MATERIAL FOR DCI SPEECH (S-3411)

Created: 11/20/1970

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CIA HISTORICAL REVIEW PROGRAM RELEASE AS SANITIZED

FORi

Material forpeech

1. Attached is on outline with which wo sought to Mingt of note* on the subjects whichIndicts the Director wished to address ln hi. apeech to tha Business Council. Thoce notes sees rosponaire both to th* subject abetter and long enouyh thatiat|tt..tti sort of laaterial yonneedbxirdamingnotes have bo'ectodlaa trtilch can fomiih la the event yon would Ilka, to pursue any ofeectlons in <rr eater detail.

2. ould like an opportunity toraft the reiaarks tora against any technical gaffe our joint interpretation of thla presentation.

oLamotor Eaonoajlo Research

e stated

CIA HISTORICAL REVIEW PROGRAM RELEASE AS8

Outline for EC! Speech to Business Council t

Russian Business Practices- and Influence on the mdalojfrst

I. SiBjaary

threat-

of forces-

of the Soviet economy.

II. Soviet Trade Policy and Trade Practice

of foreign trade policy or foreign trade objectives

trade activity my be considered of three parts.

Trade vith the Communist countries of Eastern Europethe principal element and the principal focus of Soviet tradeo not intend to dwell upon further.

Trade vith tbe Industrialhe major source for Soviet acquisition of industrial technology.

Trade with the Less Itevoloped Countriescentered largely around exports under Soviet military and economic assistance programs and imports to service the debts created by these programsaimed at expanding Soviet influence in "uncommitted areas'.

C Soviet trade practice

Eaphaals on "correct" formal practice.

The Soviets execute contractu and pay their bills on time.

III. Soviet Trade with the Industrial West

of existing trade.

effort toward acquisition of technology.

acquisition of technology in the West hasby Inability to generate exports with whichfor their needs rather than by the magnitude of

IV. Soviet Trade and Aid in the Middle East

policy objectives.

and military assistance programs.

1. Their magnitude and focus upon various sectors of

the economy. P. Changes in pattern. C- The composition or structure of Soviet-Middle East Trade.

petroleum trade and its relation to the First premise should bc that Soviet presence in the

Middle East has little or nothing to do with its oil it'sunction of Kid-East geography.

2. y-product the USSRot of hard currency in the Mid-East to support its purchases in Western Industrial cquipmeDt.

3> USSR ia the 2nd largest producer of oil in the world and is itself an important oil exportingarticularly for the Communist world.

I*. The USSR mayonger run interest in Mid-fruit oil ohould it continue to defer needed technological developments in Its owu production of crude.

5. The USSR will tend to behave "correctly" in ito relatione with the Mid-East in dealing with the letter's oU because to do otherwise would run the risk of economic retaliation froo the Vest and the risk of Kid-East accusations that Soviet advice waa self-serving.

aT

The Soviet Economy

he Soviet economy willood recovery from ito poor performanceear ago. Our preliminary estimate0ate of growth of GUP of more thanompared with tho unusually low rate of 2jt Kuch of the growth0 lu dueumper agricultural output reflecting favorable weather during the current crop season.

Although the short-run picture has brightened, we believe that the lone-run outlook for the Soviet economy has not improved fundamentally. After decades of strenuous development, Soviet gross nntional product in only half as great no thend only U# of the USer capita basic. The long-run growth rate in Industrial production will probably continue to slow down in spite of0 increase. Finally, the published resource piano nnd output goals for Soviet agriculture for thendicate that annual increases in farm output will continue to lag behind the ever increasing demands of the Soviet populace.

Soviet dissatisfaction with its long-run performance, and uncertainty as to how to proceed, is apparent in the fact that there if. nlill no announcement of industrial targets for the Five-Year Plan to begin in less thanays. Indeed day-to-day reports from countries dealing with thehow the existence of conflicting recoiancndatlons among leaders on long-range plans.

SOVJST FOREIGN TRAD3 AND POLICY

A. General

Soviet foreign trade is conductedtate monopoly by specialized foreign trade corporations, foreign trade activities ore designed and executed primarily to serve the needs of the Soviet economy. In this system, the role played by the state trading companies and the fact that foreign trade prices bear no systematic relation io domestic prices have served to insulate the Soviet economy from economic developments in the outside world.

The USSR traditionallyolicy of attaining maximum economic Independence from the West. This policy has been tempered by the desire to draw on Western countries for advanced technology snd industrial equipment. The goal of independence from the West has been basically achieved; the USSB is nowelf-sufficient economic entity possessing vast and diverseell-developed industrial base,arge internal market. In aggregative terms, foreign trade playsmall role in the economy. Soviet foreign trade is small in comparison with the total value of goods and services produced in the Soviet

economy. Soviet exportsaluedillionaccounted for roughly 2f) percent of Soviet gross national product, compared withercent for the United States. Per capita exports ofre far below those of any other industrialized country. Exports of the Common Market countries, for example,0 per capitaore than eight times greater than those of the USSR.

Soviet planners design their policies to insure that most Soviet requirements for foreign goods are met from production within the Communist world. About two-thirds of Soviet foreign prede is conducted with other Communist countries, ond most of this trade is vith Eastern Europe. Trade is also one of the levers used by the USSR to maintain its hegemony over Eastern Europe.

The remaining one-third of Soviet foreign trade is divided roughly between the Industrial Westwo-thirdsand the loss developed countriesne-third. The USSR traditionally has traded with the Industrial West primarily to obtainrincipally industrial goods including plant, equipment, and knovhowto raise the level of industrial technology and to achieve production goaLa more rapidly than Communist resources permit. Soviet trade with the less developed countries is an outgrowth of Soviet foreign policy to increase Soviet Influence in these countries st the expense cf the West.

B. Foreign Trade Developments

Over the past decade, Soviet foreign trade has grown at an annual rote ofercentevel6 billion8illion Growth has been uneven, particularly9 and thes when significant changes ln trade with China occurred. During thehe pace of Soviet foreign trade growth slowed, andt was onlyercentargely because trade with Eastern Europe increasedercent for the two years. The growth rote of trade has. increasedowever, rising by an average annual ratecrcenl, led by an increase ofercent annually with Eastern Europe.

About ten years ago the share of the Communist world in Soviet foreign trade was about throe-fourths, but ln recent years the Free World's share has risen to roughly one-third, largely as the result of the rapid growth in trade vith the Industrial West. The decline in trade vith China also was an important factor in the reduced shore of the ConununlcL world. Eastern Europe's shore has not changed significantly over the decsde, but such countries os Cuba and Yugoslavia have become more important In Soviet trade.

Soviet exports huvo been dominated by fuels, rnu materiala,

ond semifinished materials throughout the postwar period, hut

exports of machinery and equipacnt hoveignificantly --

0 million8 to more6 billion Most

Soviet exports of machinery and equipment have gonp to Eastern

Rirope, ond this area has accounted for most of the recent increase

in these exports. Most of the remainder is destined for the less

developed countries of the Free World. il exports

increased roughly twoalf times, reachingalue

billionevertheless, they did not significantly increase their share of total Soviet exports during this period. this periodoxcopt9he growth in exports of oil has resulted from sharply increased exports to the Industrial West. owever, oil exporta to the Industrial West Tell anillionigh6 million They remain, however, the largest commodity export to the West. In the last fev years, diamonds and platinre croup metals have emerged as an Important export to the Industrial West, together earning an0 million Food exports have uow regained their former importance after grain exports fell sharply Grain exports valued at0 million9 represented an Increase of more5 million over6 level. Thus,he USSR has returned to its former role et exporter of grains, its export surplus

illion tons9 comparing very favorably vith net

importsillion tons ln Moreover, for tho first

timehe USSRet exporter of graina to the Industrial

West vith an export surpLus ofillion tons

Soviet imports for the past decode have featured machinery and equipment as veil as consumer goods. Imports of machinery and equipment Increased1 billion89 billion Untilhree-fourths of these imports originated in Eastern Europe and the remainder in the Industrial West. Since then, however, the Industrial West has increased its share to aboutercent, imports of consumer goods, valued at aboutillionBvc grown little in recent years becauseecline in food imports, particularly wheat Manufactured consumer goods hove figured more Importantly in Soviet imports in the last few years, rising1 billion59 billion Most of these products originate in Eastern Europe, but the Industrial West provided substantial quantities.

USSH: Foreign Trade Geographic

Millloa/

Exports Import a Exports Imports Exporta Sports Exports Imports Export a Imports

Total

_

Countries

Europe

World

.

Waat

Developed

h/

to nearest allllon dollars.

all of this trade is conducted with the less developed countries but It is not specified byorigin and destination.

SOVIKT BUSINESS PRACTICES IB TRADEE WEST

The munncr ln which Soviet traders conduct business Is In large part due to the fact that the Soviet foreign trade corporation Is the solely authorized Soviet exporter or importeriven group of commodities; it stands between the domestic producer/consumer ond the foreign buyer/supplier. Porelgn trade corporations, by their very character highly-centralized ond subject to all the consequent disadvantages, only act for the final users or producers, and they depend on the lattero' decisions on the relative meritsoreign offer or bid received. Covering enormous sectors of the economy they can seldom offer their Western trading partners the speed ond efficiency to which these are accustomed in dealings with other capitalist enterprises. The long gestation periodonsiderable amount Of business with the USSR is duo not only to administrative delays but also,to factors inherent in the foreign trade system such as imports ond exports having to follow the directives of the notional economic ond foreign trade plans and temporary, or not so temporary foreign exchange shortages.

Tne most demanding stage of the soles process Is the actual negotiations. Soviet buyers insist on discussing the sale slowly and thoroughly and are wary of such opon-end clauses oe references to "usual ccflMoercioltc. which ere dangerously vague terminology where transactions between private firms and Soviet state agencies are involved. Some businessmen complain that negotiations are unduly protracted ond costly and they are sometimes complicated by the refusal of all but tho president of the foreign trade corporation to toRe individual responsibility on decisions. Experience has shown, however, thatontract

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has been signed the Soviet trade agency may be expected to adhere closely to all provisions (and to make sure that Its foreign trade partner doos likewise). Also,punctiliousness nay be said to be rewarded by punctual payment.

estern firm venturing into business contacts with the USSR has no choice of trading partner, its contact being limited to the particular trading corporation which specialises In the product It may wish to buy or sell, the state monopoly ia often able to select its business purtner and exploit to full 'advantage competition snong private foreign competitors. There hove been numerous examples of this ln Soviet negotiations with Western suppliors of plants and equipment over years. Often when

technology io similar, the credit tcrma and/orill determine the succesaful bidder. Or commercial considerations cay be subordinated to political expediency, as pointed out below.

It la not only Ministry of Foreign Trade officials that potential Western suppliers may have to deal vith. Suppliers may find that first contacts are with the Soviet State Committee for Science and TechnologyCSTolicy-making end guiding function with respect to acquisition of foreign technology and development of industrial cooperation with Western firms and

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countries. In its current searchestern firm or firms to supply the USSHruck plant, SCST officials have discussed the project with representativesumber of potential suppliersFord, Leyland, Daimler-Benz, flat and Renault. SCST officials also have met with officials of IBM, Siemens (West Germany) and ICI. (UK) to diocuss possible Soviet acquisition of Western computers and computer technology. If an agreement is concluded with the SCST, there Is atlll the Ministry of Foreign Trade bureaucracy to contend with in ironing out contract details.

Because foreign tradeonopoly of the otate, commercial consideration may fall victim to political ones. It does not follow that all foreign trade decisionsis the West flow fron overall foreign policy. It does follow, however, that the

Soviet state can and,does on occasion subordinate foreign trade activity to the imperatives of foreign policy. Postwar Soviet hiatory is filled with examplescutting of deliveries to Finland8 to Influence Finnish domestic affairs; reneging on oilnte to Israel during6 Arub-Israeli war; stopping wool purchases from Australia after the rtetrov affair,umber of others. On the, opposite side of the coin, when the USSR decided to cultivate favor with DeGeulle's France in thes the Soviet Foreign Trade Ministryizeable amount of business France's way and In addition, opted for France's SECAM color tolovialon technology instead of the more sophisticated US technology.

Cenerully speaking, however, the Industrial Western countries ond large corporations are not vulnerable to political pressure. Their strong coapetltive position and diversified commercial relations militate against Soviet usehroat to dlarupt trade. Finland stands as an exception because It is highly dependent on Soviet trade.

CIA/OKR

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Soviet Effort Toward Acquisition of Technology

Five propositions *

1. oviet dependence on Western technologyears after the advent of Marxism-Leninism.

concentration of the most abletalent on military production,control.

surprisingly small apln-off from thisnon-military applications.

for-space

in the nuclear power and CKS fields.

oviet's are keenly aware of their technological inferiority outside of the military; indeed, as Khrushchev once did in his reference to "bury" the West, they may however threaten to blow you up if you notice their inferiority.

5- Soviet search for remedy of this condition is clumsy, poorly planned, poorly designed and poorly administered.

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the USSRrice-market mechanism toand Investment has no acceptable internal meansnew ideas or newnd no acceptable mesneinnovation. It is reduced to the planned introduction

of compulsory labor productivity factors which are more often achieved by accounting chicanery than the Introduction of new production techniques. Major new technical changes even when developed iu the USSR must wait until they are adopted in the West so that the USSR can identify their probable impact and implicitly their probablo worth. Thus, although there are isolated areas in which Soviet technology vies with the West, the average lag in introduction of technology in the USSRlz the Industrial West Is aroundears or more.

weight of the Soviet bureaucracy consistentlyefrort to improve the use of new technology unleoois both free (of economic cost) and unable to exertterm change on any other sector of tbe economy. This "weight"

Is both cause and affect of Soviet technological lag. The bureaucracy itself is organized inay (research and development done by institutes rather than by production organizations) as to inhibit innovation. It stifles almost all reward for innovation on the part of workers and managers l) by providing little or no monetary or public acclaim for innovators andy suppressing or deferring the development or expansion of any Innovation which may disturb

existing production relationships. Innovation is only permittedully planned basis. Must be able to run before you walk. The result is to "put down" anything new outside of the military. If rapid changeatisfactory definition of revolution, tho USSB has to be one of the roost reactionary regimes on Earth.

The mililary itself pays somethingrice to the bureaucracy for its greater "technological freedom". It has been saddled with long production runo, even on weapons where the technology i6 very dynamic. But itrice by being competitive in every reach of weapons system, offensive or defensive, land, sea or air.

The rate of technological development in weapons design and weapons production seldom lags tha West by moreew years and in some cases even leads tho Woot. The development of atomic weapons and the use of atomic power on the one hand and the introduction of long-range ballistic missiles and ABM systems on the other are excellent examples.

The limited spin-off from mililary production for civilian production is inirect product, of the governmentalover all economic activity. General purpose tools in military industries makingO copies of Western consumer goodB are not likely to produce either an attractive or an economic product. But the consumer votes only for the Communist party, not with his

rubles. The.producer gets paid only for hov many, not hov good. Mo can only expect to get new tooling if it is needed for some military output. Thla restriction obtalno until long-range plana can be changed even though new tooling might significantly reduce the coat of production.

Planning, Soviet style, rather than liberating the people has only succeeded in further suppressing them.

h. One may reasonably wonder, Is the Soviet leadership aware of the technology gap? Indeed they are. The one proposition on which all ingredients of Soviethe Communist Party, the economic planners, the induatrial managers and the Soviet consumer' agree io that Soviet industrial technology Is far behind the general state of technological awareness. Moreover, If no one is watching or listening, that Soviet industrial technology Is far behind that of any of the Western industrial nations. What they nay differ on le whether to modify current practice with heavy emphaais on military technologyore general Innovative effort.

Occasionally, as Khrushchev once did, the Soviets win threaten "to bury" the West to cover their embarrassment over their general industrial achievementand to emphasize the area In which their greatest achievement lies.

5- Soviet planners and industrial managers have repeatedly over recent years been given the go ahead by the Soviet loaders to import Western industrial technology to reduce this gap. Soviet efforts to implement such directions have been incredibly bumbling -poorly planned, poorly designed and poorly administered. Their efforts to modernize their automotive induatry and digital computer industry are cases in point. In each case the Soviet objective ia defined in terms of output under one production facility which is so large thathere ie no basis.in production experience for the developmentingle entity of this size, at least notone pass" effort and' S) there is no prospect of effective demand for the planned output of the facility either in the USSR or its export market. Moreover, the USSR conceivesoint Soviet-US business participation in which the US firm provides the invoatraent resources as well as the technical skilla, builds the facilities to Soviet specifications, and then is compensated by the export of components over which they have neither quality control nor control over tha technical specifications. ubmit this is as absurd for the Soviet people who must eventually pay fordomestic cost ofacility as it is to the US firm which is asked to underwrite the capital costs of the venture-

Soviet Economic Policies and Programs In the Middle East

I. Soviet Policy Objectives

Soviet policy in tho Middle East is an extension of its overall policy toward the Third World the expansion of Soviet influence. Although this goal hasraditional one forthe Soviet leadership during the pastears has eaployod sharply different tactics in ita pursuit. In contrast to the previous Soviet efforts to foster local Communist parties in order to hasten Communist takeovers, the post-Stalin regires have sought to cultivate good relations with the legitimate governments of these countries vith the customary instruments of contemporary statecraft. It wos Moscow's hope that if it could establish sufficient influence ln newly emerging countries, it could manipulate their strong neutra-list and anti-Western sentiments to orode Western^inportant foreign policy tools employed in this endeavor have been economic andaid.

The Middle East was particularly ripe for Moscow's new aid diplomacy In thes. The conflict and passions generated

by the Arab-Israeli conflict sharply aggravated existent anti-Western feelings andighly receptive atmosphere for the intrusion of the USSR. Inho Soviet Union,ront, concluded an arms agreement with Egypt. This

agreement was followed quickly by arms pacts with Syria, Yemen, and eventually, Iraq. These arms agreements, hailed widely In the Arab worldlow,to colonialism, nogated the Western embargo on arms shipments to the Kiddle East, enabled the Soviet Union toover the newly created Baghdad Pact, opened the area to the growth of Soviet influence, and generally exacerbated the political turmoil obtaining in the Middle East. Soviet military aid quicklyonor-donee rapport whichasis for expanding other political and economic ties with tho USSR. In all cases,

economic aid agreements followed soon after the military agreements.

Ctfu/icto'c.-fo-OU. AvUXZrftA^ In time, the Soviet Union oocame the primary^clionts in the Middle

t

East. It also" has "become sr. important trading partner for some of the countries in the area. II. Economic Aid Programs

A. Mngnltude and Character of Aid

3. The USSR has extended7 billion of economic aid to Kiddle Eastern countries since the beginning of its aid program These commitments, the largest provided any area ln the -Third-World, account for about 'tO^ of all Soviet economic old extended during the pastears (See Appendixndgypt ranks second (after India) among all the less developed countries (IDC)ecipient of Soviet aid. Egypt, which has received Soviet commitments of more thanillion, also is by far thelargeat recipient of Soviet assistance srong the countries of the Middle East.

Iran end Turkey rank second and third, with total commitments0 million5 million, respectively. They are followed by Iraq,0 million, and Syria, Yemen, and Greece, whichhave received0 million.

*t. As has been typical of Soviet aid to cost of tho LDC's, the largest share of the aid extended to Kiddle Eastern countries has been allocated to heavy industrial use. This category, accounting for at least kyf, of all aid provided to thet, includes industrial complexes such as the Helwen steel mill in Egypt, steel mills ln Turkey and'Iron, and aluminum plants in Egypt and Turkey. Aid allocations for large scale dams, Irrigation, and hydroelectric power comprisef the total and include: the Aswan Dam in Egypt, the largest Soviet aided project ever undertaken; the Euphrates Dam in Syria, for which the Soviets are providing more0 million; and the Aras Dam on the herder botwecn Iran and the USSS, which will provide equal irrigation and power facilities for both countries. Oil development credits, which have been risinghore of total aid extended in recent years, comprisef the total extended to the Middle East. Aid for oil development In Egypt, Iraq, and Syria has enabled these countries to establish state-controlled oil cocpanles.

1). Pattern of the Khrushchev1 5- Soviet arms aid waa followederies of economic aid agreeTQents which during the first five years added up to more than

illion to Egypt, Iraq, Syria, and Yemen. But even morethan the dollar magnitudes of these early agreements was the projects for which the USSR provided aid. The agreement8 to

*

build the Aswan Dam, and the subsequent aUocation of5 million for its construction, gave theropagenda advantage* that far outweighed the costs of its effort. Moscow also5 million industrialization credit to Egypt which was used for the letter's First Five-Year Pain. Tnis aid was used for construction lnJ.ic_ sector ofetallurgical, engineering, petroleum and chemical projects ond'a variety of light industrial projects. It enabled extensive Soviet participation in Egypt's industrial development plans, particularly in mineral and petroleum resource development and metal manufactures. Soviet aid to Iraq, while less dramatic In size and the character of lt6 undertakings, provided assistance for light industrial and engineering plants,ailroad from Baghdad to the port at Basra, an agricultural machinery factoryharmaceutical plant. Under credits extendedyria benefited from railroad and dam construction and

Ecological prospecting and oil exploration. During this early period economic aid to Yemen helped it improve port facilities and to build an airfield.

k. Following several lack lustreshchev inillion dollars of additional aid to Egypt andillion to Yemen. These commitments were to mark the end of the Khrushchev era in Soviet aid when largeorasking.

5- The5 was the beginningew style in Soviet aidore conservative style that was to be highly selective of its clients'and the projects that it sponsored. Though the long run objectives had not changed, more and more the aid program was toareful Soviet appraisal of tho political and economic returns on its investment. onsequence, in recent years assistance has been concentrated in fewer countries, countries which from the Soviet view will provide it with needed raw materials or countries which Moscow considers to be of strategicto-its^interests. To ensure the most effective use of Soviet aid resources, its aid program has become much more highly targeted than itecade ago, as Khrushchev's successors apply location criteria to their aid detenainations more systematically thon before. These stricter criteria are particularly consistent

* Lines of credit which were not allocated to specific project use at the time of their extension.

lct Monocle and political interests in the Arab World, and their application will help to reinforce tho Russian foothold in the Ree$ Hast. They reflect also the Soviets growing concern vith China and the need to strengthen relationships with the countries along the southern borders of the USSR. onsequer.ee the Jiaa^ Eastern countries continue to be among the most favored aid clients.

6. The emergence of Iran and Turkey6 as major aid recipients ic one of the most significant developments, in the Soviet aid program ln recent years because it marks the entry of the USSRreviouoly almost completely Western aid preserve. These two Central Treaty Organization countries had5 billion of American aid in theears prior0 (See Appendix The Soviot agreements with Iran and Turkey undoubtedly were viewedajor triumph by Moscow. Although the Soviotn had provided minor credits to Turkey previouslyillion credit to Iran3 foroint dam and hydropower project on tho Soviet-Iranian border,0 credits9 million to Iran0 million to Turkey marked the start of active Soviet participation in developing public sector industries in these countries. Ihey provided the last linkshain of countries that were important Soviet aid recipients vith borders

contiguous to the Soviet Union or to Communist China*. These agreements uere Intended to lay the foundations for enduring economic relationships with Iran and Turkey while they significantly reduced the economic dependence of these countries on the West. The pipeline for transporting natural gas from Iran to the Soviet border for which the USSR allocatedillion of credits from6 line of creditwill be of particular importance in cementing economic relations between Iran and the USSR. Theillion in earnings from gas sales to -the USSR over the nextears will more than cover Iran's debt obliga-ticns to the USSR for both economic and military aid, allowing Iran to capitalizeormer waste product. At the same time the USSR will benefit from the import of this gas at the relatively low price0 cubic meters. The supply of someillion cubic meters of gas annuallyill allow the USSR to supplement the dwindling gas suppliese Azerbaydzhan SSR and to save distribution costs of bringing it into the area from distant Soviet fields in Central Asia.

7. 8 the USSR Increased its original ccfirnitaicut? million to Iran8 million. In addition to the pipeline, these credits are being used toteel mill inachine building plant,inc refinery, and to reconstruct a

* The chain also includes the following countries of SouLh Asia: Afghanistan, Pakistan, India and Nepal.

railroad froa the Soviet borderew industrial center at Tabriz. The Initial commitment0 million of Soviet aid to Turkey under6 agreement' was raised6 millionhis aid provides for assistanceublic sector projects, most important of which are: teel works, an aluminum plant and an oil refinery.

As in the case of the Iranian-Soviet pipeline, in recent years the USSR has provided assistance more and more for projects that are of mutual economic benefit to Itself&nd?to the recipient country. The output fron aided projects for bauxiten Guinea, zinc smelters in Egypt, Iran and Bolivia, and for oil exploration and exploitation in Egypt, Algeria, Syria and Iraq (and possibly In Iran) will help the USSR to satisfy its own domestic requirements. The USSR also profits from the assi stance it has extended to Egypt, Iraq and Yeicen for developing their fishing industries whose facilities will be made available to the far flung Soviet fishing fleet. The Soviet-aided shipyard at Alexandria provides repair facilities for Soviet vessels and Is building several commercial ships for the USSR.

Of particular significance is Russia's assistanceEastern oil development for which the USSR has provided0 million of credits- While helping to establish national oil companies in these countries and reducing their dependence on

Kcotern companies, the Soviets undoubtedly are looking to3 vhon they cay need to supplement domestic crude oil supplies to meet their requirements. 0 million of credits extended to Iraq last year for the purchase of oil drilling equipment will bo repaid in crude oil. This ia of special note because it is tho first timeoviet-Iraqi economic aid agreement has provided for repayment in commodities, rather than "in hard currency.

Iff. Soviet Trade with flear^ Eastern Countries

10. Soviet trade with Hee^Tiastern countries also demonstrates

and sore the Soviet interest In taking particular commodities

that arc important to its economy or to other Cccraunlst countries.

0 the USSRillion of Egypt's potroleim for shipment

toAcuba. It tookof Syria's wool exports,of Egypt's cotton and 2h$ of Turkey's raisins. Over the post decade Soviet trade with Kei^tostern countries has Increasedaster rate than Its trade with the Third Worldhole. Its trade with the^teax East also has grown more rapidly than with the developed West. (See Appendix Similarly, the USSR preempted an increasingly large share of the total trade of major Wea^rXstern recipients of Soviet aid as their trade with the USSR expanded faster than with the rest of the world. For example,0

Egypt'* total trade rouets trade with the USSRJ; Syria's total trade roses trade vith the USSRraq's total trade rose, its trade with tbe USSRran's total trade rose byits trade with the USSR roseTurkey's total trade rose byts trade with the USSR. For cone of these countries, the USSR has become their principal market. This is particularly true for Egypt. 8 the USSR accountedf Egypt's total exports. It alsof Syria's totalof Yemen's andf Turkey's.

12. Though It is not possible to estimate exactly how much of the Increase in trade'between the Soviet Union and these Kea-AU^&s. Eastern countries is attributable directly to the aid program, the direct contribution of aid to trade appears to bc relatively small. Estimated Soviet aid deliveries*mall part of total Soviet exports to these countries both0s is shown In tho comparisons below;

* Based on Soviet trade data for complete plants.

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Soviot Exports to Selected Pem^ Eastern Countries

I960

Deliveries Total

Deliveries

* 51

88

' liR

6

31

Soviet

imports from these countries

reflect repayments

commodities for aid (both military and economic) delivered in

past and on which repayments of principal and interest are due.

of repayments has been growing, especially for Egypt,

they have not yet accountedizeable share of Soviet

frccn thosehey probably represent nohanof tho total increase ln Soviet Imports fromast

1*. Beyond trade that has bean generated directly by this aid program, there are, of course, indirect but aid related factors that lead to Its expansion. These, however, cannot be measured. Spare parts are the most obvious but ccrjiercial orders undoubted!/

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have been expanded after inhibitions to tho purchase of Soviet equipment were dispelled following use of aid equipment. Soviet imports from these countries also have grown somewhatesult of Soviet agreements to take goods from Soviet aided plants whose capacity may exceed local requirements. Assessment

15- Ho one will dispute the fact that Soviet influence In the Mi<*flQa.

Heefl^East has increased dramatically over the pastears,of the Vest has declined. It. is aleo true that Soviethave had an important political Impact. Although(and certainly military aid) has contributed to the growthinfluence init la not possible to measure

ount that aid hao contributed to Soviet penetration.

16. In spite of Soviet aid failures on some projects, typical for all aid programs, on balance, Nea^^Kas'ternndoubtedly would rate Sovietuccess. So would Moscow. For many of these countries, Soviet aid has been the only major industrial assistance they have received during the pant decade. Even in Turkey and Iran thlapplies since thes. -or most of these countries Soviet aid will contribute significantly to the growth of industrial and in Syria and the UAR to agricultural output. For example: the Aswan lam not only will double the output of electric

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power in ths^-wR and thus support auditorial industrial expansion,

it also will result inin gross agricultural

t

output. The Euphrates Um in "Syria is expected to increase' cultivable landillion acres and to5 million to Syria's national income, end "Pie steel mill in Iran, its first, is now scheduled toillion tons of steel and may be expandedillion tons later. These kinds of projects tend to create more lasting ties and bring more credit to the donor than tho equivalent aid being provided as food or for local small industrial or agricultural projects by Western nations. The United States lias provided aboutillion of aid to these countries, almost half of which was committed to Turkey. But annual coraoitments declined markedly in the early 6o's and in recent years are confined largely tossistance to Iran and Turkey.

17. Meanwhile the Soviets continue to inject men andthe^Heftp^East to cement its ties. The flow ofhas equalled as many as 5OOO cconiraic technicians inultural interchange. .In addition,jkxXiort&Xs that have received technical training in thestudents that have gone there help to

strengthen the bonds of understanding between the Soviets and

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2Uuu^Eastern countries. The resulting familiarity vith the Soviet institutional structure and the personal links botveen the USSR and the foreign nationals often enhance the Soviet image and produce lasting relationships.

Appendix Table

Soviet Economic Credit! tnd Grants Extended to Less Developed Countries and to Kiddle Eastern

Millions IS $

Aid: of which

to Middle East

133

to Middle Eaat aa *

Total

5 ?toveaber.

atistance ln the form of deferred payment for ships extendedrivate company. FeV have been

delivered.

Cable B

United States Economic Credits and Grants Extended to Middle East9

East*

US

Includes only those countries receiving aid from the USSR.

I fill

ill

rl^r'

iilfH'iliiiinft

':tii^Wl#:il

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V. Soviet Activities in Kiddle East Oil

The USSR, now the second largest oil producer in tho world after the OS, has abundant resources In petroleum that could make it the world's leading producer by the end of the century. izablo share of these resourcos ore In regions where exploitation will be difficult and costly. Moreover, the Soviets have followed poor extraction practices ln presently exploited fields while they have been slow in developing the technology they will need tothe remote new fields in Northern Siberia.

The Soviets can cope with these difficulties, but onlyajor -effort. Through thea Soviet oil productionwill be adequate to provide for domestic needs, the bulk of Eastern European oil demand, and continuation of exports to other Communist countries ond tho Free World. Wc expect the USSR'a oil surplus will diminish in thos, so that If tho Soviets want to maintain or expand their exports they will probably have to offset these increasingly through imports from the Free World. Indeed, they may become net importers from the Free World toward the end of this decadeajor effort is undertake? to improve the technology of crude oil production in the near future.

Vo do not expect that the Soviets willituation to develop in which their oil Imports would constitute moremall fraction of total Soviot demand. By the same token such Imports, which presumably would come from Arab oil producers, would represent at most,ery small fraction of total

production of Middle East oil.

ThB USSR now has agreements vith Iraq, Syria, and Egypt whereby i

Soviet assistanco in developing oil resources is to be repaid in oil. Some moderate expansion of such Soviet support to thenational oil companies can bo expected. This assistance enables tho USSR to acquire supplemental supplies of oil whilearket for Soviet goods and services not otherwise readily

The quantities of oil thus acquired by the USSR will be necessarily limited by Soviet determination not to become heavilyon external-sources for soommodity as oil.

Moreover, thereimit to the Soviet goods and services that the Arab states would be willing to accept for .oil that would earnforeign exchange if sold to other customers.

There aro other considerations that will, limit the role of the USSR in Middle East oil matters. The governments cf the oil states take strongly nationalistic attitudes toward their mineral wealth and would resist giving theominant role in exploiting this wealth. Moreover, Soviet petroleum technology is not sufficiently advanced to stimulate the interest of Middle East countries In large-scale Soviet assistance. Finally, the oil states need the large marketing organizations of Free World oil companies to sail their vast quantities of petroleum and only the Free World has the necessary tankers to move the oil to distant markets.

Nor docs tho expanded Soviot political influence in the Middle Beat oean that the USSR would novo to deny Middle East oil to tho Vest, evon if it wereosition to do so. Denialmall ocale, (one country-supplier or pertountry) would notessential industry in tho Wost and would be costly to tbe USSR in terms of international good will. Western countries would viow such denial as an act of economic unrfnro and probably wouldln kind.

Denialarga scale sooms even more remote. Tho USSR prob-ably could not persuade tho Arab oil producers acting in concert to withhold their oil and forego the revenues ao vital to their economies. Furthermore, the USSR would not be financially able to compensate the Arab states for the rovenuos foregone.

The USSR may, in fact, not wont to upset the 3tatus quo In world oil activities. Soviet commercial interests probably coincide with those of tho Arabs and of the oil consumers in dictating stability ln International oil markets. Soviot as well as Arab exporters benefit from open marketa and high prices. The USSR's pragmatism In business practices has been demonstrated by their cooperation with Western oil companies ln arranging oil exchange dealshose swops were inaugurated by tho USSR and Western oil companies in7 in tho face of highor transport costs arising from tho Suas Canal olosure. Under this armngement. Western oil companies provide oil to the USSR at Persian Gulf sources for delivery to

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RANDUMNovember0

Director, Office of Economic Research Subject: Material for DCI Speech

has teen asked to speak to theBusiness Practices, andforHI* EaSt" o ^reParc a

He wants co not the stageew briefon the cross threat, the balance of forces, nnd tne Gtato of the Soviet economy, and then devote achunk to Soviet trade, aid, acquisition of technologypractices, policies, objectives, in other words. To what extont is trade used in support of general Soviet policy, to what extent is it affected by Soviet Policy? Soviet experience and policy in grants/loans? rinally what is the Soviet Union up to in the fliddlt Vast,tr"acthere, do they needant the oil, what would they do if they did control it, etc?

I can put together the gross threat, balance of -oeces,and the genoral objectives in the Middleut eoulo you and your colleagues please furnish the raw material for the rest? ay raw material because

I can use whatever is easiest fornenon, notes, rocgh crafts, what have you. atch of paperskeleton outline of how they should fit together for the speech.

give mo the necassory time to work itspeech text,nvo tho material on oror "endny Nov.f the weekend

Tha-

Soviet Activity and Ifeddle EnatOfteS BM abunlaei potenlialof pet ro leva,Ml offshore, that could uko It the world'sy th. end of tail century. lseblethese resources ere lawill be difficult

and

The USSR Ig raw th* second largest oil producer In the world faiW the US). b. years tarouch thes, Soriet oil production probably MU1 ba adequate to provide for ill dowstie Deeds, natlafj KasUrn Kuropean denand for Soviet oil, and permit substantial exports

r.

to other CoanioWt countries tad to the Free World.

If. as Is expected, tbe SSSR continue, to supply the lion's

share of Eastern Iuropa's oil needs end to maintain tho recent level of oil exports to the Freehe USSP by the end of thiaul quantities of oilree World, presumably the Arsb oil atates. Theao requirenenta probably would represent soitethlng lessf Arab oil production forecast for IWO andcall part of total Soviet deaaad. In the years follouinc, tbe Soviet (and Kastern Europe's) needs for free Uorld oil viU depend on the successthenvestment progran in Its oun oil industry and further trchnolocical advances. Both of these factors are lapoeelble to predict at tMa tine.

The USSR now haa ^rewcnta withyria, and HgypliMiiliitt in dewlopinsiB to b.f suchopport to Ihooilan

lhe iissa to acqalraaapella. of oil whil. providingt-rkel for Soviet good, erf service, nol oU-.erwisoortable. Tho qu*ntitiofl of oil thuo acquired by the USSR will ba

iUltad by Soviet det.rala.lloa aot tohdavily

dependent on externalfor aooaaodlty aa ail. horaover, thoronit to tao Soviet gcada and aorvloa. that thattata,be willing to ace.pt far oil thai would aararoralgn exchange if aold toistonari.

TfcaM are olhor considerations that will linit th* rol* of theIB Middleoilh.f th. aUlax. atraoelj nalloseUrtlc altitade, toward theirealth ard would resist riving Uisoainatlng role in exploiting Wl. wealth. Kareavar, Savitt oatrol.ualataffieiettl-advanced lathaf Kiddle Last count rios la large-so.le Soviot aaalalaiwo. Finally the oil iMad the largeof rreo World oil eoap.aU. lo sdi th.irpalrolowy UaWorld hu tha necessaryeve the oil to dlDtant mtrkels.

Nor does tho expanded Soviet pollUoal Influence In tho Middle East nean that the USSR would novo to deny Kiddie lael oil to the West, even if it wereosition to do so. Denialil aeale, (one country or partountry) would not disrupt essential Industry In the West and would be coatly to the USSB in teres of international eood will. Vestern countries uctld *lew such denial aa an aet ofwarfare and probably would retaliate in kind.

Denialarge scale seeits evon rare rencte. The USSRcould not persuade the Arab oil producersoncert to

withhold their oil and forego the revenues so vital to their oeononies.

I.

Kurthenioro the USSR would not bo financially oclo to compensate the

Arab states Tor the revenues foregone.

Tne USSR nay, ln fart, aot want lo upsot the status quo in world oil activities. Soviet conraerclal interests probably coincide with those of the Arabs and of tha oil consunert In dictating stability ia International oil aexkets. Soriet as well as Arab exporters benefit frc open narkels aad high prloes. Ihe USSR's prsgrtatlsn ln business practices haa been denonstrated by their cooperation with Western oil in arranging oil exchange deals waps were inaufjralad by the USSR and Western oil coopanles ln7 in the face of higher transport costs arising Ironeslosure. Under Uls arrangenenl, Western oil coepanles provide

Original document.

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