Created: 8/7/1973

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.. he Basic/Strength of. the" SoVi'et Ec6homy


1. Freed, . .

Soviet Kecd for Foreign Assistance

Soviet Need for US

C. Arras Programs vs. Economic

High-quality Products and Materials.


Technological Progress


h^vBnsic Strength^of the'.S^qwerfui

or further.-development.- The rapid pace of .

i^austrial growth-,'to-sterca by iMsSlve *hfuSrdns-of

_ "Vi.


leaders -theolof.en.&ev capability1 thathat.US whitefueling additional growth. Although Soviet achievements in agriculture have not been as impressive as those in industry, the average Soviet citizen is adequately fed and clothed. By us standards the lot of the Sovietrconsumer is drabeal per capita consumption is about one-third that of the USbut by his own standards, and by the standards of allew nations of the world, his lot is tolerable.

While problems persist, the basic strengths of the Soviet economy have permitted the Soviet leadership to resolve conflicts between fundamental long-run goals without recourse to drastic actions. Neither the2 nor the declines of recent years in the rate of technological growth in industry have forced the Soviets to abandon such ideological scared cows as central planning and control over the economy, the counter-productive system of incentives or the favoring of industrial development over

agricultural growth.


The .slowdown .nr overall growth


arid 'Concitiulng

t still


to-'thc le


performance goes beyond the temporary setback occasionedrop failure. The recent rate of growth of industryercent is clearly below expectations and long-run goals. Tho leadership has correctlyajor part of the growth problem to the USSR's overall technological inferiority to the industrial West and Japan.

b. The Growing Technological Gap: While the

leadership recognizes the importance of the USSR's technological inferiority to the industrial West and Japan,and probably understands the root causes of the lag, unwilling to directly confront the implied managerial and organizational ch.mges and all their consequences. Decrees reforming the applied RfiD sector and the recent reorganization of industry suggest leadership perception that the traditional organization is outmoded in these spheres. Dut, as in the past, the newly adopted measures are cosmetic in content.


,cs)i. .'itrJi.Luvokumii.SacriJ>>cos'Quality/

tutelage of enterprise Recent productivity trends; moroovcr;idening technological,s

C... Rising Consumer Expectations: Consumer welfare also impinges on productivity growth and the technological gap. Though well-fed and wcll-clothod by comparison with past generations, the present Soviet generation is demanding more sooner. This generation, moreover, secus well aware that its living standard is inferior to even that of Eastern Europe and certainly to that of the industrial west. This inferiority is felt not only in the amounts of consumer goods available, but also in their quality.

<3. The Agricultural Situation: Agriculture is the weakest and least productive sector of the Soviet economy. The system of giant collective and state farms has >roved to be the worst managed and least efficient organizational form in the country. hird of the labor force is still employed on the farm, and the cost of producing grain and meat

r^abovg wor jar.gje^prices and peasant inco^js.fioecade have<

costs without stimulating. efficiency. In spite" ofargest inputs of labor -andhe ;USSR' is"periodically forced into-Wosterri laarkcts for food to .providoi'paroniiBed iir^rovGjrotvbs iir-the- diet .for>fche- population/

> 'Defense': 'The" pirecerjt lavcl'of "Soviet defensespending when viewed as the cost of maintaining and expanding the. stock of military assets absorbsercent of GNP. Military machinery production accounts for aboutercent of total industrial output. Uniformed and civilian employees of the Ministry of Defense numberillion. Thus, the defense "burden" is present, but it is not serious. The Soviet leadership would obviously like to have more of these resourcesparticularly, higher-quality laborevoted to other uses, but it probably is awareoderate shift to civilian uses would notanacea (or improving the economy's performance. Further growth ;of the economy and projected increases in scientific and technical graduates moreover, will likely give the leadership more freedom of manucver in the economyhole and thus enable it to meet feasible defense needs without disrupting other plans.

As. j

the-growthmill taryncG.-thef hare of Soviet resources devoted to military programs has, fallen steadilyfromercent0ercent Because the economy has grown so rapidly, military programs now require only about one-tenth of industrial output and one-third of the production of the machinery sector. If defense spending had boon held at0 levels, the added growth of GNP would have been only two-to three-tenthsercentage point per annum.

Although the Soviet Union can afford to spend more on its military programs, this does not mean that the occasional complaints of Soviet leaders about the burden of military programs are meaningless. The Soviet leaders surely would not welcome an escalation of defense expenditures which would leave unchanged the relative strength of the two blocs. And in some areas where the civilian economy is backwardsuch as computers and some kinds of electronicsa release of some of the talent heretofore pre-empted by military research and production would be of substantial help.

over a'loncppcriod of *tirac. this policy would upgrade Soviet economic performance, particularly in terms of the quality of production. Indeed, the most dynamic sectors have depended crucially on imports from the Westfor example, 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 potential contribution of western machinery to total investment is relatively small and limited by the USSR's ability torowing volume of long-tern credits. In addition, western technology ia not always easy for the Soviet managerial and USD systems to assimilate.*

1 The Sovietystem is immensely inefficient: there is poor coordination and communication betweeq basic and applied research institutes, between institutes and enterprises and between enterprises; the scientific education curriculum is out of tune with tho times; the development stage of the JUD process is neglected in terms of funds and other resources allocated; incentives to innovate are inadequate at all levels; and administrative paperwork inside institutes detracts from "think" time.

Moreover, although the reliance of the USSR on the

production/equipment, nut byrope and

Japan, Qftcn' at co:hpa roubleew n

example,"oil production anddvancedhigh capacity"'dataew specialized types of equipment for truck production. In these cases the USSR would prefer to buy from the us, but the demands are postponablc.

Soviet Meed for Foreign Assistance

The USSR possesses extensive mineral deposits and limber resources. Many of the richest deposits, however, are underdeveloped and are located in Siberia and in the Soviet Far Kast where severe climate and poorly developed or nonexistent infra-structure present unusually difficult problems of exploitation.

For some of these

crude oil and natural gasthe need to develop new deposits to meet currently planned production goals fors urgent. Moreover, if these deposits are to be developed on schedule, modern petroleum equipment and technology must be acquired from the West. In the case of other

supply are'desicett'by the-. Foreign assistance

' t-?

'desired4/for tljesd.projects beeiiUsc' c'apacity'ahd


industiy WQuld-jnaVe it; very/^if frcult for the USSR- to provide

' " "


attiand mining program inithout seriously disrupting other high-priority programs. However, limitations existhe amount of credit the USSR cano obtain such assistance. The USSR owes the Westillion. Debt service now takes upf its export earnings from the West, and continued use of Western credit at the current rate might soon boost this percentageoint beyond which the USSR would not be willing to go.

esult, the USSR is seeking help from the industrial Westery large scale. Although the total dollar value of the foreign investment, sought is not known, the joint Soviet-Western projects now under consideration would eventually entail as much as $iq illion of hard currency financing over the next decade. (See Annexrief description of the projects).

This magnitudeoreign investment wouia oe rougtuy uijUAvmencercent of the total dollar value of Soviet domestic

' ows-.fiextforciahanvestments -will,a. .-

of the equipment component-;

* The bulk of these purchases have been made irf tho US and the Soviets claim that they will buy no more US grain this year in order to ease the pressure on our grain markets. If crop prospects deterioratere imports arc need, the Soviets can probably find adequate supplies in Canada, Australia and Argentina.

Brezhnev's commitment to expand meat production is the most striking example in his policy to improve the lot of the Soviet consumer. This program for- bettering the national diet hasemand for grains that cannot bti met from domestic production evenear of good weather. In the faceoderate downturn in domestic grain productionhe SovietsEiillion tons of foreign grain last year, primarily to support their ambitious livestock program. Despite all signsecord high grain harvest this year the Soviets are estimated to have alreadyillion tons of foreign grain.* th normal weather45 the Soviets will again needimports of grain. However, by encouraging substantially higher production in Canada, Argentina, Australia, etc. with the help of long-term contracts, the USSR with an average crop could probably avoid the purchase of US grain.

C. Arms Progrcms. vs. Economic tionls

IS4 'Cif

.". art bo'a way of'ilmitirig.corijf iicts

between economic. priorities' ifi it results "in arnfs reduction.

eduction would permit the Soviet leAdership to ;

use resources currently tied'to the defense effort in the EesOlutitin.-fif 'othef-e'con'omic'pVobdeiTis'.*; pfoviet economy is so large and its^growth high enough,-that detente's contribution to solving economic problems would bo small in the aggregate. As indicated above, direct defense spending ist of GHP and military hardware production isf total industrial output. It can be argued, however, that because the defense sector uses some types of resources traditionally in very short supply transfer of those resources to civilian uses would provide impetus to growth beyond that suggested by the overallmeasures of burden. In this sense, the resolution of conflicts between arms programs and economic growth must be looked atore disaggregated

2. High-quality Products and Materials

The defense establishment purchases three-quarters or more of the output of the aircraft and shipbuilding industries, two-thirds of electronics production,f numerically controlled machine tools, one-third of the production of the instrument industry and one-tenth of truck production.


its effect on growth). An accumulation of evidence indicates that the return on Soviet investment

in its present pattern and distribution has gotten

very low. This means that, barring some drastic institutionalarge transfer of resources

embodied in the above types of products from defense to investment is likely to increase the rate of economic growthisproportionately small percent. 3. Manpower

The nationwide shortage of manpower.evident in thos easing somewhat. Tho military's demandillion uniformed personnel andillion or so

civilian employees, together currently occupies onlyhe total'labpr force, . . i ,

.he .problem of providing civilian industry with young workers. he military- teaches, skilli;.. .

hich. arc, unable in. civilian, .life*

cient'if ic-.arid emj'ineerfiiig- talent*is. siphoned off by the defense sector. eduction of defense;

. expenditures would make many highly skilled persons available for the rest of the economy. Again, the tight supply situation in these skills evidenced inndas eased considerably and5 will likely have diminished greatly dueuch larger stock of persons with degrees in the relevant disciplines.

4. Technological Progress

The impact of arms reduction on the rate of technical progress in the USSR will likely be slight. The benefits from transfering highly-qualified scientific and engineeringand technical skills from defense to riqn-defense uses would be limited. Most importantly^the problems in Soviet technology are in tho management of itsystem and in the management of industrial enterprises where the incentive systems at ail levels are counterproductive.

In .short.

sectors might be limited by the management problem Consumer Goods

There would be negligible impact on the availability

of consumer goodsesult of reduced military demands on the civilian economy. Reduced military demands for food and clothing would, of course, be partly offset by the demands of ex-service personnel as civilians. Some increase in output of consumer durables could be expected since the defense industries have the technology which is readily adaptable to their production. The quantities added to total supply,would be small..

This annexrief .summary of major US-USSR

cases, Soviet payment for US assistance in developing Soviet resources wouldpecial form of barter payment in which US firms would be repaid in the product of theumber of other projects are being discussed or negotiated


with potential Western suppliers, some of which may involve US participation.

'Development of Natural Gas Deposits in West Siberia The USSRonsortium of three US companiesTenneco, Texas Eastern Transmission Corporation, and Brown and Rootrecentlyetter of intent to cooperate in the development of facilities that would permit shipmentillion cubic feet of liquefied natural gas (LUG) per day from the large Urengoy field in Western Siberia to the US east coast. As now envisaged, this project would entaildollar investment of5 billion plus ruble costs equivalent to about'Sl billion that would be incurred for construction in the USSR. Of the dollar investment,7 billion would be in the USSR for gathering lines in the Urengoyile large-diameter pipeline from the fieldew port on the Kola peninsula,as liquefaction plant and related facilities at the port. leet of 20

LNC tankers is expected to cost6 billion, and terminal facilities in tho US0 million0 million.

Development of natural Gas Deposits in Cast Siberia Occidental rctroleum Corporation and El Paso Natural Gas Company haveetter of intent to purchase rr,orcillion worth of Soviet gas from the Yakutsk basin in Eastern Siberiayear period. Deliveryillion cubic feet per day of gas is to


begin The Japanese are being invited to participate in the venture and would take half the gas and the remainder would go the. west coast. Aboutillion worth of hard currency financingile pipelineiquefied natural gas plant in the Vladivostok area will be required. Additional costspossibly5 billionwould be incurred for the construction ofKG tankers. At the present time, however, proved reserves of natural gas in the Yakutsk basin are inadequate to provide deliveries on the scale being discussed. The USSR currently is seeking to borrow5 million from Japan to conduct exploration to prove the gas reserves. Production of Mineral Fertilizers

Occidental Potroleum Corporation has8 billion


exchange contract with the USSR the largest Soviet-American trade deal in history. The agreement covers the sale by Occidental of up to J. million tons per year of superphosphoric acid to the USSR for production of phosphate fertilizers in return for Soviet amonia, urea, and potash. Under the terms ofyear contract, Occidental also willmmoniarea plants in the USSR costing0 million and

will be repaid with products from the plants. The exchange is tentatively scheduled to beginlthough recent reports indicate the starting, date may be moved up to as early


Other projects being negotiated or discussed includepipe line which calls for aboutillioninvestment0 million for theboutillion (US participation unknown);deposits 0 million Western investment withno USonte Edison fertilizer projectmillion in Western investment withUS

arious timber and wood chip projects0 million with no USil drilling off Sakhalin Island0 million initially and0 million in USron ore development costing aboutillion with no known US participation.

Total western investment in the USSR estimated if all of these projects go forward would be somewhereillion probably closeillion. US participation would be half or more.

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