhen lull-scale deliveries for all projects are inbe committed tootal of IS billion cubic fect of natural gas daily. Various West Euru-

: in.ave advanced5 billion in long-term loam to finance Soviet purchases of large-diameter pipe and equipment for natural gasand transmission. The total value of Soviet deliveries, which depends in part on future world price levels, could wellillion,

8 the USSB and Austria concluded an agreement whereby the Soviets will provide Austria with natural gas.eliveries had already reached their maximum levelillion cubic feet per day. As part of the agreement Austria provided theunder long-termmore0 million in large-diametex steel pipe. Austria has recently sought additional deliveries from the USSR but has met with stiff Soviet resistance over prices and quantities.

A similar but much larger pact was concluded between the USSR and Italyhe Soviets agreed toaximum of 5S0 million cubic feet per dayyear period. Deliveries actually began earlier this year following the completionatural gas pipeline transiting Austria and are scheduled to reach maximum levebew years Under the agreement, the Italians provided the Soviets0 million in lone-term credits at favorable rates to finance Soviet purchases of large-diameter pipe and related equipment

The USSR has concluded two natural gas agreements with West Germanfirst0econdach of the two agreementsfor deliveriesyear period, with combined daily deliveries peakingillion cubic feet by the. West German banks haveotal0 rnillion in long-term credits to finance Soviet imports ofillion tons of large-diameter pipe am! assorted pipeline equipment.

inlandeal for tbe ainvlructionoviet-Finnish natural gas pipeline and the subsequent purcltasc of Soviet natural gasyear period beginninginland willaximumillion cubic feet per day by the. As part of the agreement. Finland will provide the USSRillion in large-diamrtrr pipe.

The French were the last toatural gas agreement with the2 contract ealLi for deliveries overears beginningy the end of the decade, daily deliveries willillion cubic feet, including the gas actually destined for Italywap agreement concluded between the Italians and the French. In return, the Soviets were granted0 million in long-term govern ment-backed credits to finance purchases of pipe and equipment related to tbe production and transmission of natural gas.

Soviet Aluminum Industry

The USSR Is currently discussing the construction of alumina, aluminum, and aluminum rolling mill plants with Western firms. The US Kaiser Corporationcience and technology agreement with the Soviet State Committee for Science and lechnology last January and appears to be in the bidding for tbe construction of some of the contemplated plants France's Pechtney Ugine Kuhlmann is alionstrudion of aluminum production facilities with rhe Soviets, although the Western firms apparently are not in competition with one another.

Soviet imports from the West in support of planned expansion could run well overillion. The Soviets probably will Insist on counter-purchase agreements covering part of the ahiminuni and aluminum produrts produced from these plants to pay for the expansion and toontinuing source of haid currency earnings.

27

Original document.

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