SOVIET-EGYPTIAN FINANCIAL RELATIONS

Created: 8/14/1970

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CENTRAL INTELLIGENCE AGENCY Directorate of Intelligence0

INTELLIGENCE MEMORANDUM

Soviet-Egyptian Financial Relations

Introduction

The USSR in recent months has provided Egypt with new types of sophisticated military equipment and has increased both the number and theof its military personnel ln Egypt. By comparison, the current level of Soviet support for the Egyptian economy is small indeed. Thisexamines the nature.of the financial flows between the USSR and Egypt in the past few years, the importance of these flows for the Egyptian economy, and prospects for the near future.

Nature of Soviet-Egyptian Economic Relations

1. When Fdrouk was in power, occasional barter trade provided the only economio contact between the USSR and Egypt. 3 the new revolutionary governmentrade and payments agreement and,rief contraction, trade expanded rapidly. The first economic and military aid agreements, which came* vastly expanded the scope of Soviet activities in Egypt. During the following0 million in economic

Cseohoelovakia was the supplier forgreements signedS

tote; This memorandum was produced solely by CIA. It waa prepared by the Office of Beonomio Research and vae coordinated with the Office of Current

Egyptian-Soviet Aid Agreements

aid credits vere extended, and new military aid agreements were concluded in every year but two (see

Host Soviet economic aid to Egypt has been tied to specific aid projects, including the Aswan High Dam and its hydroelectric power producing and transmitting facilities, the Alexandria shipyard, expansion of the Helwan steel complex, and many smaller industrial installations. The terms of Soviet economic aid have been typical of the Soviet program in the less developed world. Interest.on project aidnnuallyyearperiod was allowed for, with repayment in commodities. Two major exceptions were7 million in credits extended for land reclamation and capital goods. These credits were to be repaid In five years.

Military aid consistedombination of price discounts and liberal financing. Interest rates were at least as low for military as for economic credits, but amortization was originally scheduled over shorter periods5 years for early agreements). Because of the much more rapidof military aid agreements and the shorter amortization period, substantial repayments of military aid began as earlyhileof economic aid became significant only

commercial trade has beenfar more advantageous to Egypt thanUSSR. Prom the Soviet point of viewrepresents an accommodation of Egypt'smainly political reasons. From theof view the trade' provides major Egyptian exports to the USSRof relatively low grade cottonmarketable in the West (see Soviet and East Europeanseful buffer to fluctuationsmarkets and shipment of surplus cottonUSSR and East European countries is ainfluence on the world pricescotton. The major Soviet commercialhas been petroleum, which -was insupply in Egypt7 when the Elinto operation. The USSR hasto supply other key materials, suchand solid fuels. Moreover, in additionofficial aid program, the USSR providedlarge credits on bilateralayments agreement specified settlement

in hard currency of debts over an agreed limit,3 agreement was deliberately vague on this point, and at least3 the USSR allowed the Egyptians to accumulate large bilateral account deficits.

assistance to Egypt hasservices as well as critical goods. to imports of.capital goods, longhave paid the salaries of Sovietworking in Egypt. The militaryhas involved both professionaltraining operations. Some of tha Sovietpersonnel have been provided free ofmoBt such services are believed to beEgypt's bilateral clearing account- of goods moving by sea between the USSRhas been covered8 by aagreement, which specifies thatassigned equally to the Soviet andfleets. Because of the limited sizescheduling of the Egyptian merchantfar more than half of all goods havein Soviet owned or leased bottomspresumably, to the bilateral

The Soviet-Egyptian Balance of Payments

main elements in Egypt's balancewith the USSR2 are shown3.* Since thegypt hasamounts of military equipment from thein some years military deliveriesimports of civilian goods from themilitary shipments have fluctuated greatlyyear to the next, however, peakingith considerable declines in the Civilian imports grew0. Egypt ranon trade accounts every year duringif military deliveries are excluded. Onaccounts, interest payments and paymentsthe repatriated portion of the salary ofin Egypt and the expenses oftrainees in the USSR have considerablySoviet payments for use of the Suez Canal.

On capital account, the major elements are Soviet

" The derivation ofe explained in the Appendix.

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development loans and military loans and grants. In sons years Egypt has alsoubstantial capital inflow by accumulating deficits on clearing account. -

Forecade Egypt has run deficits on its current account transactions with the USSR. These deficits have averaged5ear and they add up to more than SI billion overear period. The bulk of these deficits are attributable to Soviet deliveries of military goods. If these deliveries are excluded butof military loans are includedalance on transactions in productive goods andhe deficits fall to welln every year

The net Egyptian deficits, excludingdeliveries, increased markedly in the, but have since declined. Thetepup of Soviet deliveries on both commercial and aid accounts to offset'aflow of imports from the West, which was partly the resultorsening hard currency balance. The record deficit7 was primarily the result of emergency shipments of Soviet grain afterssistance from the United States ceased. owever, Egyptian exports to the USSR have grown while civilian imports have returned to theevel. Consequentlyeficit shrank greatly8 and

The overall balance-of-payments trendsthe following elements:

a. apid buildup in Sovietof goods under, followedecline, theneveling outigh level ofillion, when the bulk of the equipment for the Aswan High Dam waa delivered. id deliveries have declinedcause major deliveries for the Aswan High Dam project have been completed and the USSR has extended no new investment credit

arked increase in repayments of economic creditsnd even larger increases.

provision ofto Egypt on clearingyear,illion in Therehift,learing accounts surplus

rapid buildup of militaryuntil thea decline, reflectingout ofhere has been amilitary credit repayments.

izable part of Sovietaid to Egypt has been in the form ofEgypt made substantial repaymentshe net Egyptianthe USSR exceededillion at the end Only about one-sixth of thedrawings of0 million had beenrepayments representedf drawingscredits (and only about half of totalgoods hasrant). Accumulateddebts totaled0 million.

Economic Impact of Soviet Aid to Egypt

Its economic and military aidhas been substantial, the USSR clearlytaken upon itself the responsibility forthat country's economic growth. Soviet aid was vary small. During theperiod the USSRrucial role inand construction of some keybutelatively small partinvestment. Soviet machinery andfinanced by credits represented aboutthe imported goods used in Egyptian stateandf the total value of statethe USSR provided onlyfnet capital inflow as repayments ondebt mounted and Egypt borrowedthe West (see

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Period

Period

3 4 S 6

nat capital infl* into Kgypt b/

Net inflow of Sovi" capital c/

344

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42 46

61

281

64

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-iurrant aoeount. FinanoingS-B8 iioludcd about y tturv* drawdown.

V eountt excluding military doliwrUm.

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6oviet aidto the Egyptian economy. The net flowaid increased sharplyime whenbalance-of-payments deficits had greatlyEgypt's ability toet flow ofthe West, and had forced substantial cutsfrom the West and in domesticrequiring such imports. Inon Soviet development creditsthan one-half of capital goods importsnet capital inflow from the USSReficit on capital account withof the world. Because of reducedsharply reduced importseries of poor crop years,stagnated. If work onhad not accelerated during thesewould almost certainly haveecline

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he net capital inflow fromto Egypt, excluding military deliverieshas fallen to near zero. Theaccount has become nearly balanced andaid has fallen sharply aswhile payments increased. Militaryhave been large, though much smaller than

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the USSR allows Egypt once again to

run large deficits on coramprcial account,et

outflow of non-military goods and services from Egypt to the USSR is likely for atr

4 years. Expansion of the Helwan'steel complex and construction of aluminum and ferroalloy plants to consumo Aswan Dam electricity are expected to absorb56 most of5 million of credits still to be drawn for these projects. Credit drawdown will probably be at an annual rate ofillionate likely to be more than offset by scheduled debt amortization and interest payments, which at the very least will level, off at about0 level ofommercial trade surplus seems more likely than resumption of sizable Egyptian deficits. The DSSR will probably continue to purchase part of Egypt's share of El Morgan crude oil for shipment to Cuba and possibly elsewhere, and to buy excess

Outlook

output of Egyptian manufacturing industries.

probably will obtain substantial new development credits some time in the next few years, but,of the inevitable lag between extension and implementation, actual deliveries under such credits would not become important for atears. ;

extent and duration of thefrom Egypt will depend heavily onon repayment of military debt. Ifare resumeds the Egyptiansin Moscow, the net outflow fromincrease byillion in that year.

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the reduced flow of aid, thewill maintain and even increase itsrole in Egyptian economic affairs. of economic enterprisesignificantback7 when Soviet techniciansCompany personnel at the Helwan steelUSSR was partly successful in raisinghad been only about one-third of Subsequently, Sovietmost managerial functions in.the

17. Whatever the eventual Soviet economic role may be, Egypt in the next few years will remain largely dependent on its own resources for economic development. Debt rollover agreements concluded with Western creditors6 in the main restrict new credit extension to the amount of repayment, andew cases (such as the Unitedet outflow is stipulated. Egypt is heavily in debt to the International Monetary Fund, and, thus far, there has been only one small new credit from the International Bank forand Development. With only0 million in credits from other Communist countries remaining to ba drawn, oil company investment commitments now appear to constitute the most important remaining source of net foreign capital inflow into Egypt. Fortunately for Egypt, its own foreign exchange earnings are expanding. Rising agriculturaletroleum output should continue to raise exports and, with the Arab-Israeli conflict likely to remain intense, subsidies from other Arab states should continue. Thus the absence of any net capital inflow from abroad should not prevent some expansion of the Egyptian economy.

Conclusions

, The 'JESK duringrovidedconsiderable, economic aid. Soviet aid wasimportant to Egypt6 andSoviet deliveries rose sharply whileWesternere unavailable becausearrears on past debts. Since thehowever, deliveries of Soviet aid tofallen, economic aid repayments haveexcluding military deliveries and technicians,net flow of 'soviet resources to Egypt hasnear

gypt' has benefited considerably from

economic relations with the USSR. but Soviet trade

with and aid to Egypt have fallen' far short of

assuring an adequate rate of economic growth. gypt exports surplus cotton that the USSR does not need and imports.machinery and raw materials, thateeds' very badly. The USSR has been willing.to help build selected investment projects to. accommodate Egyptian .trade needs and on rare occasions has provided emergency shipments of key commodities. But, unlike its relations with the client states of Eastern Europe, the USSR has not taken on the responsibility of assuring Egypt's economic success. In contrast to its growing commitment to Egypt's defense, the USSR's economic involvement in Egypt has been small.

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