THE USSR AS A MARKET FOR THIRD WORLD EXPORTS (NONE)

Created: 10/1/1970

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THE USSRlARKET FOR THIRD WORLD EXPORTS

october0

RELEASE AS9

antral intelligence agency irectorate of intelligence

SECRET1

T hg_ USSRarket For Third World Exports

Introduction

It is now someears since the Soviet Union shifted its tactics toward the Third World away from exclusive emphasis on subversionore sophisticated approach which included economic and military trade and aid. Over this period, the USSR has shown a' growing awareness of the potential of foreign trade as an instrument of foreign policy and an increasing skill in using it forpolitical objectives.

At the same time, Soviet leaders have become more aware of the purely economic or commercial benefits of international trade. This awareness has been paralleled in revised ideologicalconcerning the role of international trade. The unveiling ofive-Year Plan, in particular, was accompanied by official statements which essentially accepted thewestern principle of comparative advantageoundation stone of international exchanges and were silent on the traditional Communistof autarky.

A relevant quote froms as follows:

"In order to use more fully the advantages of the international division of labor, of the rise in the economic effectiveness of external trade, and to better satisfy the Soviet peoples' demands in trade, provision is being made for:

Improvement in the structure of imports byprimarily those types of raw materials, materials, and articles whose production inside the country entails greater costs and

The USSR, then, has had two motives forits trade with the Third world:

A political motive, that is, the use of tradeactic to gain entry into Third World countries and hopefullytrong enough position to influence their policies, and

An economic motive, primarily to decrease production costs and improve the efficiency of resource allocation, but also to improve consumer welfare.

Overall Trends

1- For the decade of, Soviet-Free World trade increased faster with tho Third World than with the developed countries. Growth,_Jiowever, was quite uneven,ear95 and stagnating thereafterhen it moved ahead dramatically, bysee At the end of the decade) the USSRarket% of the Third World'scompared%s shown below:

Pillion9 9

Global less developed

country 1

Less developed country

exports to the

Soviet share of the

less developed country

1

The Industrial West" remains theimporter of Third World goods, usually takingf the total. Soviet purchases from the Third World have been concentratedelatively small number of countries, primarily in South Asia and in North Africa and the Nearozen less developed nations account for four-fifths, and the United Arab Republicndia, and Malaysia together for one-half of total Soviet imports from the less developed countries. Into the countries shown in Tableovietfrom Syria should be mentioned, since9 Syria exportedillion Lo the USSR.

In spite of the very low percentage of total Third World exports which flow to the USSR, the Soviet Union is an important export market for several of these countries. For two of them,

* The industrial West includes Austria, Canada, Denmark, the European Economic Community apan, itomay, Sueden, Switzerland, the United Kingdom, and the United Slates.

Afghanistan and the UAR, the USSR is the mostmarket- The less developed countries whoignificantr more) of their total exports to the USSRre shownTable 3.

Table 3

Soviet Share in Selected Less Developed Countries' Total8

Country

Malaysia

Commodity Composition

general commodity composition ofexports differs little as between SovietWestern markets. The larger sharematerials in Western purchases isby crude oil, which8 made up almostWestern purchases butegligible part

of the USSR's- Soviet purchases are concentrateduch narower range of goods than Western Twelve commodities, as shown in Figureccounted for almost two-thirds of all Sovietfrom the less developed countriesy contrast, two-thirds of the total of the Western purchases were distributed overommodities. Statistics arc shown in Table 4.

most of the major Third Worldthe Industrial Free Worlda far larger market than the USSR.however, does account for aof total Third World exports of Soviet rice purchases from the less

-Soviet imports from lhcDevelopcdsCounlries and-distribution byr major coniniodlticsn

4

Commodity Composition of the Less Developed Countries' Sales, by Major Commodity Group a/

19G8

Commodity Group

Percent

World

;i

Based on imports by the"USSR and member countries of the Organization for economic Coordination and Development (Of-ICD).

developed countries have buen nearly as greatby the Industrial West, and Sovietwere about one-fifth of those of theWestern

6. Soviet purchases of individual commodities generally are heavily concentratedew less developed countries, and in some instances the USSR represents the major market. For example, the USSR took most of Afghanistan's and Syria's wool exports and one-half of India's sheepskins and the UAR'e cotton yarn exportsecent year (see

Table 5

Soviet Share of Selected Third World Exports

Value in Million US S

(Percent!

Jute bags

40

yarn Rice

8

7. Two significant uhifts have occurred in the composition of Soviet imports during the past several years. The most significant has been the increasing share of finished and intermediate which8 amounted0 million,f Soviet imports rrom the Third World. Thlfl comparer,illion, or 3% he trend toward increased imports of processed as opposed to raw commodities is evident in Soviet

purchases of Egyptian cotton products, the makeup of which has moved from raw cotton to yarn, cloth, and finished clothing. So far, however, growth of Soviet purchases of Third World manufactureseen confinedandful of countries. f such imports came fromUAR, Iran, and Pakistan. Imports of" manufactures from India alonea significant portion of which came from Soviet-built factories facing severe problems in disposing of their outputaccountedf the total.

second significant change has beengrowth of Soviet food imports fromparticularly oranges, cocoa, coffee, Foods madef all Soviet importsThird World, compared with Quantities imported, especiallyappear to be still far belowconsumer demand, as will be The USSR also is in the early stageraising its imports of crudenatural gas from several countries inthe Near East, and South Asia. Incrude oil imports from theillion and were supplied by Algeria and the UAR. supplying the USSR with naturalalue of S9 million9 and isto continue increasing; arrangementsIranian sources of gas for export toare well under way.

Factors Affecting Soviet Purchases

Alternative Sources of Supply

of the goods imported by the USSRdeveloped countriesolo inSoviet production of the same goods. Of imports from the Third World, someby value, are commodities which arein greater quantities by the USSR. VeryWorld imports provide as much as halfSoviet requirements of any commodity.

10. or finished and semifinished goods such as shoes, clothing, and cotton fabrics. Eastern Europe is a far larger supplier to the USSR. In other instances the Industrial west is the primary

g _

source. The Third World does supply the USSRits imports of some agriculturala fuw industrial raw materials. Table 6se ci.it g 9

Table 6

Share of Selected soviet Imports Supplied by the Less Developed Countries

Import

.

packing

rubber

yarn

and meal

'JO

oils

bags

and almonds

pepper

umber ol major export commodities of the less developed countries, the USSR alsoignificant exporter. For example,he USSRillion worth ofillion including cotton yarn, fabrics and clothing) from the UAR, while exporting raw cotton valuedillion,illion In cotton fabrics. The same relationship holds foi vegetable oils, wool, oilcake, and corn. The greater volume of Soviet exports in these cases strongly suggests that such imports play norole and an insignificant economic one.

Certain Soviet imports from the lesscountries, now most importantly rubber and tin, but also oil, natural gas, ]ute,me other primary products, In; ip lo meetw materialf theindustry. Dut the bulk ol what theseivo Available for export (with the important exception ots loodstuffn ond jnricultui H iwhich are ol high value from the si.milt* mil. of constsmui

welfare, but of essentially no strategic orgrowih value. Despite the traditionalpriority accorded to industrial development, onlv about one-fourth of Soviet imports- from the less" developed countries0 can clearl-y- beas of industrial value, whereasre obviously for consumption by the general public (sec

Table 7

Soviet Imports from Free World Less Developed Countries8

Million US S Percent

Total

and gas

and minerals

and dyes

6

f.

and wood products

.

oils

fats and oils

1

and packinq material

fiber and yarn

and skins

consumer goods

r

fodder

Soviet Market for Tropical Foods

13. In spite of the rapid growth in Soviet imports of food products from the less developed

countries, per capita consumption of tropical foods in the Soviet Union, is far lower thanuropean countries or ^ven in the advancedof Eastern Europe, such as Czechoslovakia. These difficulties apparently do not reflect^any lack of demand on the part of Soviet consumers, who quickly buy out stocks of tropical foodsthey appear in retail outlets. We have noted in past studies that there appears toigh elasticity of demand for quality food in the Soviet Union.

14, The latent demand by Soviet consumers for tropical food products can be roughly estimated by applying income elasticities of demand which have been calculated in Western countries where consumers are free to respondise in income with re* spect to the purchase of all goods and services. In effect, thiseasure of consumer response in the absence of government imposed rationing. Using this technique, wide gaps appear between actual and potential consumption of tropical foods in the USSR at current income levels. Actual levels of per capita consumption in the USSR* France* and Czechoslovakia are shown inor selected imports, and potential Soviet demand is shown in Table 9.

Table 8

Estimated Per Capita Consumption of Selected8

Kilograms Per Capita

.24

I.

.90

.fi7

These data indicate the decisive influence of the USSR's longstanding policy of using its limited hard currency export earnings primarily to purchase industrial equipment and technology and other hiqh priorityestricting import;

of Free World consumer goods to those quantities that can be obtained through balanced bilateral trade. The USSR has not only allowed the gap imports and latent demand to. continue, But-"when expedient, it has allowed the gap.to grow. This clear lack of concern with meeting potential demand is illustrated by the failure to seek other sources of supply for bananas following the cutoff in imports from North Vietnam, its major supplier, imilar decline, which occurred in total Soviet coffee purchasess traceableoviet decision to curb imports from Brazil so as to reduce its import surplus with that country. arge gap between consumer demand and actual imports of tropical foods is likely toso long as Soviet leaders give a low priority to what they regard as luxury goods in allocations of foreign exchange-

Table 9

Actual and Potential Soviet and Czechoslovak Per Capita Consumption of Selected Products a/

Per Capita Consumption (Kilograms)

Product

Bananas Cocoa Coffee Oranges

Income Elasticity of Demand

Actual

2

Actual

5

.81

Poten-tial

- income elasticities are those computedeurope by llela balassa, and appear in Prospects for Developing Countries, the norm used for per capitais france inoviet andi n r.i,

pean consumption would be at the loner soviet and czechoslovak per capita income. the incomeof demand for imports ia a simple ratio, measuring the change in imports hange in disposable

clearin

Versus Hard Currency Settlements

additional factor which has restricted the growth of Third World trade with the USSR has been the Soviet practice of insisting onlearing arrangements. Tho growth pattern of Soviet importn from the Third World reflects the- importance that Soviet authorities attach to minimizing hard currency outlays. lmost the entire growth in Soviet imports from the less developedhas been concentrated in states with which the USSR had clearing agreements, while the USSR's hard currency purchases from these areas remained virtually stagnant. 9odd less developed countries whose trade with the Soviet Union was settled via clearings were supplying about two-thirds of all Soviet imports from the Third World.

From the Soviet standpoint, bilateral clearing has tho obvious advantage of facilitating the payment of Soviet purchases with Soviet goods; hence,in exports or importslearing partner generally will not resultlaim on the Soviet hard currency reserves. In contrast, Soviet experience in hard currency settlements with Third World countries has shown that,oviet economist candidly observed,

The exchange they earn from exports to the USSR goes partly toward paying their hard currency obligations to capitalist states, and not for increased purchases from the USSR.

For Third world countries, bilateral clearing trade with the USSR meansortion of their exports to purchasies of Soviet goods. Hence, countriestrong global trading position, like the major oil- or rubber-producing states, generally are not among the USSR's clearing partners. Indeed, almost all of its clearing partners are countries which use this means to dispose of commodity surpluses over and above sales on Free World markets.

Among the developing countries which turned to the USSR in the face of more fundamentalin their global trade are the UAR and Afghanistan. Both nations lost Westerr. markets at the same time as

i i

their agricultural production was increasing. The severe fall in demand and prices for Egyptian cotton at the end of the Korean War boom7 was followed in5 by Western withdrawal of credit forof the Aswanndby the UK and French restrictions on Egyptian cotton and their blocking of Egyptian foreign bank accounts. e'sulf, the initial Soviet clearing agreementselcome outlet for mounting UAR cotton stocks. Afghanistan has found itself similarly squeezed into Soviet markets by Pakistan's cutting off Afghanistan's transit trade with Western markets.

Although by far tho larger and more dynamic part of Soviet purchases from the Third World is settled via clearing accounts, the USSR paysillionear in hard currency for imports from less developed countries. The USSR's annual payments deficit in this trade has averaged0 million It isalmost entirely with countries from which the USSR purchases such essential commodities as rubber, tin, and occasionally wheat. Purchases of these three commodities accounted forf total Soviet hard currency imports from the Third World6 If the five hard currency countries exporting till, rubber, and wheat to the USSR are not included, the Soviet Union's hard currency deficit: with the Third Worldurplus ofillion for the period.

With its remaining hard currency tradingin the Third World the USSR eitherirtual payments balance or, as in its trade with Iraq andayments surplus. About one-third of the Soviet surplus with Iraq resulted from hardpayments for Soviet military,aid deliveries.

Soviet officials have asserted that the USSR will increase its purchases from those less developed countries which raise their purchases of Soviet goods. The evidence suggests that Soviet exports and imports with each of its Third World partners have tended strongly to move in the same direction: duringC8, Soviet exports and imports moved in the samewith four-fifths of its less developed trading partners. Moreover, this trend was equally true of both rising and falling trade. Ofountries that increased their purchases of Soviet goods in this period, Soviet purchases fromf them also rose;

of thehose purchases of Soviet goods trtll4 Soviet imports declined iromf thc?m.

Limited Less Developed Countries' Export Availabilities

third factor which limited SovJ.ptFree World less developed countries during theperioderies of production shortfalls inof Third World countries who werepartners of the USSR. These shortfallsfrom internal domestic problems, disease, and mismanagement. Some of theand commodities arc .shown in reveals that exports from these lessfell, not only to the USSR, but toas well. However, the effects weresevere in the case of the USSR since theseaccounted forf Soviet imports from

the Third World, and had accounted for the major share of import growth up to that time. However, if the USSR had wished to do so, it could have imported identical or nearly identical commodities and foodstuffs from other less developed countries. Its failure to do sourther reflection of the bilateral nature of this trade,

owever, Third. World exports,of the USSR's doninant trading partners inincreased dramatically. Preliminary datathat Soviet purchases from the less developedby about0 million bove the8

1 billion. This sharp rise was concentrated in six of the USSR's major Third World trading partners, and the UAR, India, and Algeriaaccounted for over half the total gain. In the case of Algeria, virtually all ofillionoccurred in Soviet wine purchases. Therise in imports from Halaysia, the only hardtrading partner to share significantly in thein Soviet imports, reflected higher world rubber prices ratherreater volume of purchases. Soviet oil purchases accounted for> million of the SbV inion increase in Soviet impuri.it from the UAR. An increaseide variety of commodity imports seems to account for most of the upsurge.

Production and Exports of Selected Commodities from Individual Less Developed Countries

Country and Commodity

Metric 6 7

ghanistan: cotton

Production Exports

Of which:

To the USSR

iiurma: rice

Production Exports

Of which:

ToUSSR

Ghana: cocoa

Production Excoits

Of which:

To tho USSR

india: tea

Production Exports

Of which:

To the USSR

3yna: cotton

Production Exports

Of which:

To the USSR

!?AP: cotton

Production Exports

Of which:

To the USSR

26

21

15

4 4

132

/

4 0

2 3

4 7

75

6

4

14

7

11

33

381

335

106

416

6 7

3

398

29

17

20

2 -

2 A

521

4

437

295

subsn

17 -

SKCI'. H')

AidRepayment:.

25. One additional major factor affecting Soviet trade with the less developed countries has been the so-called "aid and trade"-program, and mosthe effect of repayntents on assistance" granted earlier to the Third world by the USSR. Since tho-oviet economic and military aid has been an important stimulus to the growth ei the USSR's Third World trade. This has been particularly true for Soviet exports, of which roughly iOi ave consisted of economic aid deliveries. Soviet imports, coo, have boon augmented by repayments tn goods tor earlier economic and military aid deliveries.As shown inhe volume of repayments has grownillion00 millionhen repayments accounted for well over one-fifth of total soviet imports from tho lesscountries. repayments in goods grow at

Table 11

Third wcrld Aid Repayments to the USSR a/

Year

US $

S

7

a. iir.c repayments made tn haed ti.rretihioh equaled cne-'kiiJ -Asade in goods.

an average annual rate, while total soviet imports from these areas grewate of onlyer year. Long-term debt service payments for no mo/e i of the overall9

increase in Soviet imports, although they madear larger shoreell over halfof the increase in imports from India.

however, have not always led toin total Soviet imports from each debtor 4oviet imports fromdeveloped countries, including several ofThird World trading partners, either failedany appreciable growth or actually declined,of rising aid repayments from each of thecountries are Afghanistan, Burma, Ceylon,Pakistan, and Sudan. The growing aideach country were more than offset by suchreduced export availabilitiesreferencecurrency sales.

Recent Tradi? Promotion Activity

The USSR has not taken any dramatic new trade initiatives with the Third World in the past few years. It has been carrying on low-keyed activity aimed at promoting an expansion of tradeumber of less developed countries. Most such activity has been along traditional Soviet lines: concluding formal trade agreements which set higher nonmandatory targets for purchases by each party; seeking preferential treatment for Soviet goods in exchange for larger Soviet purchases and generally trying to formalize bilateral trade and payments arrangements.

In addition to these traditional approaches, the USSR has been alert to opportunities for making spot purchases of products from countries facingmarket problems. 9 and0 it signed spot agreements valued atillion, most of which were settled on clearing account, to cover the purchase of distressed commodities, including stocks

of old cotton from Sudan, low-grade Ecuadoroan bananas,lut of Algerian wine- All of these commodities would otherwise have only been salable at substantial discounts, if ac all. The USSR also has elected to undertake several economic aid projects which arc par-ticularly likely to lead to expanded Soviet trade in the future: its participation in oil and gasin Iran and lrag is tied to future Sovietof these products. Othersby the USSR, including recently completed tail links with Iran and arrangements for the repair and construction of Soviet ships by the UAR, will also contribute to intensified trade in the future.

Outlook for

i' il range ofSoviet inputs the Third World over, wo can startrojection ofby the less developed countries. Assumingless developed countries* totalM rate of growth during the next docadeachieved duringnnually},exports would reach6 billion in their exports to the USSR continue to accountsane share of that growth as2 billion However, the recent meeting of the Trade Development Board

of the UN Conference on Trade and Developmentubstantial reduction in the rate of growth of tho less developed countries' global exportsto about St annually. At this lower growth rate,0 the less developed countries' global exports wouldilliont Soviet share would amount9 billion. We can generalize the results of this simple estimating techniqueevel ofofillionr perhaps somewhat more.

second method of projecting thoof Soviet imports from the Third worlda projection of Soviet GNP. The growth ingross national productirectprojecting Soviet imports from the loss The growth in Soviet exports to thecountries over the past decade closelywith the growth in the GNP. As anshare of less developed countries' exportsUSSR being paid for under clearing agreements,

the growth in Soviet exports has produced agrowth in imports from the less developed countries in ronavment.

30. Therefore, tho rise in Soviet GNP can be looked upon asrowth in offective Soviet demand for imports from the less developed countries. Tho future growth in those imports can be estimated by applying the Soviet income elasticity of demand for Che in that prevailed duringo the expected value of future Soviet GWP. During that period, from the less developed countries increasedn rapid jr. that of(seeui' recent ufttLmator. .mi that Soviet CNP will Lncr<;rt!:o

3^.

ate% annually in. If the Soviet income elasticity ol demand for lesscountries'l) holds during the next decade, those imports would reach onlyillionather than the higherates92 billion basedonstant share of less developed countries' global export projections.

31. otentially very important new factor is the forward estimate of Soviet oil imports from the Middle East and North Africa. Our recent estimates indicate the USSR will have an increasing requirement'for imported oil, and our "best estimate-is that the value of these imports will reach aboutillion There are, ofumber of factors which could move this estimate downward or upward by wide margins. If the bulk of the growth in petroleum imports is supplementary to the estimated growth of imports based on the projected Soviet GNP, the now estimated level of Soviet imports from the less developed countries would rise to This addition would more than double the projected annual rata of growth of Soviet imports from the less developed countries between9 n increase in the rate%% annually. Using our earlier calculation that "normal" Soviet imports from the less developed countries could amount to aboutillionhe supplementary oil imports would raise the grand total toillion. This would raise Soviet takings of less developed countries' products to about Whilemall figure, the Soviet Union woulduch more significant trading partner of individual Middle East countrios, most prominently Iran.

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