Confidential
DIRECTORATE OF INTELLIGENCE
Intelligence Memorandum
Economic Relations Between Yugoslavia and the Warsaw Pact Countries
OA HISTORICAL REVIEW PROGRAM RELEASE IN8
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Copy No-
CENTRAL INTELLIGENCE AGENCY Directorate of Intelligence9
INTELLIGENCE MEMORANDUM
economic Relations Between Yugoslavia and the Warsaw Pact Countries
Summary
Tho economic relations of Yugoslavia with tha USSR and the other Warsaw Pact countries have been little affected by the worsening of politicalafter the invasion of Czechoslovakia. the trade agreements negotiatedhe last was signed by the USSR at the end ofubstantial increase in Yugoslavia's trodo with the Warnaw Pact Yugoslavia's trade with theso countries, although less than one-third of its total trade, offers an important market and source of supply for its newerand more inefficientndustries. But the leadership is now less interested in the growth of these industries and more interested in restructuring and modernizing the economy, an effort that depends heavily on expanding trade with the Wes Moreover, the leadership remains uneasy about the intentions of the USSRroe-wheeling Yugoslavia. esult, trade with the Warsaw Pact countries probably will fall below the targets of tho trade agreementss it has in many past years, and these countries' share intrade will increase little, if any.
Hole: This memorandum was produced solely by CIA. It was prepared by the Office of Economic Research and was coordinated with the Office of Current
I'
Yugoslaviaubstantial stake in trade with the Warsaw Six* (the Warsaw Pact countries less Rumania). These countries, which account for about one-fourth of Yugoslavia's total imports and one-third of its exports, furnish outlets forgoods that cannot compete in other markets, notably machinery and equipment, iron and steel products, and consumer manufactures. In return, the Warsaw Six are Yugoslavia's most important source for imports of fuels and other materialsuch as raw cotton and semi finished iron and steel products. Moreover, this trade is important to Yugoslavia's efforts toalance in its relations among the Communist, Western, and less developed countries.
The Yugoslavs are far less dependent on the Warsaw Six now than they were in, when trade was completely disrupted. rade cutoff would nevertheless resultecession inise in unemployment,emporary setback to the relaxation of federal economic control that has token place Serious dislocations would be felt by some industries. for example, thc Warsaw Six tookercent of Yugoslav production of railway cars,ercent of cables,ercent of bauxite, andercent of tho output of cargo ahips. With added economic assistance from the Wost, however, Yugoslavia could make a fairly rapid adjustment to the loss of trade
The chances that theould break off trade were remote even at the moment of greatest political friction following the invasion of Czechoslovakia. The effect would only hove been to push Yugoslavia closer to the West. The USSR and its partners gave assurances to Yugoslavia soon after the invasion that economic relations would be maintained in spite of political disputes. Trade8 agreements and deliveries under Soviet industrial credits were
The Vssii, Bulgaria, Czechoalooakia, Hungary, East Germany, and Poland. For the purposes of this Rumania ia excluded from the data andof Yugos laoia 'e economic relatione with thePact countries because Yugoslavia'a present political relatione with Punania differ sharply from ite relatione With the other members.
continued, and by the end8 agreementsfor increases in trade9 had beenbetween Yugoslavia and the Warsaw Six. Host of the new pacts envision increases ofoer cent above8 trade levels. Theagreement, signed on8engthy delay by the USSR in opening talks, callswo-way exchango0 millionlmostercent above the probable level of trade
Trade agreements, particularly in recent years, have been poor indicators of actual trade between Yugoslavia and the Warsaw Six. Some increase in trade undoubtedly will take place9 in view of the resurgence of industrial growth in Yugoslavia since the middle Yugoslavia, however, still isurplus in its clearing accounts with this area, reflecting the greater freedom given to importers7 to exorcise their preferenco for Western goods. Thus the Yugoslav government probably will continue efforts begun last year to restrain exports to the Warsaw Six. -Moreover,has redoubled attempts to expand tradein the West. Italy, West Germany, and the United States have been approached regarding debt rescheduling and new loans; the United States has already responded favorably. Yugoslavia also is continuing to press for more favorable treatment for its exports to the European Economic Community (EEC). Even partial success in these efforts could lead to increased trade with the West at the expense of trade with the Warsaw Six.
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The Uneven Course of Total Trade
economic relations withand Eastern Europe have run an unevenWorld War II. rade withhas not been built into theas it has in the other Eastern ugoslavia's tradethe Warsaw Six totaledmillion,of its total trade. As shown in thecutoff of economic relations thatouster from the Cominform inreduced traderickle did not trade at all withnd had to switch to the Westimports. The death of Stalin3
ledhaw in political relations and when the Soviet government finally made its peace with Yugoslaviarade expanded rapidly. 4 million in commodity credits were extended to Yugoslavia by the USSR, Czechoslovakia, East Germany, and Poland.
the Soviet government branded"revisionist"conomicagain. The USSR suspended drawingsand East Germany, Poland, andfollowed suit. Up to then, Yugoslaviaadvantage of only9 million ofline extended two years earlier. trade turnover with the Warsaw Sixgrow slowly0 and then dropped backaverage5 million. Thisonlyercent above that ofercent of total trade. ew period
of rapprochement begannd new credits were granted Total trade turnover with the Warsaw Six nearly tripled,9 million9 percent of Yugoslavia's total trade.
a result of successive steps tosystem of foreign tradeizable surplus in itswith the Warsaw Pact countries. Bysurplus, including both goods and services,
had reached0 million. Exporters have found it easier to sell to Communist countries,
whero quality standards arc lower and where prices paid generally exceed those on the world market. Importers, on the other hand, have becomeresistant to purchasing Eastern European goods because they are generally of lower quality and carry higher prices than comparable Western goods. Thus',elaxation of trade controls gave importers more freedom of choice, theylood of orders for Westernand fell fat short of filling the import quotas agreed upon with the USSR and Eastern Europe.
In order to reduce clearing surpluses and ease the corresponding strain on hard currency reserves, Yugoslavia has had to restrictfor importing from the West and keep closer track of exports to tlie Communist world. With longer run solutions "in mind, the Yugoslavs have also tried to modify trading arrangements with the Warsaw Pact countries to provide for settlement of outstanding balances in hard currency. Agreements to this effect were reached withand Hungary in the summernd discussions on this theme have been held with other Warsaw Pact countries.
Reflecting these efforts to reduce clearing surpluses withWarsaw Six, exports to these countries have fallen from 41 percent of total Yugoslav exports5 toercent7 and to onlyercent during the first nine months Imports from the Warsaw Sixf all Yugoslav imports; th* share has dropped fromercent6 to aboutercent currently.
The USSR is Yugoslavia'3 leading trade partner among the Communist countries, taking aboutercent of Yugoslavia's exports to this areand supplying one-third rf Yugoslav imports from the area. Next in importance are Czochoslovakia and East Germany, followed closely by Poland. The average shares of each of the Warsaw Six in Yugoslav trade with this areare shown below:
Percent of Total
East
Yugoslavia does not supply afraction of the trade of any of thecountries, the USSR has accounted for about
ercent of Yugoslavia's total trade turnover Czechoslovakia, Bast Germany, and Poland each have accounted forercent, and Hungary and Bulgaria forercent.
Composition of Trade
most important exports toSix have been industrial manufactures;important imports from them have been rawmaterials. rovides datarelative importance of Yugoslavia's tradeWarsaw Sixor major categories These countries account for at of Yugoslavia's total exports oftransport equipment (particularly ships,rolling stock, electrical cable,hemicals, and consumerclothing, footwear, andWarsaw Six also takehird ofexports of iron and steel andand metals (notably bauxite). Becausethese products, except nonferrous metalsconsumer goods, cannot compete effectively
in Western markets, sales to the Warsaw Six haveelcome boost to Yugoslav output.
Warsaw Six provide over two-fifthstotal fuel imports, notablyover one-third of its imports of mineralsand consumer goods. Inignificant share ofof raw materials and semiflniahed products
1un
s-jj = El "3
j 1 is-'
ill,
Mil
for the iron and steel, petroleum, chemical, rubber, and textile industries from these countries. It also imports from them some important types of machinery and equipment, especially metalworking equipment, agricultural machinery, and military hardware.
in services with the USSR andis small relative to such trade withof the world. Earnings from services,are an important part of Yugoslavia'swith several of the Warsaw Pact countriesexample, such earnings were aboutercent
of exports to Czechoslovakia Yugoslavia haslearing surplus in invisibles with Communist countries, amounting6 toillion, orercent of total net earnings from invisibles. Host of this surplus reflects transit charges on goods shipped through Yugoslavia. Earnings from Eastern European tourists are of minor importance. Visitors from the Warsaw Six accounted for only aboutercent of totalreceipts from tourismest German visitors alone probably accounted for twice that proportion.
Extent of Yugoslav Economic Dependence on the Warsaw Six
One way to measure the extent of Yugoslavia's economic involvement with the Warsaw Six is to describe the impactoss of this trade would have on the Yugoslav economy. omplete cutoff of trade,elective reduction of trade in the more important items exchanged between Yugoslavia and the Warsaw six, would resultemporary recession in industryrop in employment. The industries most affected would be machine building, metallurgy, shipbuilding, chemicals, and textiles. Output in these industries, which accounted for slightly over half of Yugoslavia's industrial production and employmentrobably would actually decline in the first yearrade cutoff. The probable impact, industry by industry, is indicated by data in Tabichich shows exports and imports in physical unitshare of domestic production and apparent consumption, respectively,
A cutoff of exports could be highlyfor several industries. Railroad car producers, for example, exported aboutercent of theirin7 to the Warsaw Six; shipbuilders, nd cable manufacturers,ercent. The loss
rjgoslavia: Indications of the Impact of Economic Pressure OO the Production and Consumption of Selected Products
Thousand Metric Tons
to Warsaw Six
Imports from Warsaw Six
n
Consumption
Volume
of Production
Volume
of
Apparent Consurnpt ior.
exports
Bauxite Refined lead Rolled copper c/ Railway stock Tankers and cargo ships (number) d/ Lead cables' Artificial
Principal imports
42
9
9
7
7 26
260
9
1
0 4
Negl Heal
0
egl. Negl.
0
0
coal Crude oil Pig iron Rolled steelnwrought alurainust
5
4
4 Negl
0 0
o
egl.
9
4
Yugoslavia; Indicac on the Production
ons of the Impact "id Consumption7 (Continued)
of Economic Pressure Selected Products
Exports to Warsaw Six
Metric Tons
Imports from Warsaw Six
Production ConsumDtion
Percent of
Percent of Apparent
ie Production une Consumption
imoorts
Continued}
g_/
cotton
and
rubber
otherwise indicated.
Apparent consumption is production plus imports less exports, no account being ken of inventory levels. Actual reported consumotion figures were used for crude I.
Including products of copper alloys. Seagoing ships tong.
Excluding blooms, slabs, and billets. Including tractors.
ofarge part of the export market for machinery and equipment and the consequent cutback in output would, in turn, reduce domestic demand for steel and nonferrous metals. In addition, the steel industry would haveoreign market forercent of its rolled steel production, and the nonferrous metals industry would have lost such markets forercent of its bauxiteandercent of both its lead and its rolled copper output. An export cutoff also would hurt the production of chemical products includingplastics, and many chemical compounds and of consumer goods, especially clothing, footwear, and furniture.
loss of imports also would have As shown by the dataomemost important imports from the Warsaw sixshare of apparent Yugoslav consumptionluminum ingotsrubber (about, and mctalworking and agriculturalandercent, respectively). Thus,purchases could be made, iron andwould be hurt by the loss of cokingnonferrous metallurgy by the lossof aluminum ingots, and the rubberthe cutoff of much of its supply of Shortages of oil for households andpurposes probably also would occur. Ina termination of imports of equipmentindustrial credits would disrupt progress
in building thermoelectric powerplants at Lukavac, Kostolac, Kosovo, Tuzla, Obrenovac, and Sisak and would delay work on the Djordap Hydroelectric Power Station and the Danube Locksoth of which are part of the joint Rumanian-Yugoslav Iron Gates project. Soviet credits also are aiding theof Skoplje and the modernization and expansion of steel plants at Zenica, Smederovo, Ilijas, and Niksic. Food supplies would not be noticeably affected by an import cutoff, nor would supplies of coal for heating, for transport, and for electric power production. In addition,could get along without most, if not all, of the consumer manufactures now imported from the Warsaw Six.
impactrade cutoff onbe spread fairly evenly among the regions of
the country. The share of the industries that would be most affected in the total industrial product of the republics ranges fromercent for Macedonia toercent for Kosovo-Metohija tho backward autonomous region of Serbia. The shares in the other republics hover around the average share ofercent for the countryhole. The bruntrade cutoff would fall on the steel industries of the lesser developedparticularly of Bosnia and Herzegovina and Montenegro; on the load industry of Kosovo-Mctohija; on the machine building and textile industries of the more developed republicsSlovenia, Croatia, and Serbia; on the shipbuilding industry of Croatia; and on the chemical industries of the more advanced republics and Macedonia.
trade cutoff also would stifle othereconomic cooperation between Yugoslavia andSix. Joint production deals betweenhave been concluded in nearly every branch
of industry, and an Bast German firm Lacke and Farben of Berlinas the second, after Fiat of Italy, to invest directlyugoslav enterprise following the passage of Yugoslavia's JointLaw
the short run, enterprises andcould do little to reverse thea sudden cessation of trade with the Warsawsoften the impact, the government would haverather stringent measures. Importneed to be strengthened torain
on hard currency reserveswitch to the West for imports. Price controls would have to beto prevent inflation and protect theexport markets. Subsidies probably would be needed by some exporters, particularly those that had been selling both to hard currency markets and to the Warsaw Six and had incurred increased per unit costs because of the loss of the latter market. Steps also would need to be taken to cushion the effocts of added unemployment on domestic demand, perhaps by raising unemployment compensation rates. The government might even have to resort tountil emorgency purchases could be made of fuels, cotton, rubber, and other necessary raw materials. These products would have to be obtained for hard
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cash on the open market because it would beto arrange emergency imports under clearing arrangements.
government's leverage inwith the effectsrade cutoffconstrained by its present hard curroncy Unfortunately, Yugoslavia already hasdeficit in hard currency trade;6 millionaard curroncy exports. The offset of netfrom invisibles, estimated at roughlystill left0 millioncurrent account. he Yugoslavs reportedlytrouble securing enough financial creditthe imbalance and may have to draw downreserves, which stood at Moreover, import controls would
have little effect in the short run because many of the mors significant imports, such as machinery, are arranged for well in advance. For theserade cutoff would inevitably prompt requests for emergency financial assistance from the West.
time the Yugoslavs couldand wouldsteps to cure the dislocations resulting from
a loss of trade. The structure of imports with hard currency countries could be changed to substitute necessary raw materials for less essential imports. Yugoslavia would also attempt to increase trade with its remaining bilateral partners, although little success could be expected in replacing the large Warsaw Pact market for Yugoslav steel and machinery oxports. The government could take stops to encourage domestic investment and initiate now projects, such as roads and other public works, to try to absorb part of the added unemployment. Western countries would probably be asked forin the form of rescheduling Yugoslov debt repayments and providing new long-term credits to aid in the modernization and restructuring of Yugoslav industry. The government also might relax some of tho restrictions in its new ForeignLaw, which thus far has not attracted much Western capital.
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Also, with time, some domestic enterprises could try to expand and diversify output so as to fill the gaps leftutoff of imports from the Warsaw Six. This approach might be reasonably successful for cement, some consumor manufactures, andew kinds of machinery. In most cases, however, this method of adjustment would be severely restricted by the nonsubstitutability of products and the small domestic market for many products imported from the Warsaw Six.
The need to revert to controls in the short run wouldetback to the government'seconomic programs. Added import controls would counteract efforts to expose enterprises to foreign competition; new price controls would weaken the attempt toore realistic structure of relative prices through market forces; and greater government involvement in investment programs and
in economic decision-making in general would reverse the flow of power from the government to enterprises and banks that has taken place With good luck and good management, however, the added price and import controls could be relaxedonce the effectsutoff had worked their way through the economy and new patterns of industrial production and demand for imports had been established. Favorable trends in exports and Western financial assistance would increase the chances of an early return to tho partial degree of freedom that currently exists.
the longutoff of trade with
the Warsaw Six might evenlessing in disguise, because much of the consequent drop in output would be in the least efficient Yugoslav industries steel and machine building, for example. Thewould have to resist demands, however, for hastily conceived investment programs that would utilize excess capacities in such industries,proposals to start up production of goods previously obtained from the Warsaw Six. Emergency projects of this sort, carried out under theof import controls, wouldonger run retreat from the objectives of the economic reform and would drain off funds that could be used to modernize industries with greater export potential such as nonferrous metallurgy, textiles, and wood products.
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Outlook for Economic Relations
22. Yugoslavia's trade with the Warsaw Six has not been noticeably affected by the strain inrelations since the invasion of Czechoslovakia. Soon after the invasion the USSR and its allies reportedly pledged that normal economic relations would be maintained. Thus far, trade under current agreements and deliveries under Soviet credits have continued. There had been warning signs in the fallhe USSRonference to discuss Yugoslav ship exports1 and delayed the opening of talks on9 trade agreement. ew date had not been set for the shipbuilding talks as of the beginning However, new agreements recently concluded9 callubstantial increase in Yugoslav-Warsaw six trade,robable level of0 million8 to1 billion The key agreement, finally signed with the USSR onwo-way goods exchange0lmostercent above the8 trade level. This agreement suggests that the USSR, at least for the time being, will not apply economic pressure in an attempt to subdue Yugoslav critics of Soviet policy.tep, as the USSR is aware, would only push Yugoslavia into closer invoivoment with the west.
23. The prospects for Yugoslav-Warsaw Six trade arc not so bright as thc new trade agreements would suggest. An increase in trade undoubtedly will take placef only because of the strong upswing now under way in the Yugoslav economy. The Yugoslavs, however, stillarge surplus in their clearing accounts with the Warsaw Six, and tho government probably will continue efforts to hold exports to these countries to the amounts that importers can be induced to accept in return. this trade still is chiefly importantarket and source of supply for the more inefficient Yugoslav industries. Trade with the Warsaw Sixwith the current Yugoslav policy of playing down growth in these industries and, instead, of restructuring and modernizing production with the help of expanded trade with the West. As long as this policy is effectivo, and Yugoslav importers continue to be given some scope to oxercise their preference for Western goods, trade with the Warsaw Six probably will remain around its presentshare of Yugoslavia's total trade.
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24. The share of the Warsaw Six could even drop further. Still distrustful of Soviet intentions, the Yugoslavs probably will continue to discreetly step up contacts with the Westedge against any future rupture in relations with the Warsaw Six. Already, Yugoslavia's aluminum producers haveesire to reduce dependence on the USSR for aluminum ingots by increasing such imports from the United States. Yugoslavia also is engagedew round of discussions with the EEC to try to lower barriers to Yugoslav exportsparticularly of agricultural products. Kiro Gligorov, the Vice President of the Yugoslav Federal Executive Council, visited the United States at the end of September to explore prospects for rescheduling debt repayments, increasing Yugoslav exports, and obtaining further credits from the Export-Import Bank and the World Bank. Thus far, the United States has agreed to rescheduleebts,otal relief ofillion. Yugoslavia also has approached the United Kingdom, Italy, and West Germany for financial assistance. illion credit has been obtained from the United Kingdom,est German creditillion is under discussion. If such efforts continue to bear fruit, trade with the West will increase considerably in the next few years, possibly at the expense of trade with the Warsaw Six.
Original document.
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