MAJOR INDUSTRIAL COUNTRIES: POSITIONS ON RESTRICTING CREDIT TO THE SOVIET UNION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP02-06156R000100060001-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 12
• Document Creation Date: December 22, 2016
• Document Release Date: May 17, 2012
• Sequence Number: 1
• Publication Date: April 22, 1982
• Content Type: MEMO

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22 April 1982
MEMORANDUM FOR THE RECORD
SUBJECT: "Major Industrial Countries: Positions on Restricting
The attached paper was passed to
(ANIO/USSR-EE) on 20
April. The paper is part of a longer study requested by Under Secretary of
State James Buckley in support of his discussions with the West Europeans on
the subject.
Deputy Chief, Western Europe Division
Office of European Analysis
Distribution:
1 - DDI
1 - D/EURA
1 - OEA/Japan
4 - OCO/IDCD/CB
Orig - File
EUR M 82-10044
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Major Industrial Countries: Positions on Restrictin
Credit to the Soviet Union
All the major industrial
Italy, c and Canada Ja viewWcredit erasmanyan
s
France, United Kingdom,
integral part of East-West atradencreditusystemsciaNoneaofnthem
of some sort as part of their
are enthusiastic about credit aetorrestrictionsh Any decision
ministries most strongly oppose decision i to restrict credit
have to be mae at the
would
a gument pused to
level. Specific s
country and are examined below.
t
o
justify them vary from country
25X1
Japan
Current Situation
In recent years Tokyo has begun to move away from the idea
that expanded relations with the Soviet Union would give Moscowia
bilateral relations. s
greater stake in stable, peaceful,
change in policy is partly an effort to keep in step with the
increasingly restrictive US attitude toward East-West trade and to ov look
ofs t ade eedowimth therUSSR
partly a reaction to events ramificationsTokyo
the political and military
has declined as the buildup forces to the strength
lndian Ocean have E led
s
and the diversion of some U
them to recognize added military and political wrespPonsibilities
in northeast Asia. The shift stron Tokyo's
economic sanctions after the
the imposition of relatively 25X1
Changing perceptions of the profitability of Siberian
s
development projects also a encouraged
and early e1970s fthigh aJapanese
toward trade. the late expanding demand for raw materials
growth th rates and d steadily
stilled any doubts about the availability of markets for Siberian
resources five or ten years in the future. Since the oil crisis
of 1973/74, however, demand for commodities imported from the
USSR has become much more erratic, while Japan's s toratechnologyn
from raw-material intensive heavy industries
for new sources of
intensive industries is diminishing the ndustr need
As the prospects for. Siberian favors p trade w h so
Sov~et
the size of the business lobby that trade with, the
Union. Today, the primary constituencies pushing s, whi
f USSR are the steel and marexpdttsttoethe SovietaUnion, and
over 70 percent of all Japanese
the trading companies that act as their intermediaries in
dealings with Moscow. Steel and machinery exporters consider the
25X1
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availability of official export credits essential to their
ability to compete successfully against West European companies
for Soviet orders; they actively pressure the government to adopt
a favorable export credit policy, and their lobbying force o 25X1
to limit its post-Afghanistan sanctions to "new" credits.
Tokyo's support for exports to the USSR takes two forms: (a)
medium- and long-term trade financing extended by the Japan
Export-Import Bank, and (b) a fairly standard and generally self-
financing export insurance system provided through the Ministry
of International Trade and Industry (MITI). The Export-Import
Bank presently provides up to 70 percent of the financed portion
of a transaction, but a shortage of funds this year may force a
reduction to 60 percent. A down payment of 15 percent or more of
the total price is required. The subsidy element in loans
extended to the Soviet Union at the present OECD guideline rate
of 9 percent depends on the size of the risk premium associated
with the transaction. Japan's long-term prime rate is now only
8.4 percent, so the premium would have to exceed 0.6 percent
before any subsidy occurred. The premium on commercial loans
e
chan
i
f
g
gn ex
ore
extended under present conditions of Soviet
shortages and substantial political uncertainty would surely be
larger, but under more normal circumstances the risk premium
minht he small enough to eliminate the subsidy element entirely.
Prospects
Steel and machinery exporters are almost certain to
strenuously oppose proposals to reduce official credits and
guarantees on exports to the USSR. If, however, it becomes
apparent that West European governments will consent to similar
cutbacks, Tokyo will probably go along, for at least two
reasons. First, Export-Import Bank funds for financing plant
exports are becoming insufficient to meet demand. From this
perspective, the elimination of the Soviet Union as a recipient
would free funds for projects elsewhere. Second, because
Japanese commercial interest rates are far below those in Western
Europe or the United States, Japanese firms big and bold enough
to bear the risks of exporting plants and machinery on a strictly
commercial basis would be in a good position to expand their
business with the Soviets. 25X1
The gap between Japanese and West European interest rates is
a potential sticking point that could greatly complicate efforts
to secure Japanese and West European assent to quantitative
restrictions on export credits and guarantees. The gap may alarm
West Europeans and lead them to demand some type of restraint by
the Japanese. Any restraints would, in turn, provoke the
opposition of Japanese exporters and make it harder for Tokyo to
agree to a gradual phase-out of credits and guarantees.
Moreover, the export credit application process is the only lever
that Tokyo now has to influence the transactions of exporters
shipping items not included on the COCOM list. The Ministry of
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Finance could informally advise commercial banks to limit
financing for exports to the USSR, but this would run counter to
the current trend toward internationalization of the yen and
liberalization of capital markets. 25X1
One solution that might be acceptable to Japan is a
differentiation between yen and dollar-based credits. For
credits denominated in dollars Japan would apply the same
interest rate as that of other western nations. In the case of a
yen-denominated credit, the USSR would have to accept the risk of
yen appreciation (or high prices appreciated) in
exchange for low interest rates. 7 25X1
West Germany
Current Situation
Bonn's basic position is well known: East-West trade is no
different from other trade and is carried out primarily because
it is economically beneficial to both sides. Supplementing this
is the view that developing economic ties with the East will
contribute to reducing political tensions. A third rationale is
the long tradition of economic relationships with Eastern Europe
(Mannesmann, for example, has been a major supplier of pipe to
Moscow since 1896). Finally, in the background is the hope that
ns will ultimately lead to German reunification.
7 25X1
These views have not been substantially affected by the
rather sharp decline in the share of West German exports going to
the USSR and Eastern Europe: from a peak of 7.2 percent in 1975
to 4.3 percent last year (excluding trade with East Germany --
1.5 percent of total West German exports in 1981). Despite the,
declining share, trade with the East Bloc remains extremely
important for certain depressed industrial sectors, particularly
for the steel industry and for the large AEG firm, whose survival
could hinge on its contract to supply compressors for the Soviet
gas pipeline. 25X1
Bonn intervenes in the market to promote exports less than
most other Allies. Subsidized export credits, for example, are
relatively small and go primarily to LDCs. Indeed, West
Germany's major trade promotion device -- export credit (Hermes)
guarantees -- is at most an indirect subsidy. In recent years
Hermes guarantees have covered 8-10 percent of exports;
guarantees outstanding total around 60 hillion. of which about
1$9 billion is owed by the East Bloc.
Export credit guarantees are provided by the private Hermes
company operating as Bonn's agent; it thus is the government that
sets policy and bears the ultimate risk. It is up to the
individual West German exporter or bank to request Hermes
coverage, depending on the perception of risk; exports to Western
industrial countries are almost never insured. The fee structure
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is based only on the amount of the export credit, its maturity,
and whether the importer is a public or a, private entity -- not
on the country involved. Taking a five-year credit as an
example, the fee is slightly over two percent in the case of a
state purchaser, almost double that for a private entity. The
maximum maturity allowed is ten years for LDCs and eight and one-
half years for Communist countries. Repayments must be made in
equal semi-annual installments with no grace period. The system
appears to operate in a non-discriminatory fashion, although
guarantees for East Bloc exports always benefit from the ow~r
25X1
fee because the importer is, by definition, a state entity.
There is no disagreement over the fact that Bonn's credit
guarantees boost West German exports, but whether they constitute
an export subsidy is a much more difficult question. Bonn of
course believes there is no subsidy and points out that over the
years the fees collected have more than covered the claims that
had to be paid. The IMF and the Royal Institute of International
Affairs have characterized the Hermes system as being somewhat
less generous than the guarantee programs of other major Western
exporters such as France, Italy, the United Kingdom, and Japan.
25X1
Prospects
There is generally little sympathy in West Germany for the
use of economic weapons against the Soviet Bloc. The main
exception is some elements of the opposition Christian Democrats
who are inclined to take a harder line toward the USSR. The
other key groups -- including the governing parties and most of
the press, business, and labor -- remain firmly opposed. 25X1
West German negotiators would be most receptive to arguments
for tighter credit policies if they were couched in economic
terms; i.e., emphasizing the increased risk involved in loans to
the Bloc. That West German markets perceive such an increase in
risk seems clear both from the increased demand for Hermes
guarantees and from the stagnation in private bank lending.
Eastern Europe's share of West German' bank loans outstanding has
dropped substantially. Moreover, Bonn has stopped issuing Hermes
guarantees for Poland and Romania and has stated its willingness
to join in raising interest rates and reducing maturities East
Bloc credits; it will be reluctant to go any further. 25X1
i
Under the Hermes system tighter restrictions can be imposed
for higher risk countries. Although the fees do not change, Bonn
can set ceilings for the guarantees, require larger down
payments, and/or reduce the percentage of the loan that is
guaranteed. Bonn likely will point out that it has made large
guarantees only for Poland acid the USSR, and that Poland has
already been cut off. Further, West German officials will argue
that the USSR remains an excellent long-term credit risk,
primarily because of its expected gas exports. 25X1
25X1
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s
Although the existence of various US wiwithinshes erany
accommodating
provides a potential channel for
action by Bonn will be contingent on at least two other
conditions:
o Restrictions must not impede the gas pipeline; and
o Other major Western countries must fir ticreduce on
eliminate a irect p
terms P
hter
to go to
The second condition could be a major robstacle
as tfar as
restrictions. Other countries seem
Bonn on credit terms; moreover, Bonn is convinced that West
Germany has been the most scrupulous in terms of not subsidizing
exports and of adhering to minimum interest rate agreements -
and as result has been somewhat disadvantaged in its Eastern
trade. 25X1
set Union
that Soviet
Economic relations between France dds the
general
governed by long-term cooperation acan specific scientific,
guidelines for trade patterns from which stechnical, and economic agreements may be worked oand ut. Both
countries also meet periodically technical, "Petite
and
Commissions to discuss economic, commercial major industrial
The signing have be ret
scientific cooperation.
contracts and sebetweeniFrenchl anterms d Soviet lleaders. Franco-
Stooviperiodic et trade is also promoted by international trade fairs and by
firms set up in France with the participation of Soviet foreign
trade or.ganizationss. 25X1,
/_Z Al
France
Current Situation
Since President de Gaulle began seeking a "special
Ttrade
relationship" with the East Bloc in 1960s, East-West
rade
has played a key role in French relations a means
is viewed both as having intrinsic value and as providing
to attain broader political goals, such as demonstrating French
independence and establishing France as a go-between in East-West
communications. This view has not
Last year,
low level of Franco-Soviet trade. of the value of total French
of total French
only 1.8 percent -- $1.6 billion --
exports and 2.8 percent -- $2.9 billion --
imports. Energy accounted for more than 80 percent of the value
of French imports. Food and agricultural products comprised the
bulk of exports, followed by metals, machinery and transport bal equipment, and chemicals. eas isomer of thea$800smilli oni mworth
slightly for France next year _
of contracts signed in 1980 are reflected in the trade figures. r In addition, 1981 was an even better
were
of which o$SOOw m 11 on acts
$1,2 billion worth were signed i
._ _ -- vamal pipeline. 25X1
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France's export credit system offers a comprehensive range
of financing and insurance. The official export cask, exporte
Francaise du Commerce Exte F ench banks or French branches of
related credits extended by
credits its.
foreign banks and lends official export
seminsuraice
coverage for export credits is provifial
Compagnie Francaise
export and credit insurance agency rs reports
totaled reports
d'Assurance our le Commerce Exterieur (COFAC pa is
Soviet debt on official credits and guarantees stock billion at yearend 1981 and that cr d t of atmleastn18
was $4.3 billion. In addition,
months are subsidized by the French Government for theFf ll terms r
ance of the loan o at
annual subsidies on markeSovit trade of $i150-
provide fixed
estimated
on. . Other important forms of support include
protection otecti mionllio against losses due to foreign exchange fluctuations
lic
and inflationary pressures, as well as the cr blending dits. of nub
25X1
sional funds wi 25X1
25X1
Prospects
Paris considers its system of subsidized and guaranteed
credits so firmly embedded in the structure of French trade with
the Soviets that a major hardening of terms could paralyze French
ands will ermialmosnedt to
certainly
exports to the Soviets. indeed, Paris
its trade deficit with the
continue to look to government and commercial credits to achieve
olicy of officially supporting such credits may
behis endconditioned The p somewhat by Mitterrand's harder attitude toward
b robabl not be
relations with efactor Soviets, decision is some
overridden. Another ministries on the subject, but
growing disappointment among 25X1
again, the pro-trade forces appear in firm control.
In response to Washington's -4negative view of Western
governments; granting easy guaranteed credits to the Soviet Union,
Paris points out that the effect of credits on thereoietisk,nomy
good it r and
is minimal, that the Soviet Union remains a
that France is contractually forbidden rom i ~ediately applying
credit restrictions. practice of selling to the Soviets on
disfavor on n the the present pcredit and buying for cash, it believes that it must do so to
among West European
remain competitive. As for burden-lthe wide differences in
countries, the French believe that, given
national export systems, such a prospect is unrealistic. The
French would agree to ensure a better exchange of information on
the matter of credits on a bilateral and possibly multilate
the import restriction measures and
basis, and Paris has agreed to
Soviets into the higher OECD
to the EC's call to mote At bottom, however,
category if all other OECD countries agree.
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the French remain firm in their refusal to restrict exports to
the Soviets or deny them credits for purchases of French goods.
25X1
United Kingdom
Current Situation
High unemployment and new stress on using export growth as a
way out of the recession make British agreement on even limited
export controls unlikely. Although British trade with the Soviet
Union accounts for less than 1 percent of the total, it is
important to the depressed chemical industry; in addition, the
Soviet Union could provide a potential market for British high
technology goods. Much of the recent Soviet interest in British
export goods has centered on oil and gas extraction, pipeline
supplies, and engineering services. The government believes that
reducing the subsidy element of offical guarantees would give low
interest rate countries a large advantage in manufacturing
trade. British firms, hard pressed by a profit squeeze and only
partially regaining the losses in export competitiveness suffered
over the last several years, will push the government to continue
its current program. Spokesmen for the Export Credit Guarantee
Department (ECGD), which administers London's export credit and
official guarantee program, claim that credits are a normal part
of doing business. The elimination of subsidies, they argue,
would boost rates 4-5 percent and cripple their efforts.
25X1
The ECGD is a separate government department responsible to
the Secretary of State for Trade. All ECGD operations require
the consent of the Treasury, but in practice only questions
involving new credit policies, large amounts, or especially long
terms are submitted to the Treasury. ECGD provides credit
insurance to exporters and guarantees of repayment to private
banks (either suppliers or buyers) for export credits. ECGD
accepts 90 percent of the risk of the buyer's failure to pay and
90-100 percent of the political risk on comprehensive
insurance. On bank guarantees, ECGD"accepts 100 percent of the
risk. 25X1
The ECGD efforts to encourage Soviet purchases have been
disappointing. For example, a $2 billion, 5-year, project-
related credit line ran out at yearend 1981 with only $1.2
billion spent by the Soviets. Recently, however, several oil and
gas projects -- under a 7.8-percent, 6-year ECGD line of credit
-- were agreed. These have been committed and will be drawn as
delivered in 1982-83. 25X1
Prospects
In recent months British banks have adopted a more cautious
attitude toward lending to the Bloc. The switch is based on
economic considerations, with banks typically trying to shorten
25X1
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maturities and in some cases refusing new short-term loans and
rollovers. In addition, inatleast been roneaiscased case in ECGD response interest rates
to a
for a Soviet Contract have
allocati
ons directive to reduce credit Although ECGD iss
government at all ministries.
budgetary basically
operated as a commercial business, funding is voted annually by
(primarily
Parliament and recent }losses on credit guarantees (pr
t
The United Kingdom is hesaconcerns about the leveldof
restrictions against the Bloc despite
London believes that using
Western credit exposure to the USSR.
influence to restrain Soviet feels activity
caught between it t closesties
security, but the government
to the United States and its membership iect on on tthis EC,iswhisuech iIt eis
as moving in the opposite would place a
especially concerned that the US approach
disproportionate share of the burden on the West
tdE ropedn and is
skeptical of the impact credit restraints general
military capabilities. In addition, London has voiced a gene
West European fear that the Soviets may try to retaliate,
producing a series of escalating actions an yeVent al "eacon
is activ seeking -EC
as part of
The Thatcher government
compromise omic
o
only in whic credit dbasedcontrols
economic brather than political
a longer, term pro
Independent action by London will probably be limited to
Economits to
exchanges of information and a move to shift thendSsovie
higher credit classification based on economic grou.
and political considerations makeincirteme al rativeinctheaatsesthe
government oppose all but the mos of r in
interest charges. It may, however, consent to a compromise that
n
would include fractional increases and larger differentials and
categories, including some reclassificion Bloc
Britain
especially Soviet credits to higher rate categories. subsidies.
does not share the US objective of eliminating between
Moreover, any British move will. seek to bridge the gaps
d the EC to take larger account
nI-- nyp about cthemUS
u
the US an
iderations. The British are is ecne because of their belief
conpussh for trade sanctions on the pipeline
e appears to be the "major loser.
.,...
op
I=Y
Current situation t Traditional Italian enthusiasm
Rofors East-lesy ttradee e is
waning, at least in some quarters. is inabii up
its mind on participation in the Siberian gas pipeline ial
ove t resn concerning
s indicative of the current
am~ovarecent Off
thus relatively responsive ort credits
limiting official subsidies and insurance rnmental odiscussions on a
involving the USSR, and intra-gove 25X1
formal revision of existing policy are under way.
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25X1
olitical climate in Italy has permitted
The unsettled p policy to come to the fore.
partisan unhappiness with existing p on Eastfoet
The two largest political parties look favorably
t
constituency and the Communists for ideologi however SO s. Wi internal dissent plaguing these two parties,
Soviet rhetoric of the S cialis and Social Democratic parties
25X1
has taken on added significance.
The disappointing evolution of Italian-Soviet trade also
T helps explain changing Italian attitudes. At the height 'of the
cwar, large Italian firms were at the forefront pofdthe
cold
East-West trade, and in the early 1960s Italy
first Western countries to offe rte the the s bsidizedeltrade in 1970s,the fcredits. the heyday of dete
attractiveness Derng goods decreased as the Soviets sbean ato
enjoy better of access Italian to high-technology US, French, Japane from
West German goods. Sales to ther SSR stagnated, 197 5to1. dropping from
ent in
industries, although
2.9 percent of total Italian expo or
1980. This decline has affected all o xp t for several Italian
the Soviet market remains very P 25X1
energy, automotive, and _steel companies.
has had only a
To date the changing trade relationship a the Afghanistan
t
marginal impact on export credit policy.
invasion, Rome periodically extende Since edit l nescreditSoviet 1980 new s
been isssued of I only iaoncaaitcaal case-by-case ase basis. Rome continues,
d fference
however, to subsidize these credits. Medalrtol theCe
The
public institution, doles out subsidies equ i
on in to anci prngovicosde costs.
miillalifinancing
credit
etween OECD Consensus rates and commercial
$425
19b80 budget gave Mediocredito
subsidies for exports to non-EC costtofeprovidingttheseesubsidies
to promote Italian exports, the problems have mounted.
has become a contentious issue as fiscal p
25X1
Prosaects
limiting generous credit subsidies on
Italian Government adamantly
While sentiment for
exports to the USSR is growing, the
refuses to get out in front of its sal desire tol maintain export
level, this position stems from another, in the current international
competitiveness. On action would be looked upon
climate Rome believes any leadership and
equivalent to sanctions. Italian Communist Party Friendship ons society
influential member s of e anyalmeasures Wesembl resembling sanctions.
would view as unacceptable Y
i
Moreover, the Italian electorate ~oonr s de r I n sanct short ions Rome ineffective
will 9at best and counterproductive Italian officials will remain
along with a clear major Y? not make a unilateral
willing to talk but will almost certainly
decision; nor w' they promote a West European decision in line
deci 25X1
with US wishes.
25X1
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Canada
Current Situation
Ottawa actively promotes trade with the Soviet Union, but
Canadian exporters have been unsuccessful in penetrating Soviet
markets other than grain. Total trade with the USSR accounts for
only 1 percent of overall Canadian trade, but grain exports of
close to $1 billion to the USSR constituted one fourth of
Canada's positive trade balance in USSR a
relatively important trading partner. 25X1
Canadian grain sales to the Soviet Union have thus far been
in cash. The Canadian Wheat Board, however, is authorized to
offer three-year financing, and other East Bloc countries already
purchase wheat on credit. Given the deterioration of the Soviet
financial position, it is unlikely that Canada would be willing
to extend than one- ear loans if the Soviets were to ask for
credit. 25X1
Unlike grain, exports of Canadian technology are made
through long-term loans. These official export credits are
provided by the Export Development Corporation (EDC), a
commercially self-sustaining government corporation. The EDC
first offered credits to the Soviet Union in 1970, but credit
lines were not commonly used until the 1975 signing of a C$500
million line of credit. In most cases EDC loans to the USSR
cover 85 percent of the value of the transaction. 25X1
The offical credit line was allowed to expire in 1979 to
.protest the Soviet invasion of Afghanistan. Since then, Ottawa
has been reviewing proposals on a case-by-case basis; no new
credit agreements have been signed. The EDC had approximately
US$300 million worth of previously poinmitt d financing agreements
with the USSR at the end of 1981. a25X1
US$600 million line of credit may soon be signed to finance
exports of equipment for the Soviet Astrakhan gas project, for
which Canadian firms are competing with French and West German
companies. 25X1
Prospects
Trudeau is willing to discuss credit limitations in a
multilateral setting and believes the Versailles Summit provides
an excellent opportunity. While generally condemning Soviet
activity in Poland, Trudeau views export credit limitations more
as a reaction to the USSR's worsening financial position than to
the Polish situation. Moreover, he would be more willing to go
along with sanctions involving high technology goods than those
involving grain embargo because the former would be much less
damaging to Canada's trade. Trudeau believes Canada is bearing a
disproportionate share of the burden of current East-West trade
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restrictions because Canada, according to Trudeau, more closely
follows OECD guidelines on credits and interest rates than do
others. He would like to see a more closely defined and enforced
OECD consensus on credits to the Soviet Union. While generally
supporting US proposals, Canada has some specific concerns:
o Ottawa would require West European backing of any US
proposals before lending full support. This is one
area where Trudeau likes to assert Canadian
independence from the United States and makes a special
effort not to follow US policy automatically.
o Trudeau would try to exempt the Astrakhan deal from any
sanctions. Negotiations on the Astrakhan project have
been underway since 1977 and he believes this
sufficiently predates any current concerns. This is
also Canada's first chance to exploit oil and gas
technology markets in the USSR, and Ottawa is anxious
for the deal to go through.
o Concerning proposals for more "transparency" in
officially supported credits, Trudeau may have some
difficulty in providing information on the EDC and on
private credit agreements offered to the Soviet
Union. Canada's Bank Act defines this information as
confidential, and it would be very difficult for
Trudeau to waive this right.
o Trudeau is presently quite concerned with the
extraterritorial application of US policy on US-owned
subsidiaries operating in Canada; this concern would
mount if restrictions applied by the two countries
differed or if Canada 7 ded not to appl"
restrictions. 25X1
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