SOVIET FOREIGN TRADE: POLICY, PERFORMANCE, AND PROSPECTS

Created: 5/1/1969

OCR scan of the original document, errors are possible

CIA HISTORICAL REVIEW PROGRAM

S SANITIZED

DIRECTORATE OF INTELLIGENCE

Intelligence Report

_ Soviet Foreign Trade: Policy, Performance, and Prospects

Secret

ER9

Copy No.

CONTENTS

Page

i i

Introduction

General Foreign Trade Developments

The Communist World

Eastern Europe

Other Communist

The Free

Soviet Hard Currency Position

Industrial

Less Developed Countries

Tables

Distribution of Soviet

Soviet Trade in Selected Commodities

Soviet Trade Turnover with Individual

Eastern Buropean Communist Countries

Growth in Soviet Trade with Eastern

Composition of Soviet Trade

with the Eastern European Communist

Share in the Trade of Eastern

European Coconunist

Trade Turnover with Other Com-

munist

Trade with Communist China

- i

9. Soviet Hard Currency Current Balance, Imports of Wheat, and

Sales of Gold

Soviet Drawings and

Scheduled Repayments on Westernand Long-Term

Orders for Machinery and Equipment

from the Industrial

Trade with Selected Western

Soviet Commodities Traded

with the Industrial

Trade with the Less Developed

Trade with Selected Less

Developed Countries

Commodities in Soviet Trade

with the Less Developed Countries .

and Drawings of Soviet

Economic Aid to the Less Developed

,

Soviet Balance of Payments

with the Free World in Hard

Gold Production, Sales,

and

Composition of Soviet

Composition of Soviet

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secri't

Composition of Soviet ExportB

to Eastern European

Composition of Soviet Imports

from Eastern European

Composition of Soviet Exports

to the Industrial West

Composition of Soviet Imports

from the Industrial West .

Composition of Soviet Exports

to the Less Developed Countries . . .

Composition of Soviet Imports

from the Less Developed Countries . .

52

46 5G

CENTRAL INTELLIGENCE AGENCY

Directorate of Intelligence9

INTELLIGENCE REPORT

Soviet Foreign Trade: Policy, Performance, and Prospects

Summary

Over the past decade, Soviet foreign trade has grown at an annual rate ofercenta rate roughly comparable to that of world trade. And although performance was uneven over the period,rowth matched the longer term average. Soviet exports plus imports8 amountedillion, orercent of gross national product. The most significant trends by major geographic areas are as follows:

a* Trade with Eastern Europe, which accounts for more than half the total, has been growing significantly more rapidly than total Soviet trade. Communist plans for the next few years envision aof this trend, as the economiesthe USSR and the Eastern European countrieseven more closely interrelated.

b. Trade with the Industrial West, the second largest component, grew rapidly ins, bolstered by emergency wheat importsillingness to draw down gold reserves to gain modern technology. The West now accounts for aboutercent of total Soviet trade. Although continued absolute growth is likely, the rate is expected to be slower than ins. The current regime, in principle, is followinglead in vigorously acquiring Western plant and equipment to modernize backward

note: This report waa produced solely by CIA, It was prepared by the Office of Economic Research*

Soviet industries. However, che Brezhnev-Kosygin foreign economic policy is more conservativeit requires hard currency purchases within the framework ofup gold reserves and limiting the acceptance of available credits.

less developed countriesFree World, Soviet trade This leveling offlargeeflection of theSoviet economic aid deliveries tothat year. Imports from thecountries are not high onof Soviet economic priorities;for this trade is veryin Soviet eyes. The USSR haatho less developed countries amarket for Soviet machinery andunder commercial tradingtherehift in Soviettrade with less developedthe Free World should remain at aboutof the Soviet total over theyears, or even decline slightly.

with Communist China,an important factor in the totalins ands,ceased. China's place ason Soviet economic andhas been taken only in partVietnam. The USSR's largest inputNorth Vietnam wasaid0 million economicbelow the peak flows However, the Sovietcommitted to the future supportthe Hanoi and Havana regimes throughflow of assistance.

The Soviet leadership has reaffirmed its policy of expanding trade with Eastern Europenowforercent of Soviet trade. Reflecting its superior bargaining position, the USSR hasougher line on the terms and composition of trade. It has demanded higher prices for its raw materials as well as Eastern European assistance in developing Soviet sources of raw materials on which Eastern Europe depends. In addition, the USSR has required

that these countries take more soviet machinery as part of the bargain tolow of essential raw materials. Finally, the USSR has become more selective about goods it will accept from Eastern Europe, thus cutting down on the limited assortment that these nations find salable in Western hardmarkets. In these economic relations the USSR has relied largely on bilateral arrangements. Although CEMA is nowears old, it has beenin securing any appreciable degree of economic integration or multilateralism. Moreover, significant progress is unlikely in the near future, in spite of the increasing clamor by some Eastern European countries for greater integration.

The Soviet leaders now are willing to temper the traditional Communist goal of economic autarky by acquiring Western plant and equipment to help modernizo various sectors of the Soviet economy and by planning for offsetting exports to the West. But Soviet ability to generate acceptable exports to pay for continued increases in these imports is limited. oviet Bales to hard currency countries have grown at0 million annually, but these gains have reflected in the main larger exports of traditional goods such as oil, cotton, timber, and food. The soviet leadershipas indicated in the current five-year plan directivesthat continued export expansion depends on diversification. Diversification for the USSR means soiling more manufactured goodsgoods which are now largely uncompetitive in the West. Thus far the regime has relied on organizational and procedural changes to spur exports, but these changes do not get to the heart of the problem. The hard decisions to invest in oxport industries and tomanufactured goods to the demands of sophisticated buyers in the West have yet to be made, and they are unlikely to be made in the foreseeable future. Failure toteady expansion of exports will severely limit imports from, and the growth of trade with, the West.

Western oxport controls have had little impact in the past on the growth of Soviet trade with the Industrial West. The volume of this trade has been circumscribed much less by such controls than by limits on tho ability of tho USSR to pay for increased imports. By the same token* the anticipatedof COCOM controls9 is expected to have

little impact on the growth of future Soviet trade with the West. US unilateral controls, which are more stringont than COCOM controls, are only oneumber of restrictions tending to limit US trade with the USSR. Were such controls reduced to the COCOM level, and other US restrictions lifted, Soviet purchases from the United States wouldrise in areas of superior US technology.

Introduction

Soviet foreign trade is conductedtate monopoly by specialised foreign trade Foreign trade activities are 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 to domestic prices have served to insulate the Soviet economy from economic developments in tho 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 and industrial equipment. The goal of independence from the West has been basically achieved; the USSR is nowelf-sufficient economic entity possessing vast and diverseell-developed industrial base,arge internal 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 exportsstimated at moreaccounted forercent of Soviet gross national product, compared with about

4 percent for tho United States. Per capita exports ofre far below those of any othercountry. Exports of the Common Market countries, for example,0 per capitaten times greater than those of the USSR.

Soviet planners design their policies to insure that roost Soviet requirements for foreign goods are met from production within the Coinmunist world. About two-thirds of Soviot foreign trade is conducted with other Communist countries, and most of this trade is with 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 Westtwo-thirdsand the less developedone-third. The USSR traditionally has traded with the Industrial West primarily to obtain

SEC RE

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goodsprincipally industrial goods including plant, equipment, and knowhowto raise the level of industrial technology and to achieve production goals 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 at the expense of the West.

General ForeignDuvi-IopFor.ts

5. Over the past decade, Soviet foreign trade has grown at an annual rate ofevel6 billion8 toillion Growth haB beenparticularly9 and thes when significant changes in trade with China During thehe pace of Soviet foreign trade growth slowed, andt wasercent annually, largely because trade with Eastern Europe Increasedercent for the two years. The growth rate of trade has increasedowever, rising by an average annual ratoercent, led by anof almostercent annually with Eastern Europe (see

6. Ten years ago the share of the Communist world in Soviet foreign trade was about three-fourths, but in recent years the Free World's share has risen to roughly one-third, largely as theof the rapid growth in trade with theWest. The decline in trade with China also was an important factor in the reduced share of the Communist world. Eastern Europe's share has not changed significantly over the decade, but such countries as Cuba and Yugoslavia have become more important in Soviet trade.

7. Soviet exports have been dominated by fuels, raw materials, and semifinished materialsthe postwar period, but exports of machinery and equipment have increased0 million8 to more thanillion7 (see Most Soviet exports of machinery and equipment have gone to Eastern Europe, and this area has accounted for most of the recent increase in those oxports. Most of tho remainder is destined for tho less developed countries of the Free World. Oil exports almost tripled in theut

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did notignificantly greater sharehen they were valued atillion, than The recont growth in exports of oil has resulted from sharply increased exports to tho Industrial West. Pood exports have now regained their former importance after grain exports fell sharply. Grain exports valued0 million7 represented an increase of more0 million over6 level. The USSR is onceet exporter of grain,et surplusillion tons6 import surplusillion tons. The USSR, however, has maintained with theWost the net import position in grain that it has had

imports for the past decademachinery and equipment as well asgoods. Imports of machinery and equipmentof which originate in Easternmost of the remainder in the Industrial1 billion8 Imports of consumer goods, valuedave grown little inecline in food Manufactured consumer goodsmore importantly in Soviet imports infew years, rising1 billion5

6 billion Most of these products originate in Eastern Europe, but the Industrial Wost provided substantial quantities6

The Communist World

Eastern Europe

Polioy

the postwar period, SovietEastern European countries has beenbarter. Under Communist control they haveheavily dopendent on needed Soviet rawon Soviet markets for their manufacturedof which are not competitive in Western markets.

10. The terms on which the USSR trades with the Eastern European countries havo played an important role in the conduct of Soviet foreign economic policy in recent yoars. Five years ago the USSR agreed to change the pricing in its trade with Eastern Europe.

World market prices4 were substituted for those7 as the basis for prices in Soviet-Eastern European trade. The result was to reduce the prices of most raw materials which bulk large in Soviet exports to Eastern Europe and accountmall share in Soviet imports from Eastern Europe. esult Soviet terms of trade with Eastern Europe worsened5

11. The post-Khrushchev leadership, however, soonougher stance. The USSR claimed that Soviet costs of raw material extraction were in excess of prices charged to Eastern European customers and that the recipients of the raw materials should share in the cost of raw material exploitation in the USSR. Czechoslovakia and other countries have subsequently agreed to provide credit to the USSR to extract oil and gas, to develop phosphate mines, and to assist in other similar undertakings. The USSR also complained that it pays world prices for inferior Eastern European machinery and insisted on price reductions. It has also become more selective about what it will accept from Eastern Europe, particularly machinery. Finally, the USSR has made purchases of itsondition for increased supplies of raw materials.

12. As the dominant power in Eastern Europe, the USSR is clearlyosition to influence the terms on which it trades with individual CEMA The leadership in the various Eastern European countries recognises the need to work within the system. onsequence, thesePoland, Hungary, and Czechoslovakia, in particularhave agitated for changes in CEMA that would bring about improvement in their The USSR is aware of the need to improve the lot of the Eastern European countries, but onlyramework which maintains its economic control over these countries. It has called for improvements in CEMA cooperation but has made no concrete suggestions, nor has it accepted proposals made by Eastern European countries. roposal by Poland, for example, to introduce currencyto promote multilateralism was notbecause it would result in heavy drains on Soviet hard currency and gold reserves.

13. As tho dominant member, tho USSR, however, ls willing to back some further cooperation among CEMA members, apparently favoring "selectivein relatively new and expandingsuch as chemicals and electronicsthat require heavy investment for development. Such joint ventures can help to surmount the problems of the limited resources and small markets of the Eastern European countries and can be arranged within the present framework of bilateralism. These joint ventures also would contribute to the economic cohesion of the Eastern Europeanpolitically desirable to the USSRinfringing on their economic sovereignty.

the time being, bilatoralism willto be tho principal basis for Sovietrelations with Eastern Europe. Intrade with Eastern Europe is beingattention, particularly since theCzechoslovakia.

Trade

foreign trade with theof Eastern Europe grew at anrateercent in the5 billion8 7 total was up almostover6 level, following adecline, brought on largely by aof intra-CEMA foreign trade prices. European trade increased5 and declinedercentirst decline in this trade* 7 thusesumption, when Soviet-Easternhad increased at an avorage annual rate of

ercent. Eastern Europe continues to account for well over half of Soviet total foreign trade

* The prioe revisions took effect inut had their greatest effect According to official Soviet data, the volume of Soviet trade with Eaetern Europeercentlthough value declined slightly. Soviet export prices declined more than import prices in56 so that the Soviet terme of trade worsened in those years.

and about four-fifths of Soviet trade with the Communist countries.

East Germany has been the USSR's largest trading partner in Eastern Europe and in the world during this period, except9 when China occupied first place. ast Germany accounted for more thanercent of total Soviet trade, as shown in Table 3. Czechoslovakia has been the USSR's second most important tradein the area. When viewed in terms of growth, however, Soviet trade with East Germany and Czechoslovakia has been slow, particularly Asndicates, Soviet trade with Bulgaria and Poland has shown by far the fastest growth in recent years, and that with Rumania has been the most sluggish.

Generally speaking, the comoodityof Soviet-East European trade has shown little variation over time. Industrial and agricultural raw materials, semifinished products, and fuels have dominated Soviet exports to Eastern Europo (see The bulk of these exports are shipped to East Germany, Czechoslovakia, and Poland, which are heavily dependent on such goods. Soviet exports of ores, metals, and fuelsthe basio

raw materials for industryhave accounted for approximatelyercent of total exports to the areaumber of years. 5xports of these materials have remained almost constant in value at just underillion while their share of exports to Eastern Europe havefrom just overercent to just underercent. East Germany has been by far the largest buyer, importing0 million worth

to3 grain crisis,arge quantity of grain,to Eastern Europe. Czechoslovakia,and Poland have been therain exports to Easternowillion tons insubstantial decline from2 and theillionyearly6 crops enabled the USSR to expand itsgrain to Eastern Europo7illion).

Table 3

Soviet Trade Turnover with Individual Eastern European Communist Countries a/

Value in Million US S

Table 4

Growth in Soviet Trade with Eastern Europe

Percent

Country

Annual

Annual

S

1

?

Germany

this decade the Soviet drive toits exports has seen, particularly in recent years, increased Soviet pressure on Eastern Europe to take more Soviet machinery and equipment. esult, Soviet exports of machinery and equipment to tho Eastern European countries have grown at an annual rate ofercent during the last decade andhare of total Soviet exports to the area rose from less thanercent8 to nearlyercent uch exports were valued at1 billion, typically featuringequipment (chiefly motoromplete plants, and agricultural equipment. These three categories together accounted for nearlyercent of Soviet exports of machinery and equipment to the area8 and forercent The major share of these exports continues to be sent to the less developed Eastern European countries,Bulgaria, which normally accounts for one-third of the total exported to Eastern Europe by the USSR.

Soviet imports from Eastern Europe have been dominated by machinery and equipment and manufactured consumer goods. As noted in Tablehese two

categories were most important in the growth of Soviet imports they have been in nearly every year during tho past docade.

equipment normally accountsone-third of the machinery and(mainly railroad rolling stock andmight be expected. East Germany has beensupplier of machinery to the USSR forof years. Imports of Eastere valued at0 million,ono-third of the value of all Soviotmachinery and equipment from Eastern Europe

and more than the USSR bought from the entire West.0 million worth of machinery andwas imported from Czechoslovakia. Theand East German shareregularly more than half of all Soviet machinery and equipment imports from Eastern Europehas declined from more thanercent8 to aboutercent

Bulgaria and Poland have been thebeneficiaries of their loss, goingndercent, respectively, tondercent, respectively, during the docade.

goods have becomein Soviet imports from Easternnearlyercent annuallyhey totaled more50 million from the precedinglarge increasemounting to aboutstemmed from Soviet efforts toconsumer goods to the Sovietthe fiftieth anniversary of the Sovietlargest and the fastest growing share ofgoods imported during the past docadeup of manufactured goods, going frommillion8 to2 billion inhalf of7 total was clothing. All

six Eastern European countries have been suppliers, and7 they were led by East Germany, which furnished more than one-fourth of Soviet imports of such goods from the area. Imports of food from Eastern0 millionriginated chiefly in the less developed Eastern European countries of Bulgaria, Rumania, and Hungary with Bulgaria alone accounting for about ono-half.

trade with Eastern Europe wasto rise aboutercenthusthe increase The smallest increase

their crude oil from the ussr; bulgaria and east germany obtain three-fourths of their requirements of iron ore from the ussr; and czechoslovakia, hungary, ond poland also receive about two-thirds of their iron ore requirements from the ussr.

other communist countries

Yugoo lavia

trade between the ussr and yugoslavia was greatly affected by the political-ideological splitalling virtually to zero until5 rapprochement. trade increased to0 millionut declined once again after deterioration of political and ideologicalin the wake of the eastern european owever, trade has grownapid rate and seemingly has been unaffected by political differences.

trade between the ussr and yugoslavia3 million7 (seeoviet exportsixed bag, including machinery and equipment, metals, fuels, and food. soviet imports from yugoslavia are dominated by ships and manufactured consumer goods, which made up about

ercent of imports trade is reported to have increased slightly

soviet trade turnover with other communist countries

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Cuba

Before Castro's takeoveroviet trade with Cubaconsisting entirely of Soviet imports of sugarfluctuated considerably, but neverillion annually. Immediately thereafter, however, Soviet trade with Cuba grew substantially, reaching0 million This growth continuedodest rateut7 Soviet trade with Cuba spurted to an all-time high6 million (see

In every year2 the USSR hasubstantial surplus, owing to Cuba's inability to increase its exports of sugar and other goods to the USSR. The surplus averaged0 million, and it rose to more0 million onsequence, the USSR2 has5 billion in credits for balance of payments purposes, as shown in the following tabulation!

Balance of Payments

(Million US $)

207

274

141

120

265

210

300

This aid is in addition to Soviet developmentprovided to Cuba, drawings on which have totaled slightly more0 million8 and sugar subsidy payments* have amounted to5 million1 when they began.** Soviet trade policy thus haself-imposed aid commitment to support the Cuban economy, and no significantin that aid seems probable in the near future.

* The USSRer pound for the sugar it imports from Cuba, the subsidy representingnd the world market price. Exclusive of military aid, whioh has amounted to more 0 million since Since such deliveries are estimated to have averagedillion annually.

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30. The goods supplied to Cuba reflect the Soviet position as the chief supporter of the Cuban economy. Almost one-third of Soviet exports inor example, were composed of machinery and equipment (transport equipment, agriculturaland complete plants). Other important goods supplied to Cuba by the USSR are petroleum, wheat,emicals. Wheat and flour (valued atillion for shipment to Cubaanada andard currency

stlttthe sugar that the USSR imports from Cuba.

Communiet China

^trade with China grew rapidly ins and hadarge surplus for the USSR each year5 as the result of Soviet aid in building the Chinese economy. Trade continued to increaseeax of more thanillionut the USSReficit each year as China started paying off its huge aid bill.* Tho Sino-Soviet ideological split0recipitate decline in trade throughouts, climaxed7 when turnover was reduced7 million, about one-third of6 level (see

Table 8

Soviet Trade with Communist China

Million/

192

Beoauee of rounding, aomponenta may not ado1 to totals shown.

aSoviet aideoonomio and militarya estimated at roughlyillion, delivered over

pllzyln tB b* chinaoom-

750

Neither the USSR nor China, however, hasesire to terminate trade entirely, despite the intensity of the ideological conflict.

principal Soviet exports to Chinamachinery and metals, and Soviet importsprimarily manufactured consumer goods. of such imports and exports Although trade data fornot yet available, Sino-Soviet trade probablyat roughly the same level asslightly.

North Vietnam

trade with North Vietnam hadnominal in the first years of Northaveraging about S9 millionlthough it roseillion

oviet assistance in Northdevelopmentoubling of trade, and both trade and the Soviet surplus in that trade increased steadily during the, goingillion9 toillion in the later years.

As the conflict in Vietnam expanded, Soviet trade and aid became the major prop to tho North Vietnam economy ond war efforts. According to published Soviet statistics, total trade turnover79 million (see0 percent more than the previous yearecline in Soviet imports. Soviet exports grewillion8 million while imports droppedillion,oviet surplus7 million. Commodities involved in Soviet-North Vietnamese trade7 included exports of machinery and equipment, metals, and petroleum and imports of manufactured consumer goods.

Official Soviet trade figures understate the value of Soviet nonmilltary exports to North Vietnamonsiderable volume of goods is shipped to North Viotnam as grants, and such goods are not recordod in official Soviet statistics. As an example, deliveries of wheat flour toere reported by the USSR0 tons, but other sources show that the actual total probably was three times that amount. The value of economic aid deliveries to North Vietnam7

is estimated0 million, including credits and grants, rising to0 millionrant aid delivered8 wasillion higher than The value of trade was at roughly the same level as

36. Military aid deliveries represent the largest

input into North Vietnam, amounting5 million

ringing the total aid delivered to North

Vietnam5 million. Military aid deliveries

fell89 million. Total aid deliv-

economic and militaryare thus estimated0 million

North Korea

trade with North Korea grewin the years following the armistice,fromillion4 In more recent years this tradeonly slightly, being almost However, Soviet tradeKorea grew byercent7 (asabsolute terms inin view of the recent levels. 7 is traceable at least in partrelations between tho two countriesa definite cooling of North KoreanCommunist China. Moscow has agreed tomodost assistance (mainly technicalNorth Korea's current long-term plan ending

ut North Korea's neutral stance in the Sino-Soviet conflict will prevent it from receiving substantial Soviet aid or allowing trade with the USSR to rise significantly.*

exports to North Koreaand equipment, oil, cotton, andof the increase in Soviet exportsubstantial rise in wheat exports. materials, and rice are importantwith steel and rice accounting forof the increase in Soviet imports

The value of trade8 was somewhat higher than7 and may have reached0 rail-lion.

Exolueive of Soviet military aid to North Korea, deliveriee of uhiah are estimatedillion annually in

trade with Mongolia to ahas been generated by an extensive Soviet

aid program, which has risen rapidly in recent years. Soviet exports typically are two or three times as much as imports. Soviet machinery andostly complete plantsaccount for at least half of the exports, and Soviet imports from Mongolia are predictably animal products such as meat and wool.

The Free World

Soviet Hard Currency Position

Well over half of the USSR's trade with the Free world and more thanercent of its trade with the Industrial West is conducted in hard currencies. The USSR attaches specialto this trade because of its need forequipment and technology and other materials which ore in short supply in the USSR. Until recently the failure of the USSR to generatehard currency earnings through exports led to disequilibrium in the Soviet hard currency balance of payments, characterized by substantial annual deficits and consequent reduction in the USSR's gold reserve.

The Soviet gold reserve began to declineold sales during theveraged more0 million annually, well in excess of Soviet gold production. The Soviet gold reserve had been husbanded carefully during Stalin's time, but Khrushchev did not believe in "sitting

on sacks of gold" and used it freely to help finance growing imports of Western equipment and technology. The Soviet payments position wasaggravated during thehen tho poor grain harvests35 forced the USSR to import aboutillion in wheat from hard currency countries. Annual gold sales during theveraged0 million, and by the end5 gold reserves had fallen to about SI billionone-third of5 level.

hard currency deficits werethan might have beon expected,0 million annually duringwheat imports of0 million annually

(see This result was realized byimports of industrial goods, including machinery and equipment from Western Europe and Japan, and expanding exportsarticularly oil,logs, and food. Short-term credit facilities were also employed extensively, especially6 when the USSR sold very little goldthe smallest amount since thes. The post-Khrushchev regime evidently believed that Soviet gold reserves hadritical point and that no further reductions could be tolerated.

Table 9

Soviet Hard Currency Current Account Balance, Imports of Wheat, and Sales of Gold a/

Million US S

Vear

Account Balance

of Wheat b/

of Gold c/

104

d/

For detailedf-payments data

sec

IB.

b. Including wheat flour; excludingion costs.

o. Minimum eetimatss. For details on Soviet gold production, sales, and reserves, see. Preliminary.

In balance, plus orillion.

43. The USSRard currency surplus7 for the first time inocade. This surplus resulted from both expansion of exportseduction of imports of wheat rather than industrial goods. egligible amount of gold was sold, and by the end7 the Soviet goldis estimated to have risen toillion.

SECrTET

44. The USSR also responded to the financial crisis by reducing its orders for plants andfrom the West4 These ordors had been financed in part by Western medium-term credits, but3 mounting repayments had more or less offset new credits (see. Known orders from the West were reduced from0 million3 to0 millionhis cut occurred despite the long-term credits made available to the USSR in place of medium-term credits. Soviet failure to take fuller advantage of these easier payment terms probably was due to the unwillingness of the Soviet leadership to mortgage future earningsime of considerable uncertainty about Soviet crop prospects and the ability to expand exports. Orders declined even further

Table 10

Estimated Soviet Drawings and Scheduled Repayments on Western Medium-Term and Long-Term Credits a/

Year

8 c/

on contractual and otheror minueercent.

first known drawings on long-termplaoe

o. Preliminary.

45. owever, the USSR increased its orders to an all-time high0 million,the Fiat contract worth about half tho total. Apparently buoyed by good crop prospects andin its hard currency trade balance, the USSR took greator advantage of the long-termoffered by the West and has since maintained the high level of orders from the West (seo

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table 11

soviet orders for machinery and equipment from the industrial west a/

million us s

To tat

chemical and petrochemical

timber and wood processing

textile manufacturing

automotive manufacturing facilities

ships and marine equipment

oil refining and pipeline equipment

metalworking and

food processing

electronics

others c/

1

Exoluding Finland. Because of rounding, com-ponente may not add to totals shown, b. Including plant to manufacture rubber produote valuedillion. The plant oould also beunder the category "ohemioal and

a. ide variety of plants and equipment With consumer orientationfor example, production of footwear, refrigerators, ballpoint pens, and the like. Also inoluding printing equipment, telephone equipment, medioal equipment, and special trucks.

46. in retrospect the soviet response to what ithreat to its financial position seems sensible. the regimeecade-long drain on gold reserves and7 had managed the first hard currency surplusecade. the major

cost of tho retrenchroont was in the imports of West' ern capital goods forgone and,onsequence, perhaps some slowdown in the growth of domestic out put.

data8 indicate thatagain may haveeficit in itstrade. Trade appears to have been morebalanced, with imports (chiefly machinerymanufactured goods) rising more rapidly Gold sales were onlyillion

bout the same level aso that gold reserves increased tot the end

Industrial West

Policy

USSR traditionally has regardedindustrial countries as anof goods needed to stimulateand thus to achieve economicrapidly than its own efforts wouldneed was explicitly recognized bydiscussing the Soviet seven-year planof equipment and technology from theto Khrushchev, were to be stepped upfulfillment of theithout wasting time on creationand mastering the production of new types

of equipment." The significant increase in imports from the West8 reflects the carrying out of this intent*

In trading with the West the present leadership has pursued the same objectives, but has been more conservative than was Khrushchev ln the use of Soviet hard currency resources. The present regime stemmed the outflow of Soviet gold by reducing imports from the West swelled by large wheat purchasesas well as by expanding exports. Only when the gold outflow had ceased and the hard currency balance of payments improved markedly did the present leadership step up imports.

The current regime has been able to increase exports, but this increase has been largely in the traditional commodities such as oil, cotton,and food. It has recognized, however, that

only by diversifying exports through greaterof manufactured goods can Soviet exports be increased over the long term. The efforts to diversify exportscalled for in the current five-year plan directivesave largely failed thus far because Soviet manufactured goods have not been able to compete with Western goods on Western markets.

number of measures to promotebeen introduced in recent years. Theseincentives to enterprises andfor raising the quality and quantityand for selling licenses in thetrade corporations havo been multiplied

and increasingly specialised to promote contacts between them and Soviet producing enterprises and foreign companies. Export councils were set up7 within foreign trade corporations for the same purposes. Soviet foreign tradealso have formed joint trading companies in the West or have contracted with Western firms to handle Soviet goods in this effort to promote Soviet exports. Such measures are likely to have only limited success, however, because they are

not aimed at basically improving theof Soviet manufactures. This improvement would require investments in enterprises with the export market in mindthat is, the USSR not only must upgrade the quality of Soviet products

but also must tailor such products to theof Western buyers.

its efforts to promote selectiveWestern technology, the current regime hasscientific and technical agreementscountries and firms, the most important

of these being with France and the United Kingdom. By this device the USSR hopes to gain access to desired knowhow and technology that mightbe difficult to obtain. Recent Soviet efforts to obtain advanced computer technology from the United Kingdomase in point. Soviet interest in acquiring Western technology was again confirmed in8ouncil of Ministers decree relating to the need to promote the introduction of new technology in Soviet industry. The acquisition of Western technology without purchasing equipment presumably will save foreign exchange and, at the same time,oats in the USSR.

53. Western export controls have had little impact on the growth of Soviet trade with theWest in the past. Tho major effect of the denial of sophisticated Western equipment and technology has been on the costs and effectiveness of Soviet military programs and on the quality of Soviet economic growth. Trade has been limited largely by the ability of the USSR to pay forimports, as evidenced recently when imports of industrial goods were cut to enable the USSR to pay for large imports of wheat. The COCOM List Review now in progress will further reduce Western controls on advanced Western equipment andbut there is little likelihood that the value of Soviet trade with the West will be affected thereby. As noted above, significant increases in Soviet trade will have to await the development of new Soviet products for export to the West.

Trade

54. Soviet trade with the Industrial West in therewore rapidercentthan with any other geographic or political area. This trade with the West islargely with Western European countries, which have accounted for tho major share of this trade throughout this period and7 accounted for more than three-fourths of7 billion in trade with the West. This pattern had been altered somewhat during the, when the USSR imported large quantities of wheat from Canada, the United States, and Australia, but7 it was restored when wheat imports declined sharply. Tho major trading partners of the USSR include the United Kingdom, Finland, the three largest Common Market countries (France, West Germany, andnd Japan (see.

55. The most important Soviet trade partners in the West traditionally have been the United Kingdom, Finland, France, and West Germany. Italy and Japan have bocome significant partners only in recent years. Trade with Japan grow rapidly5nd7 Japan bocamo the USSR's largest Western trading partner9 million. Soviet trade with Italy had been relatively unchanged2ut it rose by more thanercent7 million Canadaoading Western trade

partner in theecause of its large grain shipments during that period, but ita trade with the USSR declined by more thanercent

Table 12

Soviet Trade with Selected Western Countries

Million/

Kingdom

b/

b/

Germany

States

of rounding, components may not add to totals shown.

b. Soviet exports to and imports from the indiaated trad' ing partner.

growth of Soviet trade withand Japan is related at least in part toof these countries to acceptof Soviet goods. Host recentlyhave been awarded large contracts toplants and equipment to the USSR. Westnot been so favored in recent years and is not

asrade partner as it was in thes, but this result probably is due more to soviet politics than to economics.

trade with the United Statestripled in theising tobut it still accounts for less thanof Soviet trade with thehen the United States sold almost

2 million tons of wheat to the USSR, did theStatesarger share of this trade. This low level of trade relative to that of other Western countries results in part from USfor example, more stringent exportthan in Western Europe or Japan, restrictions on the length of credits for sales to Communist countries, and denial of most-favored-nationto Soviet products.

trade with the Industrialhas featured the exchange ofraw materials, and semimanufacturesmachinery and other Soviet exports have continuedoil, coal, timber, cotton, pig iron,and food despite Soviet efforts torange of products and increase the salegoods. Thus the most notablein expanding exports in recent yearsbeen among the old Soviet standbyslogs, vegetable oils, cotton, diamonds,goods of the raw or semiprocessedalone now represents nearly one-fourth ofexports to the West,nd it accounted for almost half ofin exports to tho West

* The published figures do not take into account the trade of US subsidiaries and licensees in Europe and Japan. No reasonable estimate has yet been aade of the annual value of this trade.

j 1 PPX JSg

Machinery and equipment have madearge part of Soviet imports from the West,accounting for roughly one-third to ona-half of the total. The substantial imports of wheatharp decline in imports ofut when wheat imports declinedachinery again assumed great importance. lso hadeading Soviet import from tho West, and they also declined during the period of large wheat imports, but they have not regained their former Importance. The wheat imports in this period, which had risen from nothing2 to almost one-fourth of total Soviet imports from the Westeclined7 to slightly moreercent of theseecline of more0 million.

ew element in Soviet imports from the West has appeared in the form ofconsumer goods, mostly clothing and esult, the pattern of imports from the West now strongly resembles that of Soviet imports from Eastern Europe. The increasedto consumer welfare in the USSR, refloated in the expanded imports of consumer goods in the last year or two. Is also shown in the increased imports from the West of consumer-oriented plants and machinery such as textile- and shoe-manufacturing equipment. This pattern may continue because the USSR is continuing to place orders in the Wost for substantial quantities of clothing and footwear.

Preliminary data8 indicate that Soviet trade with the Industrial Westercent, making the value of this trade well overillion. These data also indicate that imports increased somewhat more than exports. Imports of machinery and equipment probably rose by0 million and amounted to0 million. Exports may have increased by as much0 million, but the products involved are not known. Exports of oil, the USSR's chief foreign exchango earners, increased by lessalf-million tons to6 million tons. Thevalue0 million8 isigher than , such exports grew at an averageillion annually.

* Imports of machinery averaged0 million, falling0 millionut? they hadew high0 million. ** Imports of metals fell from0 million2 to less0 million they were valued0 million

Lass Developed Countries Policy

62. Since the beginning of the so-called Soviet economic offensive in the less developed countrieshe USSR hasn economic credits and grants to theseand Soviet trade with the less developed countries has increased sevenfold. This trade has been stimulated both indirectly by theof Soviet aid and directly by Soviet offers to buy and actual purchases of the major exports of many of these countries.

63. owever, the general level of Soviet foreign trade and aid activity with the less developed countries has changed little. drawings of economic aid have declined, in large part because of lagging progress on aof major investment projects. Partlyesult of the Soviet goal of assuring moreuse of this aid, Soviet aid authorities have beenreater selectivity in the types and placement of projectsore sophisticated concern with the absorptive capacity and repayment problems of the less developed countries. Soviet trade policy also has reflected an enhancedto the particular problems of individual countries and to the long-run prospects for Soviet relations with the less developed areas.

64. Zt had been Khrushchev's style to extend large lines of credit while deriving as muchbenefit as possible from the extension. The present regime, however, has become morein its commitments for economic aid projects, undoubtedly reflecting its experience with projects in backward economies which could not absorbaid deliveries on schedule or where unsuitable projects were undertaken. Soviet specialists now make detailed feasibility surveys before ais made. Moreover, the USSR now extends relatively few comprehensive lineB of creditmultiple undesignated development projects,instead to allocate aid for specific esult, Soviet credits now tend to be smaller on the average.

65. The USSR also hasumber of steps to raise the level of commercial trade with the less developed countries. Consonant with the Soviet propaganda line that only trade can be the basis for permanent and growing economic ties, the USSR78 concluded several special short-term commodity agreements covering purchases of tropical products such as Colombian coffee and Ecuadoran cocoa, coffee, and bananas. The USSR also has made several agreements to purchase some of the manufactures produced by industrialbuilt with Soviet aidfor example, Indian steel rails. The shiftreater role for commercial relations between the USSR and the less developed countries is furtherby the growing number of Soviet credits5 which have been extended on something like commercial terms, including higher interest rates and shorter repayment periods.

Trade

66. Soviet trade with the less developedover theas increased at an annual average ofercentabout the same rate as total Soviet trade. Thus, afterears7 billion in economic aid deliveries, the share of the less developed countries in Soviet foreign trade remains at roughlyercent (see.

Table 14

Soviet Trade with the Less Developed Countries

Year

US $

Percent"ofTrade

Value of identified trade with less developed Onspscified trade, virtually all of whioh eoneieta of Soviet exporte to the leaa developed oountriee, ia believed to represent largely military-related iteme. Inclusion of thie^ reaidual in Soviet trade with the lees developed countries uould increase their share in the total.

67. The major recipients of Soviet economic aid, the United Arab Republic and India, are also the USSR's leading trade partners in the less developed areas (see. Together they account for almost half of Soviet trade with this area. Malaysia is also among the more important trading partners of the USSR, but the volume of this trade derives from the more0 million that the USSR usually spends annually in hardfor natural rubber.

Table 15

Soviet Trade with Selected Less Developed Millionl/

Malaysia

Afghanistan

Argentina

Iran

b/ Imports E/

of rounding, oomponento may not add to totale ohow Soviet exporte to and importe from the indicated trading p

-

Soviet trade with the less developedhas remained at about the same level This failure to grow is attributable at least in part to the level of economic aidwhich have been0 million annually The decline7 in imports of wheat from Argentina and of rubber from Malaysia also helps to explain the failure of this Soviet trade to grow.

The commodity composition of Soviet-trade with the less developed countries has not undergone any fundamental changes in the last few years (see. The dominant element of developmental aid is reflected in exports of machinery andwhich account for roughly one-half of all Soviet exports to the area, and more than one-half of that category is composed of completeoviet petroleum exports have become less important as exports to India and Brazil have Exports of food, normally an unimportant element in Soviet exports, rose sharplyargelyesult of large wheat sales to the United Arab Republic.

Textile fibersespecially cottonnatural rubber, and food make pp the bulk of Soviet imports from the less developed countries. Imports of cotton, however, have been decliningarticularly from the United Arab Republic. Natural rubber imports fells indicated above, and the decline in food imports7 reflected the completion of Argentine wheat deliveries

Preliminary data8 indicate that Soviet trade with the less developed countries failed to increase and, in fact, may have declined. How much of this decline resulted from continued stagnation in economic aidunclear; drawings8 were about the same ass indicated in

Soviet officials, although clearly not satisfied with this lack of growth, would prefer to see trade with the less developed areas developanner based more on mutual economic interest. In this connection, the recent Soviet commodity exchange agreements are designed to help the less

-

SECRET

Major Commodities in Soviet Trade with the Less Developed Countriesin Million US S

Per-

cent Value cent Value cent

Exports

Total and

equipment 1 8 which:

Complete

5 7 5

Petroleum and petroleum

nd wood

54 49

3 65 3

Other and 7 1 3

Table 17

Extensions and Drawings of Soviet Economic Aid tfle Less Developed Countries

Million US s

5

291

Prospects

73. Conservative is, perhaps, the best adjective to describo the style in which the USSR has conducted foreign economic policy since the current leadership assumed power. The conservatism has been reflected in Soviet relations with both tho Communist and non-Communist worlds. The USSR has reaffirmed theof Eastern European economic dependence on the USSR to buttress its political hegomony. In the Industrial West it has continued Khrushchev's policy of acquiring Western equipment and technology, but has taken steps to insure that it can pay its way rather than run down its precious gold reserve. Jn the loss doveloped countries, it has dispensed aid with considerably more care and has sought toreater role for commercial relations, whichwould benefit both sides andasis for permanent economic ties.

74. For the foreseeable future the Eastern European countries will not be able to diminish significantly their economic dependence on the USSR for raw materials, becauseontinued dependence on the USSRarket for their manufactures. Thc manufactures of Eastern European countries, like those of the USSR,

generally are not competitive in the West. In the future, moreover, the outlook is dim forcurrent export levels of agriculturaland raw materials to the West on which Eastern Europe now depends to earn foroign exchange because of higher tariff barriers and quotain the Common Market countries.

Given political and economicontinued expansion of Soviet trade with Eastern Europe is likely. rief period of slow growth, trade increased by aboutercent8 and is scheduled to grow at about the same rate9evel ofillion. Because the planned growth of trade with Eastern Europe is significantly greater than theercent growth of total Soviet trade. Eastern Europe's share in Soviet trade will be the highest inearsaboutercent.

Soviet policy toward CEMA and thatfuture role in Soviet economic relations with Eastern Europe are unclear. Soviet officials have called for economic integration without really defining the terra. Bilateral relations have served Moscow's needs in the past, and the USSR may prefer bilateralism as the principal moans of conducting economic relations with CEMA members in the future. There has been an increasing clamor among most CEMA members for some form of economic integration within the framework of CEMA to help modernize their The USSR, however, clearly will not accept any formula which effectively diminishes itsand political control over Eastern Europe or significantly increases the costs of maintaining such control.

Trade with China has about reached its nadir, and, barring unforeseen developments, any upward movement in this trade is unlikely in tho near future. Trade with North Korea has increased recentlywith the cooling off of North Korean-Chinese relations. For the near term, at least, this trade

is likely to increase, the USSR having promised to provide some assistance in carrying out North Korea's long-term plan which ends Soviet trade with North Vietnam and Mongolia will also increase, the volume of trade reflecting the substantialassistance being provided by the USSR. The volume

1 QLfoJtiiTfj

of trade with Cubaunction of Sovietand Cuban sugar crops. Over the long term, this trade presumably will grow, but9 it may decline. Trade with Yugoslavia has risen rapidly in recent years, but some leveling off is probable for the next year or two.

Reaffirmation of the primacy of Soviet trade with Eastern Europe and the moreapproach to trade^with the Industrial West seem toomewhat slower growth in trade with the latter. The USSR probably will continue to conserve and rebuild its gold reserves and, consequently, to limit its imports from the West largely to what can be paid for by export earnings. Unless formulas not yet apparent can be found to increase exports more rapidly,olicy will exercise limitations on the growth of trade. The regime is unlikely to make extensive use ofcredits and may even make special efforts to reduce existing indebtedness. In any event, the evident financial conservatism of the current leadership seems to indicate that Western credit facilities will be used sparingly.

Soviet efforts to increase imports oftechnical data are another indicatorlower growth of Soviet imports from the West, in this connection, the USSR hasumber

of scientific and technical exchange agreements with Western countries and firms, the mostof which have been the agreements with France and the United Kingdom. Substantial amounts of US technical data have been imported. The acquisition of Western technical data without the purchase of equipment is designed to save the USSR foreignthat otherwise would be spent for imports of equipment.

USSR has shown greater tendencyimports from countries willing toquantities of Soviet goods. Thus,such countries as France, Italy, Japan,United Kingdom probably will increaseother countries.

future of Soviet trade with thewill depend to some extent on what thechooses to do about the currenttrade with the USSR. If the United States grants

most-favored-nation, treatment to the USSR, there mayise in Soviet exports to the United States, but Soviet goods would not necessarily bearket significantly greater than at present." The goods on which the USSR depends to earn foreign exchange in the West are goods for which no significant demand exists in the United States or for which buyer-soller relations are well establishedoil, coal, cotton, lumber, and vegotable oil, for example.

net effectelaxation of USrestrictions and export controlsalso problematical. Soviet purchasesbe confined largely to products oftechnology when such products cannot beUS subsidiaries and licensees. Thoseprobablyualitative effect oneconomy greater than the volume would US restrictions alsoajorissue for the USSRa symbol in thefield of US unwillingness to grant itand removal ofolume of trade greater thancould be expected. If the USSR continueson bilateral balancing of trade,in US-Soviet trade will depend on Soviet

ability to produce goods that US firms and consumers will buy.

stagnation in trade with thecountries in the last three yearsindicate that such trade has reached at least

a tomporary plateauecade of growth. For the near term, however, there may be some growth in trade, inosult of rising drawings and repayments of foreign aid. Drawings, which have not increased in recent years, are now expected to growesult of implementationumber of projects in such countries as Iran, Turkey,India, and the United Arab Republic. repayments on past credits should continue to rise. In addition. Implementation of several short-term commodity agreements may result in increased Soviet trade with some of the less developed areas.

* Most current Soviet exports to the United States are penalised slightly or not at all because of denial of most'favored-nation treatment.

84. Growth in trade for the longer term is far more uncertain. Growing ties with Latin America may provide some impetus to growth, for example, but those countries are heavily oriented toward Western countries. Opportunities for trade with other countries may appear as well, but to foster growth in trade may require substantial Soviet economic assistance, and this is not being dispensed on the scale ofs ands.

I"?':

'1 I"

'1 =l!

ll S

i SIS! K

ill

j If!

I

Soviet Gold Production, Sales, and Reserves

un US 5

0

u

t1

041 M

Ywar Production Conttmnption a/

$.

/

45

/ 10

Other Additions Reserves and Withdrawals Balance c/

/

y

.

-io y

N.A.

Commodity Composition of Soviet Export* a/

Value In Million US S

Total exports

Machinery and equipment

Complete plant!

Fuels, lubricants, and related materials

Coal and coke Petroleum andproducts

Ores and concentrates

iron ore

Table 23

CoaaocUty Composition of Soviet Exports to Eastern European Communist Countries o/

in Million US S

Table 23

Commodity Compoaition of Soviot Imports from Eastern European Communist Countries a/

Value in Million US S

Commodity Composition of Soviet exports to the Industrial West a/

value in Million US S

Value Percent Value Percent value Percent

CoeiKodity Composition of Soviet Imports from the Industrial West a/

Million US S

imports

741

and equipment

6

equipment Transportation

196

194

130

7.3

metals and

metals

ferrous metals Pipes

71

4.4

50

2.9

37

2.1

metals

and wood products

raw materials and semimanufactures

fiber taple fiber, artificial and synthetic 30

1.9

24

1-4

21>

1.6

goods

wheat and wheat flour

merchandise

Because of rounding.

may

odd

the totale Blown.

Table 26

Commodity Composition of Soviet Exports to th* Less Developed Countries a/

1mb

in Million us

27

Conwodity Composition of Soviet Imports from the Less Developed Countries a/

in Million US S

Value Percent Value Percent Value Percent

Total imports

fiber

rubber

metals

merchandise

B

rounding, component* may not add to the totals shown.

- 56 -

olicrifl

""Secret

Original document.

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