Created: 4/2/1974

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ro?-: John yc-o

Office of the Special Assistant to the Secretary for National Security Affairs

Department of the Treasury


Paocr on Soviet Trade and Debt

In response to your request, tvo copiesaper on Soviet hard currency trade oni debt are forvcrded herewith for tho use of Secretary of Connerce Dent.

Office of Economic Research"

Attachnent: As stated

USSR Hard Currency Trade and Debt


The Soviet Union has coped with large hard currency pay-

ments deficits in the past two years, thanks chiefly to Western government-backed low-interest credits and large sales of high-priced gold. The Soviet balance of trade will improve4 and probably will be in surplus for the first time in seven years because imports of grain willand the value of exports will increaseesult of higher world prices for major Soviet exports, particularly


The Soviet balance of payments picture is thus brighter than it has beenecade. Soviet export earnings could8 billionp8 billionurther substantial increases in exports are possible5 Prospects for Soviet gold sales are also favorable andarge additional source of hard currency oarnings. Sales from current production alone wouldat current market pricesearn the USSR an3 billion45 billion,

The expected rise in hard currency earnings willtho ability of the USSR to import the technology and equipn-ent it desires fron the West. The exact level ofthat the USSR attains during the next several years will depend upon several factors including raw material

prices, gold sales, and Soviet debt management. The expected increase in hard currency earnings in any event will provide the USSR with additional flexibility in their import decision making, allowing them for example to pay cashubstantial portion of its capital goods imports. The increased export base will also serve to alleviate the burden of debt service throughout much of the remainder of the decade.


The Soviet hard currencyaveraged0 million annually during the Until the, these deficits were financed primarily by gold sales, and by the endoviet gold reserves were down toons. 5 Western government-guaranteed medium- and long-term credits applied to Soviet purchases of capital goods replaced gold as the chief element in financing Soviet deficits. In the, Soviet gold sales


were virtually nil and reserves grew to anons by tlie end But Soviet medium- and long-term debt to the West (on government-guaranteed credits) apparently grew to more thanillion 1 debt service (principal and interest) tookf Soviet hardexports.

T. Deficit refers to the merchandise trade deficit. Several elements of the current account cannot be estimated. Those that canourism and interest on loans) indicate that the merchandise trade balance does not differ substantially from the balance on current account.

Table 1

USSR Hard Currency Trade Deficit and Gold Sales

Currency Exports Imports in" Million US $1

SalesW (Million S) (Tons)



official Soviet

at the official raten ouncend estimated free market prices subsecuently.


Table 2

Estimated Soviet Drawings and Scheduled Repavnents on Western Government-Guaranteed Medium-Terra and Long-Term Credits

Million US S


/ W







Scheduled Repayments Principal and Interest









at the End

the Year

Reccnt Dovplopments

A poor harvest2 forced the USSR to purchase large quantities of grain and other agricultural products to sustain Brezhnev's program for upgrading the Soviet diet. At the same time, the continued disappointing performance in the industrial sector strengthened the leadership's determination to upgrade its industrial plant by stepping up imports of high


technology machinery and equipment. 2 the trade deficit roseecordillion. (See Table 1) Large imports of0 million worthand other agricultural products accounted for much of the deficit, but imports of machinery and equipment and steel pipe also rose. Exports of oilthe USSR's main hard currency earnerdeclinedwhile other traditional exports declined or did not increase.

The USSR's hard currency merchandise trade deficit apparently was even greatererhaps aboutillionlargely because much of the grain purchased2 was delivered in that year. The USSR probably imported


at5 billion in agricultural products (chiefly grain) and aboutillion in machinery and equipment. Export performance was better thanowever, in part because of higher prices for oil.

To cover2 deficit the USSR relied chiofly on credit. Government-backed net medium- and long-term credits amounted to0 million, and0 million ofear credits were drawn to finance grain purchases from the United States. esult of its extensive borrowingotal outstanding debt on government-backed credits climbed to6 billion. The USSR also tapped the

Oil exports might have declined even more were it not for Soviet imports of oil from the Middle East.

Eurocurrencyfcr several hundred -illior. cellars iniiun-hcrt-term credits to finance imports of machinery anc crair.. the USSR also sold cold in substantial quantities fcr the first time

3 the USSR took advantage of high gold prices (and generally avoided high interest rates in the Eurocurrency market) in financing its hard currency trade deficit. The USSR sold3 which probably earned the Soviets0 Trillion. Much of the re-vain Ing deficit was covered by coverment-backed Western credits0 million in CCC credits). Thus the burden of the USSR's recent trade deficits was lightened considerably by easy

access to Western credits and by the windfall arising from tho sharp increase in the price of gold. In addition, dollar devaluations will pen-it the substantial Soviet borrowing on tho Eurodollar market2 to be repaid by cheaper dollars. Balance ofr.ts

Soviet hard currency earnings will be buoyed by rapid price increases for traditional Soviet experts and record gold prices, and payments surpluses rather than deficits are

anticipated for the next few years. 4 with expenditures for Western grain expected to be half or lesshese earnings cculd easilyubstantial rise of Soviet imports cf Western plant,nd other goods.

Burringorts or. the scale ofshould he true5 as well. The Sovietshave teen loath to hold fcreicn exchange inworking balances because of fears of Westernexchange earned in excess of such balances nightto increase Soviet imports fron the West. Thethese cash surpluses, and thus the extent to whichcan increase theirmport maximize,upon several factors. These includes theWestern medium-term and long-term credits, the valueexports, and the value of gold

Exports will rise sharplyecause of tho much higher prices the USSR will bo receiving for oil and raw materials. Supported by Soviet imports from the Middle East under barter arrangements, exports of crude oil may reachillion tons4 andillion tons5 (up fromillion tons. With market prices expected to range between S7er barrel, oil exports alone may earn theS3 billion4illion Increasing prices for wood products, chemicals, diamonds and coal, along with expanded deliveries of natural gas could push total Soviet exports to8 billion4 (double2 level)8 billion in

Exports of goods other then gas and oil are expected to growate ofor the balance of the decade. (Seeelow).

Table 3

Soviet Hard Currency Exports,us S




Oil pricesre estimated ater barrel (in parenthesis).

Othor Earnings

Soviet foreign exchange earnings during this period will also benefit from increased net revenues resulting from Soviet shipping and Western tourists traveling in the USSR. Together these sources are expected to earn0 million40 million Soviet gold sales, however, represent the largest single additional source of potential

foreign exchange earnings. Soviet gold reserves are currently estimated atar more thon adequate

T- Valued atillion at current market prices if all could be sold at such prices.

amount in view of the USSR's annual value ofillion estimatednd existing long-termillion by end esult the Soviets would be free to market most, if not all, of current gold production in Western markets. ourse of action would earn the USSRrice0 an ounce)0 million40 millionredit Drawings

Credit drawings and debt service are the other major variables affecting Soviet import potential. To the extent that the USSR continues to draw heavily on Western credits, total import capacity will be enhanced over the short term. Conversely, continued borrowing at such levels will leadore rapid accumulation of debt and larger debt service payments over the long run. Continued Soviet insistence on long-term credits in support of orders recently concluded or currently being negotiated in the West indicatesarge volume of deliveries for capital equipmentill be on credit. It is quite possible, however, that the large export surpluses will allow the USSR to pay cash for capital imports, particularly if lucrative credit terms cannot be obtained. The USSR has just agreed to pay cash, for example, for all purchases connected with the


At tlie currenc gold price 5 these sales would amount00 million resoectivoly.

West German constructionI billion iron ore complex at Kursk. The contract had been stalled by differences over credit terras, and the Soviets were unable to get the West Germans to provide credits at less than market

Import Maximization

Projected increases in Soviet earnings from exports, gold sales, and invisibles should provide tho USSR with the ability to significantlyard currency imports over the levels reached. The potential increases in Soviet imports of machinery and equipment and consumer goods will be even greaterarge shareoviet imports consisted of crisis-associated purchases of agricultural products.

If the Soviets were to maximize, Imports could rise as high as8 billion44 respectively. For such levels to occur, however, the following conditions mustil will seller barrel and in the quantities projected.

products, for example,

of theillion in total Soviet imports from hard currency countries

analytical purposes any lags which may occurreceipts and disbursements for additionaldisregarded.

The Soviets will sell all of current gold production0 per ounce.

The USSR continues to secure long-term financing forf its machinery and equipment imports.

If oil prices were to sell ater barrel, potential import levels would0 million less40 million less Similarly, if the USSR does notto sell gold, attainable import levels would be reduced0 million0 million respectively. Evidence indicates, however, that the Soviets nay be selling

gold this year in response to high


A change in Soviet debt management would also affect potential import levels. If, for example, capital equipmentere to be paid for solely in cash, the attainable import levels would fall0 million40 million Thus the least optimalil, no gold sales, and no purchases on creditwouldimports9 billion47 billion

Of these possible combinations of events it appears unlikely that the USSR will opt for cash payments for most of their capital goods imports. In particular Moscow will continue to press for long-term, low-interest credits for

the multibillion dollar resource development projects such as the LNG proposals. The Kursk deal, however, indicates that the USSR may become more selective in their use of Credits.

Debt and Debt Service

Regardless of the course it follows the USSR willto be in good shape with respect to debt accumulation and debt service in the short term. If, for example, the USSR continues to finance the same portion of its capital -goods imports under long-term credits as it has in recent years, outstanding debt will7 billion by the end Because of the expected increases in Soviet(export revenues, however,5 debt service will accountdepending on oilf Soviet export earnings. The former percentageecrease from3 exports which was required to financeSoviet debt. Any policy of debt prepayment or reduction of purchases on credit would serve to reduce the level of accumulated debt and annual debt-service payments Balance of Paymentse0

For the balance of the decade the outlook for Soviet balance of payments is less favorable than foreriod. Soviet exports of crude oil to the West is expected to peak6 atillion tons, and subsequently decline.

perhaps falling toillion tons This is because of domestic supply constraints, increased domestic consumption, commitments to Eastern Europe and limitations on barterfrom the Middle East. While this decline will beoffset by an increase in the value of other Soviet exports, particularly natural gas, the net effect willtagnation in Soviet exports to hard currency countries. (See







Earnings frcT. other sources will elso serve to mitigate the impact of the declining oil revenues. Soviet tourism and transportation earnings are expected to continue tc outstrip outlays in these areas, while gold production will increase steadily. If the USSR, for example, continues to sell its current gold production on Western markets, annual revenues could1 billion00 an ounce).

The fall-off in export growth has significantfor Soviet balance of payments and debt management. If imports on long-term credits continue to increase at present rates throughout the period, and if the USSRthe massive cooperative projects now being discussed with theyumen, Yakutsk, North Star, total long-terra debt could reachillion Debt service associated withebt would require3 billion,f projected Soviet exports.

It is unlikely that the USSR would continue to increase drawings on Western credits at present rates. Aware of their apparent diminished export potential for thes, the USSR is likely toore prudent approach,or-tion of their surplus export earnings during thes toreater proportion of their capital imports, prepay some Of their existing debts, or both. Such actions would reduce the rate of debt accumulationhe proportion of. exDort earnings dedicated to debt service-

Soviet Hard Current Balance of^

Current Account

Merchandise traded Transportation (netJ Travel

Interest repayments

on long-term credits*'

Dividends I"

Transfer payments?/

Capital Account

Kedium-term andiy long-term credits

Compensation payments^

Cold SalesJ/

Errors and omissions^




0 28






SjMaV 4







t,9SS$/ 3



9 sr.

of import maximization assumed.


Derived from Soviet statistics; exports ond imports. Oil exports valueder barrel.

interest payments are those made on medium-term and long-term credits obtained from Western countries mainly to finance imports of machinery and equipment. Interest payments and receipts on short-tens loans are not included. Includes profits of Soviet-owned banks and firms in the Host.

Payments made in hard currency to the United Nations and OB-affillated organisations. Usual pattern off total machinery and equipment inporta.

Soviet payments or principal and interest ln accordance with the US lend-lease "pipeline" agreement. Future paynents nay vary, depending upon US approval of OS-Soviet trade agreement. Sales priced0 per ounce.

Includes changes in hard currency holdings, short-term capital novemonts, and hard currency repayments from less developed

countries for Soviet credit.

Original document.

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