IMPLICATIONS OF THE PRESENT SOVIET ECONOMIC PROBLEMS (S-4925)

Created: 2/27/1973

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OA HISTORICAL REVIEW PROGRAM

INTELLIGENCEIN$

Implications of the Present Soviet Economic Problems

Summary

Faced with slower economic growth and ato meet rising consumer expectations and having experimented unsuccessfully with economic reform, Moscow has turned to the West to helpits economic problems. Soviet dependence on Western food and technology has grown

The bad Soviet harvest2 broughtrowing dependence on the West that the above-average harvests01 had Brezhnev's progran for increasing meat roduction and bettering the national diet hasemand for grains that cannot be met from domestic production evenear of good weather. In order to fulfill their long-run goals for meat, the Soviets will have to import aolillion tons of grains over the next thru,- i uars in addition to themillion tons already contracted for

At the same time, the USSR is embarkedrogram of importing large quantities of advanced equipment and technology irom the West. Thebadly need the boost such imports can give to their productivity, which has been holding down their economic growthisaopointing rate. They particularly need Western technology to"Relp develop Siberia's oil and gas resources, now that

Not*: Tnia memorandum uas produced Jointly by the Off toe of Economic Research and the Off toe of Current Intelligence.

older fields are rapidly becoming exhausted, and to increase and improve production in consumer industries, which are generally in bad shape. They will probably need considerable help making the new facilities work. To pay for these imports the USSR is looking for credits and joint ventures which will produce exportable goods such as oil, gas, and timber.

There is no evidence that defense plans were affecteds dislocations in the civilian sector or that they will be affected by similar dislocations in the future. The production capacity of the USSR is now so large thatoderate growth of GN? can support reasonable increases in military spending without undue strain.

The USSR can manage its probable trado deficit ofillion3ombination of credit and gold sales. Any additional purchases of grainhich will be necessary if the harvest is poor, will create pressures to cut other imports, particularly consumer goods and perhaps Western equipment.

Growing economic dependence is uncongenial to-traditional Soviet doctrine. The whole detente policy hasontroversial one, and there are some people, like Shelest, who have opposed it and suffered politically.

Other options, however, are also uncongenial:

(1) The Soviets could try to achieve

greater efficiency and growth through reforms, especially inbut piecemeal reforms undertakenid not work and drastic reforms have boon politically.

They couldower growth

rate for GOT andthis would mean slower growth than in most industrial countries, which would leadisgruntled populace at homeamaged image abroad.

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In these circumstances, the short-run course the present leaders probably will take is to make adjustments wheresome cuts in consumer programs or some agricultural reforms--but to try to maintain the broad outlines ofpolicies.

Soviet dependence on the West does not equate with Soviet dependence on tho us. The most critical need from the US over the next year is likely to be gram. If the Soviets were willing to pay higher prices and tap the markets of smaller exporting countries, the US share of grain purchases could be considerably reduced. If pressed forin other areas in return for US grain, thev would be more likely to cultivate other suppliers especially over the long run. In the field of tecnnology the reliance on the West is important and growing, but the dependence on US equipment is relatively small as the USSR's requirements can be met for the most part by Western Europe and Japan.

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The USSR does need to expand its hardPav for grain and equipment imoorts,usromising large new market for If certain large joint US-Sovietnot undertaken, this would moan slowerexport earnings and hence the capacity to

The Soviet leadership has already shownto increase its economic relations with,some extent its dependence on, the US inareas. This policy is not withoutear in Moscow that the US, moreWestern trading partners, is prone todealings with political questions. amendment directed at the USSR'spolicyurrent case in point. wary of US intentions can argue that itgood business to develop multiplethat the USSR can get most of what itin the world without the politicalconcentrating upon tho

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Supporters of the present policy can alsoextra-economic arguments. They can maintain that yrowing economic relations with the US are part

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and parceletente approach which has already brought the USSR substantial benefits in such areas as Europe and arms control. They can argue that any resulting dependence will be mutual, with US industrialists and fanners coming to rely on the Soviet market and to lobby on its behalf. They can also point out that it is useful and important to develop these relationsounter to growing ties between the US and China.

The present leaders will probably consider that the present pace of developing relations does not expose the USSR to undue political risks. ifferent situation would arise, however, if this year's harvest were another disaster. million ton requirement for grain imports arise, perhaps two thirds of this would have to come from the US. In an emergency of this sort (which the Soviets would try to minimize for tacticalrezhnev would realize that he was the supplicant and that the US might be looking for something in return. At various points across the range ofrelations, he might be willing to meet theittle more than halfway if Washington in its turn made concessions which would save his face. At the same time, the USSR would move to avoid future vulnerabilities of this sort by arranging larger future imports from such other suppliers as Canada, Australia, and Argentina. Thus tho USwould be short run in nature.

orstisastrous harvest could put Brezhnev in deep political trouble. Much would depend, of course, on how his other policies were faring. One cannot predict howarvest would affect Soviet policy toward the US; it might push it forward or leadetreat, according to the exigencies of Kremlin politics. If Brezhnev were to fall, wc are inclined to think that,emporary retreat, his policies would largely survive him. otal withdrawalortress Russia does not seem-to bealternative" for the Soviets. But if the US had sought to press its advantage in the groin trade, the search for other Western alternatives to US supplies would become even more intense.

Introduction

2 Soviet leaders wore increasinglywith economic matters. By the end of the year, the goals of the Ninth Five-Year Plan were in jeopardy as problems in industry and agricultureumber of adjustments in economic policy. Fromn, the newsailing harvest was the major concern, and the impending downturn in grain production was responsible tor the decision to import unprecedented quantities of Western grain. The drought and its aftermath, however, obscured soine of the chronic economic difficulties which have curbed Soviet economic growth since.

The Soviet Union's central economic problem is that it has passed out of the phase of its history in which it can rely on "extensive"based upon larger and larger increments of labor and fixed capital. Sincehe returns to new investment have been declining steadily. Other countries have grown at high rates without increasing capital stock very rapidly; their growth has been supported by substantial productivity gains. These productivity gains-'based mainly on technological progress but also on innovations in organization--have been much less influential in Soviet growth during the pastears or so. Since the present Soviet leaders assumed power, they have been trying, but with indifferent success, to spur the growth in productivity by internal reforms and foreign contacts.

A second, continuing economic problem for the Soviet leaders is the need to improve the lot of tho Soviet population. In so doing, they have had to alter the traditional pattern of Soviet economic growth in favor of sectors which arc less efficiont and more costly to develop. Brezhnev's commitment to expand meat production is the most strikingof- the effect _of some_consurr.er-orientedrans on economic growth. The demand for meat (and other high quality foods) has been risingery high rate as the incomes of the Soviethave grown. While the growing demand for meatorld-wide phenomenon, the cost ofmeat is far greater in the USSR than almost

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anywhere else. For example, the USSR needs about twice as much grain as the US toiven amount off meat, and, at existing retail prices, meat production is heavily subsidized. Moreover, it takes far more grain toopulation with meat instead of bread, and the USSR has always had difficulty in growing enough grain evenread-based diet.

Thus, the USSR must deal with two separate economic problems in the coming year. First, it must overcome the shortages resulting from the bad harvest ofis the problem which has absorbed much of the leadership's attention since last summer. Second, in the longer term it must make capital and labor more productive in bothand agriculture. If the USSR cannotUie pace of productivity growth, it will be unable toontinuing slowdown ingrowth.

Selected Indicators of Soviot Economic Performance

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Disappointing Year

oor harvest and an accumulation of chronic economic problems reduced the rate of growth of Soviet GNPlowest rate This compares with an average annual increase of%%1 and must be particularly gallingeadership whose main shibboleth is economic growth. Almost all sectors shared in the decline, but the droparm productionlower growth in industrial production were most at fault Theleaves attainment of the goal of overtaking the United States as distant as itecade ago when Khrushchev announced it as imminent.

Leading Trouble Spot

An abrupt decline in farm output was largely responsible for the slump in over-all economic growth Net agricultural production dropped almostelow1 level, and grain output fell by. Although Soviet leaders have blamed most of their problems on the weather, it should be noted2oor agricultural year chiefly in comparison with the peakear well-favored by climatic conditions. Even though the percentage decline in crop production was one of the largest inears, the total value of farm output and even grain production were still greater than in all but one of the years of. Grain production was onlyillion tons orelow the level that would have been predicted on the basis of long-term trends and normal weather.

The drop in agricultural production2 resulted from an unusual streak of poor weather throughout the growing and harvesting season. ack of snow cover combined with extreme cold in late January and February killed almost one third oftr^wintfi* grains. These grains usually provide almost one third of total Soviet grainhe. USSRarger thanarea to spring grains to make up for thebut the "worst droughtears" curbed their germination and growth in European Russia. Record crops in the "Virgin Lands" of Kazakhstan

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and Siberiaomplete disaster, but the harvest was late. ood deal of the grain was gathered in rain and snow, reducing its quality.

The grain and potato crops, both of which were down, are the core of the Soviet diet and are also essential to the production of meat, milk, and eggs. But the drought also damaged sugar beets andseeds, the country's primary source ofoil. In fact, the output of all important crops except cotton fell below the levels achieved. The output of livestock products failed to match the vigorous growth achievedargely because of tight feed supplies. There was little slaughtering of livestock, however, such as occurredassive scale after the poor harvest3 because of feed shortages. By the end2 the number of cattle exceeded the previous year's level, while the decline in hogs, sheep, and goats was held to reasonable proportions.

What made the drop in grain production sowas that it came at the same time that the demand for grain as livestock feed was increasing rapidly. Use of grain for food has hardly changed for overecade, but the use of grain as livestock feedby81esult of5 program to provide more meat and other quality foods. f grain was not keeping up with demand because of the requirements of the Brezhnev program. Since imports were low in these years, there were deep inroads into the government's reserve grain stocks., about nine million tons of wheat were released from these stocks for livestock feed,reducing themangerously low level.

Thus, the fall in grain output2 left the regime only twocut deeply into .Brezhnev's meat program_or to import large amounts. of grain from thehe decision to doatter clearly shows the high priority the present Soviet leadership gives to improving consumer The USSR spent0 million in hard currency to purchase largo quantities of grain, sugar, and meat1 and Even before the full extent of the damage to last year's grain

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crop became apparent, the USSR0 million worth of wheat from Canada and promised to buy at0 million of US grainhree-year period (and at0 million in the first year)

All* told, their purchases of grain for delivery byeached aboutillion tons, worth aboutillion in hard currency. This amount is equivalent to roughly two thirds of total Soviet imports from the Developed West

Industry and Construction Lag_Too

While feeling tho repercussions of the harvest, the industrial sector was having problems of its own last year. lump begunoutput grew by no more% inthe smallest annual increase since World War II.umber of industries slowed, the largest slowdown was in the production of machinery and consumer goods. The oil industry did not meet its production goal for the first time since the, largely because of an unexpectedly rapid depletion of older fields. The gas industry's production increase last year was the smallestnd some pipeline construction tasks were not completed on schedule.

The USSR's agricultural situation hurt industry by reducing the flow of some raw materials and by diverting resources away from industry. Industry2 was already on short rations with respect to sugar beets, sunflower seeds, milk, and woolonsequence of the stagnation or decline1 production. In addition, the above-normal manpower and transportation requirements of2 planting and harvest periods probably held down industrial activity. More industrial workers than usual were detailed to support the farm work, and industrial supply must have been interrupted by the roundup of trucks for agricultural work and especially by the heavy_load that.the grain_harvest in the.east andrain imports put on port facilities and the rail system.

Industrial growth was also held back by the failure to increase productivity and to introduce new plant and equipment on schedule in key sectors.

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The plansxplicitly called for anin productivity growth through theof new technology rather than by raising the rate of investment. These plans were notgains in the productivity of labor and capital in12 amounted to% per year, considerably less than those required to keep industrial production in line with the five-year plan goals. The productivity plans were frustrated for the usual organizational and political reasons: inefficient managementumbersome planning system, and the overriding priority given to increasing the quantity of production as quickly as possible to the detriment of efficiency and quality. Introduction of newkey to increasedbeen slow.

The construction lagas not the resultailure to provide enough investment; almost one third of the nation's gross national product goes toward this end. The problem lies ratherailure to complete investment projects on time. New projects readied for use2illion rubles short of the1 billion rubles, adding anothero the backlog of unfinished% had been added the previous year). esult, the growth in new plant and equipment dropped to about2 compared with an annual average increase of.

. In recent months both Premier KosyginPlanning Chief Baybakov have publiclythis investment logjam. In histo the Supreme Soviet last December,complained of the "lag in theproduction capacities, especially inchemicals, oil, gas, and light Earlier,peech to the state

PJLarjning^arjDaratus, Kosygin ^calledalt to "unwarranted "capital investment" and charged that too many new projects were begun without fully using existing facilities.- Although construction lags seem endemicplanned" economy, theto start too many projects may have been worsened by the economic reform5 which allowed more investment decisions at the local level at the ex-Dense of central control, decentralized invnstment

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grew at an average annual rate of, diverting resources away from centrally planned projects and causing "unbalanced capital development." In an effort to regain greatercontrol, the growth in decentralizedwas cut%1%evertheless, the response in terns of projecthas been unsatisfactory. The construction sector was not entirely to blame, however. Project completions in somein the light, food, and ferrous metalsdelayed by the failure of industry to provide the necessary equipment on time.

The Consunor Suffers

Last year must have been disappointing to the Soviet consumer who has been consistently told1 that his welfare is now the prime concern of the state. It was small comfort that the leadership took unusual measures to Insulate him from the poor harvest or that the traditionally favored growth-oriented sectors also suffered. He was only aware that his rising expectations had not been met.

2 per capita consumption roseith abouter year in the preceding six years. The poor harvest held back food consumption, but no ono went hungry. There were sporadic food shortages, but the massive grain purchases from the West and imports of potatoes and somefrom Poland and East Germany eased the The government also maneuvered to extract as much farm produce as possible from the private At the same time, the Soviet pressationwide campaign to save bread, and food sales were rationed selectively. It also became apparent that the welfare package introduced ath Party Congress1 was not being implemented onlans to raise minimum wages and toi'tTcOiiiu^caxcs" haV2 boou' delayed, and some of the more "expensive" features of the package may have even been shelved.

ECONOMIC IMPACT

Internal Economic Policy3

As the Soviet planners watched the discouraging events2 unfold, they had to decide on theto make The Ninth Five Year Plan had placed unusual emphasis on bettering the lot of theis, consumption andsectors such as agriculture seemed to beore equal footing with heavy industry and investment. Over-all growth was to beby rapid assimilation of new technology and the consequent productivity gains rather than by accelerating growth of capital stock.

The plannnounced last December, revealed that the leadership had decided to retain the original five-year plan targets and basicwhile making major revisions in3 goals. The revisions were intended to rectify past errors and get the economy back on track, although this wouldemporary distortion in sectoral growth rates. Thi3 year's GNP growth target isn sharp contrast to% achieved last year. The planned recovery depends mainlyncrease in farm output and an accelerated industrial growth rate Goals for oil and gas, chemicals, and some consumer and machinery items were cut in recognition of raw materialor lags in the expansion of production capacity.

The new plan is specifically designed to deal with the knotty investment problem. First, it callstringent limit on new construction starts. Investment resources are to be concentrated onwhich arc already under way and on those "which are decisive to the fulfillment of the Five-Year Plan." To this end, the growth in3 is to be held% compared with the nearlymplied in the original plan. Secondly, more investment resources will beto the parts of the economy in which projects are most behind schedule. Consumer-oriented sectors such as the processed food and light industries and agriculture will receive an increased share ofallocations.

Thus, policy statements and investment targets indicate that there willontinued emphasis on improving living standards. The expected shortages of agricultural raw materials and the construction delays which have restricted the production ofgoods, however, willemporary retreat in the consumer program. In particular, meatis not scheduled to increase appreciably The volume of retail trade is slated tobyompared withhis slowdown in turnhange in income policy, in order to avoid further inflationary pressures, wage increases are hopefully to be held to about half the rate achieved last year.

There is no evidence that defense plans wore affecteds dislocations in the civilian sector. The military has always been favored and largely protected from short-run fluctuations in output. Moreover, the production capacity of the Soviet Union is now so large thatoderate growth of GNP can support reasonable increases in military spending without undue strain. The3 defense budget9 billion rubles ia unchanged for the fourth yearow, but this figure does notumber of allocations normally associated with defense. The mostexclusion is military research and development, which is funded principally from the science Soviet science outlays3 are scheduled to bereater than last year. It is estimated that total Soviet defense spending3 will be aboutigher than2 and will amount to the equivalent ofillion.

Last year's difficulties in the farm sector severely tested the leadership's dedication to its expensive livestock program, but recent policyand the new plan goals indicate that they will continue the campaign at least The poor harvest last year, however, makes itven" tho modest program for the livestock feed base outlined inlan, with average weather, they would still have toinimum ofillion tons of grainover the next three fiscal years to meet the long-term livestock and meat goals. umber of

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prominent Soviet trade and agricultural officials have recently admitted to US visitors that the USSR will require long-term food and feed grain imports from the United States "even if we have good"

Meanwhile,3 grain crop is offoor start. Last fall, the area sown to winter grains was one-fifth less than planned because of excessively dry soil. Very little snow has fallen this winter in the major winter grain areas, and as of the first week in February there wassnow cover to protect the seedlings from the low temperatures. It is likely, therefore, that the winter grains have already suffered an above-normal amount of winterkill. To recoup winter losses and make up for the shortfall in fall-sown area the Soviets must sow moreillion hectares to grains thisrecord. If they fail to meet the spring seeding schedule and encounter only average growing conditions, the chances are slimig increase in production above last year's disappointing harvestillion tons of usable grain.

The Effect of Another Dad Harvest

rain cropillion tons or less is harvested3 (as opposednormal" cropillionhe leadership will have to make some disagreeable decisions. ropillion tons, they could decide to support the meat program again with total imports of grain that could run as high asillion tons. At the higher world prices now prevailing, the total cost ofgrain oncale in4 would equal the cost of the purchases made for delivery in3 (about S2 billion). It is quite possible that the Soviet leaders would not be willing to make this expenditure, hort crop,ailure to import sufficient quantities of grain would meanhave^to beserious neat shortages in the fallowing years. he meat queues lengthened, the leadership would have to decide whether formal rationing should be substituted for the hit-and-miss allocationsfrom the queues. Alternatively, they could raise meat prices to avoid the administrative costs

of rationing or the unfairnessirst-come first-serve system of distributing the available supply of meat. In deciding how much grain to buy in the eventoor harvest, the leadership would have clearly in mind the civil unrest that accompanied Khrushchev's decision to raise meat prices2 and the part that meat supplies and prices had to play in Gomulka's fall from power in Poland Very probably, they would notthe meat program completely; rather, they would reluctantlyower rate of growth in meat production.

Foreign Trade and Payments Policy3

One of the consequences of the bad harvestonsiderable increase in the USSR's dependence on the West for food supplies as well as advancedand for credit to finance the purchases. esult of the massive grain purchases the Soviets willecord hard currency trade deficit of aboutillionompared with an0 million (After34 deficit was3esides theillion represented by contracts already concluded for grain to be deliveredhe gap between earnings and outlays of hard currency will be affected by large imports of sugar, record acquisitions of Western plant and equipment, and possible new grain purchases in the last half3 (assumed to be about six million tons worth0 million).

As3 hard currency deficit will be financedombination of gold sales, credits, and trade adjustments. Upons of gold0 million could probably be sold3 without depressing its price below the2 level. Sales of this magnitude would be about equal to annual production (net of consumption) and would leave Soviet gold reserves unchanged atons. The major source of financing, however, will te credits, and ample amounts are availablethe West. The European money market has aof funds for short- and medium-term borrowers. Moscow's Western-based banks also can attractfunds at prime rates. In negotiating to buy grain in the US, the Soviet Union will surely

continue to ask for more favorable creditthan have been offered thus far. The United States has emerged as an important creditor2xtending0 million of Commodity Credit Corporation funds, and US and Japanese banks and financial houses are exploring ways in which they can increase their roles in financing Soviet trade.

The Soviets have tried to prevent the hard currency deficit from interfering with their plans to import Western equipment and technology. There was no clear evidenceutback In the second half of the year, the volume of new orders declined somewhat from the very high level recorded in the first six months, but large orders for such equipment continue to be signed. Some of the orders involve long-term and self-liquidating credits in kind) and do not bring immediate pressures to pay. The proposed US-Soviet LNG project and the Japanese-Soviet projects for developing natural gas and oil deposits are examples of exchanges that have no necessary impact on hard currency reserves. The grain purchases put pressure mainly on the USSR's short-term payments position. owever, as short-term indebtedness increases, it will become increasingly difficult for Moscow to avoid somecuts. Although the USSR could finance thelikely deficit, and perhaps more, solely with gold sales and credit, it will probably also make some adjustments in its trade. Imports of consumer goods and other items that are paid in cash are likely candidates for trimming. If the harvest is ad and massive additional grain imports arecuts in other imports are certain.

In any case, even given average weatherimports will continue toajor balance-of-payments burden. The indicated grain importmight bo aboutillionworth more than Siontinued priority for the original Brezhnev livestock program. The prospact__of continued inports of grain ofagnitude may welle-examinatioi. of""the long-run wisdom of the meat and consumption programs associated with Brezhnev's leadership.

Longer-term Economic Outlook

Soviet economic growth should turn upward3 because farm output willanother streak of bad weather intervenes. If average weather prevails over the next few years, GNP should grow byoer year. Even so, the average rate of growth in the first half of the4 toer year--would be significantly lower than it was. This is about average for an industrial nation, but unimpressive considering the USSR's comparative economic backwardnesshe effort it is making. The USSR almost surely would have to abandon many of the agricultural goals and some of the important industrial goals set out inlan.

In the longer tern, the USSR will be hard pressed toate of growth as high aser year. The race of growth of the labor force has slowedrowing share of all workers is to be employed in the service sector. At the same time, technological progress has not been rapid enough to offset the declining returns to netand there is no evidence that the Soviet Union is finding or will soonolution to this problem.

In both industry and agriculture lowis caused by organizational factors which discourage efficiency and inhibit the introduction of new products and methods of work. Upon assuming power, the present leadership probably believed that managerial reforms could bring about larger and continuing productivity gains. Then, their attempts to introduce reformsereby the defects of the reform proposals, the opposition of the economic bureaucracy, and the fear of decentralizationhreat to party Some careful experimentation with newmethods has continued, such as theof computers to planning, but political con- trols have prevented public discussion of anyreform programs relevant to solving economic ills in the near term.

A3 the interest In internal reform dwindled, the interest in economic ties with the Industrial West increased. The Soviet leaders believe that the shortcut to technological progress andgrowth in productivity lies in importing western machinery and technology while promoting other technical exchanges. If carriedong period of time this policy will upgrade Soviet economic performance, particularly in terms of the quality of production. Indeed, the most dynamic sectors have depended crucially onfrom theexample, chemicals and motor vehicles. Still, the imports will not resultarked increase in the rate of growth of GNP over the next several years because the contribution of western machinery to total investment issmall and limited by the USSR's ability torowing volume of long-term credits. In addition, western technology is not always easy for the Soviet managerial system to assimilate.

Many industrialized countries wouldteady growth of national product amounting tooper year, but the Soviet Union would find it hard to abandon tho idea that the socialist model provides more rapid development than theof other industrial nations. In the face of falling growth rates, some officials might be tempted to relyigher rate of investment. In thepast, however, this policy has not beenin boosting growth. While some proponents of ndustrial growth probably feel that theinvestment program, for example, has been tooadical shift in priorities away from agriculture or the production of industrial consumer goods would be risky from an economic standpoint. The cooperation and productivity of the labor force depend on continued progress in living standards, especially steady improvement in the diet. On the other hand, the effort to maintain planned rates of growth in consumption clearly will involve increasing dependence on the West, and in particular the_United, States, for grain. "

Soviet Dependence on the US

Soviet dependence on the US is considerably less than its dependence on the West in general. The most critical need over the next year is likely to be for grain. The larger the grain requirement the larger the share that would probably have to come from the US. If the requirement were aroundillion tons, about half would have to come from the US; if it wereillion tons, perhaps two thirds would have to come from the us. If thewere willing to pay significantly higher prices and tap the markets of smaller exporting countries the US share of grain purchases could be considerably reduced. Particularly, over the longer term, the Soviets could encourage substantially higher production in Canada, Argentina, Australia, etc. with the help of long term contracts. To the extent that the Russians were pressed forin other areas in return for the purchase of US grain, they would be the more likely to cultivate other suppliers.

The reliance of the USSR on the West forequipment and technology is very important and growing. However, tho dependence on USis relatively small. By far the largest part of USSR requirements for production equipment can be met by Western Europe and Japan, often at lower prices and with comparable quality. ewcases the USubstantiallead: for example, oil production and exploration equipment, advanced integratedhigh capacity data processing equipment,ew specialized types of equipment for truck In tliese cases the USSR would prefer to buy from the US, but the demands are postponable.

Other thanource of grain, tho mostpotential role of the us in Soviet eyes isarket for raw materialsupplier of credit, equipment, and technology to develop them.toits hard currency exports to pay for grain and equipment imports. The joint ventures to develop Siberian gas offer the best hope of dollar exports over the long run. Barterexample, nickel foralso become important. There are

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other Western markets for these sovietnotablyother sources of credit and technology. But if joint US-Soviet projects are not undertaken, expansion of Soviet hard currency exports will almost certainly be considerably In the long-term this would mean aslower growth of export earnings and hence the capacity to import Western technology.

Thus the principal areas of Soviet economic dependence on the US can develop only in the long term, and will then alsorowing USdependence on the USSR. Substantial US-Soviet economic links will increase the Soviet investment in good political relations with the US; at the same time, their development requires that reasonably good relations be maintained for many years. the US bargaining position is currently strengthened by the large Soviet dependence on US grain, this major US advantage may not continue beyond the next year or so and its value as, therefore, limited.

The Political Outlook

Fundamental weaknesses in the performance of the Soviet economy guarantee that, even with an average harvesthe leadership will face difficult questions concerning severalissues: the goals for economic growth, adherence to the agricultural and consumer programs, managerial reform, and economic dependence on the West and more particularly on the US. Even with normal harvests, the future needs for foreign grain that will be necessary to support present programs should become even more apparent to the leadership by this summer and tho chronic nature of tho problem will focus attention on the wisdom or practicality of basic policies.

The situation can only complicate 3rezhnev'sThie *ishe more so because he has so-strongly advocated the agricultural andprograms that are now beset by difficulties. For example, although Iire2hr.ev at the Party Congress justified at length th* new policy of consumer goods production growing faster than producer goods under the five-year plan, it appears that this in factt occur.

There has been political fallout from the poor harvest. Polyansky was demoted from first deputy premier to minister of agriculture and the incumbent minister, Matskcvich was removed. Brezhnev has far greater political resources at his command than do his critics and he seems to have shored up hisfor the time being through his successful harvest-boosting trip to the Virgin Lands andAsia last fall and through Polyansky's Nevertheless, Polyansky's demotion means the slippagence staunch ally of Brezhnev's. Moreover, it leaves an opening for first deputy premier to be fought over.

The situationevival of publicof some policy issues. Polyansky's move could encourage greater efforts to pare down the large agricultural investments he has championed and to press for administrative reforms he has fought. Advocates of some current experiment and reforms In managing the industrial economy will become more active, and institutionala traditional panacea in Soviet eyes, will attract more attention.

As the Soviet leaders realize how theiron the West for grains and technology isand promises to grow in the future, they will face two particular questions on the wisdom orof the dependence itself. They must consider how much to rely on US sources. They must also contemplate whether they will be pressed to pay for such reliance with political concessions and, if so, how they should respond.

One group will find dependence in generaland reliance on the us especially so. As late8 Brezhnev himself spoke in public for this group, arguing against over-relianco ontechnology. The continued strength of this dogmatiji.j>ich Brezhnev has since abandoned in-'foreign relations, is shown by the rigidity that has been maintained concerningpolicies and controls even as detente has developed abroad. Officials of this frame of mind

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will argue against reliance on US supplies and will cite the opportunity this will provide the US for demanding politicalexample, the Jackson amendment. They might also argue that it makes good commercial sense to bargain multipleoff against each other and that in any event their needs could be met by Western Europe and Japan.

The majority of the current leadership, while sharing these concerns, believe that in economic terms the US is the best source of certain supplies wanted by the Soviet Union. Improved economicwith the US is popular among many Soviet bureaucrats and citizens. Some leaders will argue that the dependence will be mutual since US farmers and manufacturers are greedy for markets and can present their case to the US Administration. The intense interest shown by Brezhnev, Kosygin, and other top leaders in the LNG deal is motivated in part by an assumption that this kind of agreement will increase mutual dependency. These leaders will also maintain that concentrating on theof US-Soviet economic relations furthers their political interestsis the US and actsounterweight to growing relations between the US and China.

Although many economic questions may be up for debate, an agricultural year that is no worse than average will make it easier for the top leaders to maintain ultimate control over the issues andand thus to protect their own positions. Changes, in this case,re likely be confined to leaders of secondary or tertiary rank and tomeasures of largely internal significance. As unwelcome as lower growth rates and economicon the West, and the US in particular, might be, Brezhnev and the leadership as it now stands would be loath to abandon the agricultural and_consumer programs ,entirely, considering the consequehccsVthis* wouTd have on their own political credibility, popular morale, and internal controls. Given an avorage agricultural year, they willopt for making compromises in their economic goals where necessary but retaining at least tlie general direction of present policies.

This outcome wouldouble meaning in foreign affairs. Lackluster economic performance should further encourage Brezhnev and other leaders to seek "successes" in the conduct of detenteabroad and to cultivate economic relations with the West that promise help in relievingdeficiencies. In particular the Soviet leaders will probably continue to turn to the US torowing number of economic needs. On the other hand, serious setbacks in foreign affairs, particularly in relations with the West, would be all the more painful to Brezhnev, especially as they could further call into question the whole complex of inter-related programs he has pursued.

Specifically how might economic reliance on

the US affect Soviet behavior? The most likely

consequence would be to encourage restraint in the

conduct of foreign affairs that touch the US. Thus,

considering the state of US-Soviet relations, there

arc some things that the Soviets might simply choose

not to do, for example,rovocative stance

in support of some allies such as North Vietnam or Cuba.

While growing reliance on trade with the US will increase Soviet motives for being conciliatory on other issues between the two countries, it is very unlikely that this will load them to make major concession in othor areas. Economic interest hasotive throughout in the Soviet pursuit of detente. It has been difficult to distinguish, how-over, the effect of this interest on Sovietfrom the effect of other principal motives, such as their goals in Europe, their distrust of China or the political play in Moscow. This will continue to obtain even if the economic factor grows somewhat. Moreover, the Soviet leaders will resist, as they have in the past, discussing linkage betweenrelations and specific points at issue in other areas-. wilL do this not only to-oor bargaining stance but also because they will be wary of those political forces at home who are distrustful of detente and especially of this kind of vulnerability. Finally, the Soviet leaders would probably conclude that important political toe US -ui' foi economid CMlOM

since thoy can obtain most of their import needs from Western Europe and Japan, and that US domestic agricultural and industrial interests are anxious to expand their goals in the Soviet market.

Nevertheless, Soviet eagerness for expanded economic relations with the US will probablyto make the leadership willing to accede to some modification of policy when circumstancesirect linkage to economicexample, the Jackson amendment. The modification of the laws on the education tax for emigrants last yearthe type of concession and the general range of flexibility that may be expected in the future. Likewise, major advances in US-Soviet economicwould increase the pressure from the US to enlarge the scope and freedom permittedoperating in the Soviet Union, and some give would be likely from the Soviet side on this matter.

^Worst Case *" '

In casead harvest, however, the magnitude of the economic problems and the politicallynature of any of the possible measures for dealing with them would clearly exacerbate tensions within the leadership. Regarding the populace, the relative austerity that would obtainecond yearow wouldag in morale andeven some instances of public unrest. esult, among the political elite, interest in new policy courses and even new faces at the top would rise.

This kind of internal situation would naturally affect the conduct of Soviet foreign affairs. oss of self-confidence in dealing with the West would tend to deter the Soviets from making new agreements, although, for lackiablelarge imports of Western grain and machinery would continue. trong challenge to theleadership mightime freeze Soviet policy in its present course, rendering it incapable of taking new initiatives or responding flexibly untilpolitics were sorted out.

SECRET

Although their economic needs from abroad and particularly the US would mushroom, the Soviet leadership would probably not beosition to act on them in any comprehensive way, much less to agree to important diplomatic concessions in this connection. If inolitical crisis of this sort arose and then was resolved, the eventualfor foreignreconfirmation of the detente lineetreat fromdepend on who won. In this connection, the objective need for fuller economic relations with the West wouldowerful though not necessarily decisiveon the side of those defending the present line.

Original document.

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