SOVIET HARD CURRENCY TRADE AND PAYMENTS: PERFORMANCE AND PROSPECTS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP08S01350R000100120002-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 29
• Document Creation Date: December 21, 2016
• Document Release Date: September 15, 2008
• Sequence Number: 2
• Publication Date: September 1, 1979
• Content Type: REPORT

Secret
ER 79-10509
September 1979
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National Secret
Foreign
Assessment
Center
Soviet Hard Currency
Trade and Payments:
Performance and Prospects
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Information available as of 21 September 1979
has been used in the preparation of this report.
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USSR Division, Office of Economic
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Research. Comments and queries are welcome and
-
may be directed to
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This report has been coordinated with the National
Intelligence Officer for Political-Economy.
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Secret
ER 79-10509
September 1979
National
Foreign
Assessment
Center
Soviet Hard Currency
Trade and Payments:
Performance and Prospects
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Secret
Soviet Hard Currency
Trade and Payments:
Performance and Prospects
Key Judgments Following two consecutive years of decline, the USSR's hard currency trade
deficit rose slightly in 1978 to $3.8 billion. It will grow substantially this
year, perhaps to $5.0 billion or more.
A slackening in domestic economic performance and the continued need for
Western technology are largely responsible for the growing deficit:
? A disappointing 1977 grain harvest and the likelihood of a substantial
shortfall in grain production this year, together with the leadership's
determination to steadily increase meat supplies, have led to a rapid rise in
grain and soybean imports. Hard currency outlays for these commodities in
1978 amounted to $2.6 billion and probably will jump to about $4.0 billion
this year.
? Mounting difficulties in steel production have led to more imports of steel
products. Last year imports rose by 42 percent in value, to $2.5 billion, and
will rise to more than $3.5 billion this year if present trends continue.
? Soviet machinery and equipment imports climbed to a record $6.0 billion
last year and could run to $4.5 billion or more in 1979. 25X1
Moscow has been able to increase its hard currency earnings from natural
gas, chemical products, and manufactured goods as a result of increased
export volume and higher prices. Earnings from exports of these
commodities rose substantially in 1978 and should rise again this year. But
the USSR is having difficulty in increasing or even maintaining deliveries of
other goods to Western markets. Tightness in the Soviet oil balance caused
by a leveling off of production will reduce the availability of oil for export to
the West this year. Oil shipments to non-Communist countries from Black
Sea ports during the first half of 1979 were down by almost 20 percent from
last year's January-June rate. Although higher oil prices will mitigate the
effect on hard currency receipts, a reduction in the volume of oil exports
would prevent Moscow from taking full advantage of the oil market to cover
a substantially higher import bill.
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The USSR had little trouble covering its hard currency trade deficit last
year; heavy gold sales and record hard currency receipts from arms
deliveries allowed Moscow to achieve its first current account surplus since
1974:
? The USSR was thus able to hold down the growth of hard currency debt;
gross indebtedness to the West grew by only $1.5 billion to $17.2 billion.
Soviet assets in Western banks increased by a similar amount to $6.0 billion,
leaving Moscow's net debt to the West virtually unchanged.'
? Moscow also took advantage of its increased liquidity and favorable
Euromarket conditions to resturcture its outstanding Eurodollar indebted-
ness. Roughly $1.0 billion in medium-term loans syndicated in 1975-76 were
either prepaid or refinanced on better terms.
In part because of last year's success, the USSR should have little trouble
financing this year's trade deficit, which-depending on oil export policy
and the timing of grain and equipment deliveries-could run to $5.0 billion
or more. Net earnings from arms sales and invisibles, although probably
down somewhat from last year, should be substantial and would offset
roughly $1.5 billion of this year's trade deficit. To cover the balance of its
foreign exchange needs Moscow could (a) reduce its Eurocurrency assets by
up to $2.0 billion; (b) earn up to $3.0 billion from gold sales if prices remain
relatively high and demand relatively strong; and (c) readily borrow several
hundred million dollars from Western commercial banks at favorable rates.
The longer term outlook for hard currency trade and payments is much
worse. Higher grain imports and the likelihood of a further reduction in the
volume of oil exports will almost certainly lead to an increased trade deficit
in 1980. In planning for its hard currency trade and payments in the 1981-85
Plan, the USSR must deal with the likelihood that declining oil sales will
lead to even larger trade deficits than the USSR can finance through gold
sales and arms exports.
The USSR, in these circumstances, most certainly would try to avoid
prolonged balance-of-payments financing on a massive scale. The Soviet
leadership would thus have to squeeze the merchandise trade account by (a)
limiting imports of steel, equipment, and grain, and/or (b) allocating
increasingly scarce commodities-timber, oil-to the export market. These
unpalatable alternatives would mean further strains on an already overtaxed
economy.
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Key Judgments
Hard Currency Imports 3
Hard Currency Exports 5
Hard Currency Payments Balance in 1978 8
Hard Currency Imports 12
Hard Currency Exports 15
1. USSR: Selected Hard Currency Imports
2. USSR: Major Equipment Suppliers
3. USSR: Selected Hard Currency Exports
4. USSR: Hard Currency Natural Gas Exports
5. USSR: Hard Currency Passenger Car Exports
6. USSR: Hard Currency Balance of Payments
7. USSR: Hard Currency Trade
9. USSR: Financing the 1979 Trade Deficit
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1.
USSR: Cumulative Hard Currency Trade and Current Account
Deficits Compared With the Growth in Net Debt
2
2.
USSR: Hard Currency Trade
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Soviet Hard Currency
Trade and Payments:
Performance and Prospects
Although hard currency imports are small compared
with domestic production, the USSR counts heavily on
such imports to bridge gaps between domestic supply
and demand and to obtain badly needed state-of-the-
art equipment and technology. These imports, how-
ever, are limited by Moscow's ability to market its
goods in the West and by its ability (and willingness) to
sell gold and increase its debt to Western governments
and commercial banks. The pattern and composition of
Soviet hard currency trade is to some degree an index
of domestic economic conditions and an expression of
the perceived tradeoff between the costs of export
expansion and the benefits from additional imports.
Soviet trade and payments behavior in any year also
incorporates the legacy of past decisions and Soviet
perceptions of future conditions. The past runup in
hard currency debt, for example, combined with
uncertain prospects for future foreign exchange earn-
ings led the USSR to take a cautious approach to
balance-of-payments financing in 1977-79 and to push
harder than ever for compensation agreements which
guarantee future exports. These factors have combined
to limit the growth of imports of Western goods,
particularly equipment, and to reduce substantially the
net transfer of resources to the USSR from the West
compared with previous years.
This paper assesses the USSR's hard currency trade
and payments in 1978-79 in the light of (a) Moscow's
efforts to strengthen its external financial position, (b)
mounting domestic economic problems, and (c) uncer-
tain prospects for expanding hard currency earnings in
the 1980s. We review the developments that produced
the rapid buildup of debt in 1975-76 and recent moves
to reverse this trend. We examine the impact of the
USSR's declining economic performance on its trade
account and examine Moscow's ability to cover sizable
trade deficits this year and next. Finally, we outline the
difficulties looming for hard currency trade in the
1980s and the resulting policy options that are likely to
Besides presenting general trends, we have examined
Soviet foreign trade for several commodities in some
detail. The extended treatment is warranted for several
reasons. The commodities themselves are of impor-
tance; oil export policy and grain import policy, for
example, merit particular attention. In addition, the
uncertainties in our projections can be better appreci-
ated at the commodity level. Lastly, understanding the
impact that domestic economic problems are having on
particular parts of the foreign trade accounts is vital to
an appreciation of the severity of the problems Moscow
faces in managing its foreign trade in 1980 and
beyond.
In the 1970s, the Soviet Union has relied heavily on
Western credits to manage its hard currency balance
of payments (figure 1). Moscow, realizing that eco-
nomic growth was becoming increasingly dependent on
technological progress and production efficiency,
turned to Western technology and equipment for help.
The willingness of Western governments to support
their equipment sales with long-term, low interest
supplier credits allowed the Soviet Union to rapidly
accelerate technology and equipment imports after
1971. Purchases of grain also trended upward, though
their volume varied with the fortunes of the Soviet
harvest. To the extent that the USSR could not
generate sufficient hard currency earnings from mer-
chandise exports, arms sales, tourism, and transporta-
tion services to cover that portion of its rising import
costs not financed by government-backed credits, it
has depended on gold sales and borrowing on the
Eurocurrency market to balance its hard currency
payments. Apart from heavy gold sales and some
commercial bank borrowing to pay for large grain
imports in 1973, however, the USSR was able to keep
its trade deficits close to planned levels in 1970-74.
confront the Soviet leadership.
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Figure 1
USSR: Cumulative Hard Currency Trade
and Current Account Deficits Compared
With the Growth in Net Debt
Net Debt',
to-bank credits. The hectic and apparently
uncoordinated Soviet borrowing elicited widespread
publicity about mushrooming Soviet debt and put
some major Western banks close to internal lending
limits, leading to demands for higher interest rates on
loans to the USSR.'
Perceiving that its image was being tarnished by
adverse publicity about the rising hard currency debt
and banker demands for higher interest rates, the
Soviet leadership in October 1976 called on its most
astute international financier, then Deputy Foreign
Trade Minister Vladimir Alkhimov, to put Soviet
finances in order. Alkhimov, who had been overseeing
the Ministry of Foreign Trade's Foreign Currency
Administration, was moved from his second-rung job
in the foreign-trade bureaucracy to the chairmanship
of the USSR State Bank.
I I I I I 1 1
1972 73 74 75 76 77 78
1 Yearend debt estimates understate total net debt by $582
million, the estimated net debt at the end o f t 971.
Moscow's traditional trade and financial policies had
to be abandoned in 1975 and 1976. Despite a drop in
export growth caused by Western recession, the USSR
bought large quantities of grain in the wake of the
1975 harvest disaster and still increased'capital goods
imports from the West. The failure to scale back
nongrain imports produced unexpected trade deficits
of $6.4 billion in 1975 and $5.6 billion in 1976. As a
consequence of unprecedented and unplanned Soviet
borrowing, the USSR hard currency debt to the West,
soared from more than $5 billion at yearend 1974 to
almost $15 billion at yearend 1976.
The Soviet Foreign Trade Bank, which is responsible
for financing Moscow's foreign trade, compounded the
damage from the trade deficits by failing to fully
coordinate and control Soviet borrowing. In 1975 and
1976, the USSR had to raise roughly $7 billion in
medium- and short-term funds from Western commer-
cial banks. The Soviet Foreign Trade Bank and
Moscow's commercial banks in the West entered the
Eurodollar market to obtain substantial direct bank-
In line with his view that a central banker must
exercise discipline over resources, Alkhimov laid out a
strategy for tightening control over Soviet hard cur-
rency trade and finances. Statements by Alkhimov and
decisions attributed to him by Soviet officials illumi-
nate the elements of this strategy:
? Placing limits on further debt growth during the
1976-80 plan period and ordering the deferral of a
number of major industrial projects until the 1981-85
plan period.
? Ordering a reduction in direct borrowing from
Euromarket banks in favor of greater use of Western
government-backed credits.
? Increasing hard currency export earnings by expand-
ing raw materials exports and establishing specialized
export industries. In the case of oil, severe domestic
rationing was initiated in 1976 to permit an expansion
of exports in spite of a declining rate of growth of
production.
I Schmidt, Charles F., "COMECON's Borrowing Requirements in
1976," Euromoney, January 1976, pp. 12-14; Brainard,
Lawrence J., "Financing Eastern Europe's Trade Gap-the
Euromarket Connection," Euromoney, January 1976, pp. 16-21;
and Euromoney Interview with West European Bank Loan Officers.
"Will Euromarket Lending Favor COMECON in 1976?",
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? Forcing greater coordination between the Soviet
Foreign Trade Bank and USSR foreign trade organi-
zations, in particular by giving the bank veto power
over all foreign trade deals.
? Demanding more compensation arrangements with
Western suppliers, thus making imports of material
and technology contingent on generation of sufficient
foreign currency to pay principal and interest. F
By following this discipline Moscow regained control
of its current account, restrained the growth of its debt, - 3
and lessened its dependence on Western bank borrow-
ing in favor of government-backed financing. In 1977:
? The trade deficit was cut to $3.3 billion-the net
result of a higher volume of oil exports, a slowdown in
the growth of equipment imports, and a substantial fall
in Western grain deliveries.
? The current account was brought roughly into
balance as the USSR, taking advantage of a buoyant
gold market, earned roughly $1.6 billion from gold
sales and delivered an estimated $1.5 billion of arms
for hard currency.
? The rise in gross commercial indebtedness was held
to 3 percent while total outstanding debt rose by less
than $1 billion, to $15.7 billion. The USSR did not
attempt to raise any syndicated Euroloans in 1977.
Hard Currency Imports
Soviet hard currency imports rose to a record
$17 billion' in 1978 led by record Western deliveries of
plant and equipment (figure 2). Imports of grain rose
substantially as a result of a disappointing 1977
harvest while mounting steel production problems and
' Soviet trade data are given in foreign trade rubles; the dollar data
presented in this paper were derived by multiplying rubles by
$1.47-the average official ruble-dollar exchange rate in 1978. The
average ruble-dollar ratio in 1977 was $1.36 per ruble. The change
reflects the fall of the dollar against major European currencies in
1978. The data are all in nominal terms; the growth in real terms is
considerably lower. An "index of physical volume of foreign trade"
published by the USSR shows that exports to capitalist countries (a
category that roughly approximates hard currency areas) increased
Deficit
I I I I I I I I I I I I 1 I I 1 1
I II III IV I II 111 IV I II III IV I II III IV I
I Seasonally adjusted. Official Soviet foreign trade data were used
to develop the unadjusted series for hard currency trade. Data also
incorporate the movement of US dollars against the market basket of
Western currencies which determine the Soviet foreign exchange
ruble.
continued construction of energy transmission net-
works led to increased imports of nontubular steel and
large diameter pipe from the West.
Machinery and equipment imports increased by 17
percent in value to a record $6 billion (table 1).' West
Germany, with sales of $1.5 billion, continued to be the
USSR's major equipment supplier, although France,
Japan, and the United Kingdom racked up large gains
(table 2). Deliveries from Italy were up only slightly,
while imports from the United States fell by 16 percent
to $402 million. The US share of the Soviet hard
currency equipment market thus fell from its 1976
peak of 16.3 percent to 6.7 percent last year; the drop
reflects, in part, the unavailability of Eximbank
credits.
' These figures do not include equipment and pipe imports worth
$286 million that were reported in footnotes as imports for the
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USSR: Selected Hard Currency Imports'
Machinery and equipment
of which:
4,593
Transportation
456
304
230
243
Chemicals
503
1,084
1,853
1,938
Energy
184
153
161
605
Motor vehicle manufacturing
346
260
233
123
Rolled ferrous metals
2,565
2,251
1,750
2,480
1,509
Chemicals
742
Of which:
Plastics
242
181
183
272
Rubber and rubber products
217
216
175
187
Textile and textile raw materials
390
434
535
588
Food
3,319
3,401
2,412
3,175
Of which:
Grain
2,323
2,627
1,354
2,360
Other consumer goods
436
428
429
340
Vneshnyaya torgovlya SSSR, 1970-77.
z Includes $420 million in 1976, $888 million in 1977, and $286
million in 1978, which the USSR reported in footnotes as imports
associated with the Orenburg natural gas pipeline. The imports
consist largely of large-diameter pipe and equipment for the
Orenburg natural gas pipeline.
' Excluding imports associated with Orenburg.
Equipment for the chemical industry continued to 1978, reflecting recent Soviet purchases of natural
dominate machinery imports, rising slightly in value to gasline compressors, submersible oil well pumps, and
$1.9 billion. In large part these imports entered the other equipment for the oil and gas industries.
USSR under the first stage of compensation agree-
merits that Moscow had signed with Western firms. A disappointing harvest in 1977 coupled with the
The USSR is to pay for these machinery imports by leadership's commitment to expand meat production
deliveries of chemical products to the West. The led to imports of 23 million tons of grain (worth
largest increases in equipment imports were posted in $2.4 billion) from hard currency countries last year.
the energy area. Deliveries of energy-related equip- Grain deliveries were heavy during the first nine
ment rose from $161 million in 1977 to $605 million
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USSR: Major Equipment Suppliers
Total
5,114
5,969
West Germany
1,421
1,479
Japan
931
1,220
France
770
1,012
United States
477
402
United Kingdom
137
339
Other
714
816
rency drain, it cannot afford the economic disruption
that would result by forgoing imports.
Soviet purchases of nonferrous metals and ores,
although amounting to only 10 percent of the value of
steel imports in 1978, have risen gradually in recent
years. On balance, the USSR is a substantial net
exporter of nonferrous metals, but it has failed to
develop ore mining capacity for some metals rapidly
enough to keep pace fully with its domestic needs. To
prevent domestic shortages, the USSR bought about
$250 million worth of nonferrous metals in 1978, up
about $50 million since 1975. The principal import
commodities have been tin, bauxite, rolled aluminum,
lead, and cobalt as well as ores and concentrates of
copper, lead, zinc, tungsten, and molybdenum.F_
months of the year; the record 1978 grain harvest of
237 million tons allowed Moscow to rebuild stocks
while cutting back on imports beginning in late 1978.
The United States supplied more than 60 percent of
Soviet grain import requirements, including 11 million
tons of corn. Moscow also stepped up its purchases of
soybeans; imports totaled. $222 million, of which $215
million came from the United States
Soviet steel imports rose substantially in value in 1978,
returning to pre-1977 levels. Although the pace of
domestic pipeline construction apparently slowed in
1978, large-diameter steel pipe imports-roughly 1.5
million tons-increased nearly 60 percent in value to
$1.3 billion. Japan and West Germany split 75 percent
of the market with the Japanese, West Germans,
French, and Italians all providing Moscow with
government-backed credits to finance its large-
diameter pipe needs.
Mounting Soviet problems in steel production were
reflected in the 28-percent rise in the value of
nontubular steel imports, comprised largely of a wide
variety of structural and flat-rolled steel products.
Soviet steel production has been increasing at a slow
rate since 1975, mainly because of (1) the failure to
bring new production capacity on stream, (2) short-
ages of iron and steel scrap, and (3) increasing
difficulties in iron ore extraction. Although Moscow is
undoubtedly concerned over the increased hard cur-
Hard Currency Exports
Moscow was able to limit its hard currency trade
deficit in 1978 to $3.8 billion limit as a result of a 16
percent increase in the value of its hard currency
exports (table 3). The pattern of exports remained
largely unchanged although domestic economic prob-
lems, mainly on the production side, appeared to limit
exports of traditional hard currency earners such as 25X1
timber products, cotton, coal, and metals. On the other
hand, the USSR realized substantial hard currency
gains from chemical and natural gas sales and
shipments of machinery and equipment to the Third
World.
Earnings from the sale of oil and oil products increased
slightly to $5.7 billion last year and accounted for 43
percent of total hard currency export revenue. Exports
to hard currency markets were estimated at 1.1 million
b/d, almost 10 percent of total Soviet oil production.
With oil prices approximately unchanged from 1977
(Moscow's prices closely follow OPEC's), the small
increase in earnings appears due to the addition of
Greece as a hard currency trading partner and possibly
to some slight increase in sales of higher priced
products relative to crude oil to the West. Italy, West
Germany, France, Sweden and the United Kingdom
continued to be the major hard currency recipients of
Soviet oil.
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1975
Machinery and equipment
561
657
797
1,209
Petroleum and petroleum products
3,176
4,514
5,275
5,716
Coal and coke
390
368
357
293
Natural gas
209
347
566
1,063
Ferrous ores and metals
298
282
225
128
Nonferrous metals
465
444
453
525
Of which:
Platinum-group metals
201
187
177
230
Nickel'
53
46
43
85
Aluminum'
75
96
152
180
712
852
1,029
975
262
400
437
403
Cotton
298
392
514
344
Diamonds
478
511
606
600
Vneshnaya togovlya SSSR, 1975-78.
' Data estimated from Western trade statistics.
Natural gas exports in 1978 nearly doubled in value to
$1.1 billion. The USSR pipes gas to West Germany,
Italy, Austria, and France for hard currency under
long-term agreements. Quantity data are no longer
reported by the USSR, but data are available from
partner country statistics which indicate a 19-percent
increase in volume to nearly 630 billion cubic feet,
some 5 percent of Soviet gas producton (table 4).
According to our estimates, prices increased more than
60 percent-from an average of $1.10 per thousand
cubic feet in 1977 to $1.80 per thousand in 1978,
accounting for most of the growth in earnings.
Exports of solid fuels-primarily coal and coking
coal-declined for the third consecutive year. Because
of sluggish growth in domestic production, exports
were down to virtually all European customers and
dropped by 21 percent to Japan
Meanwhile, the value of wood and wood products
exports fell to just under $1 billion. Exports to Japan,
roughly half of which were under the 1974 agreement
for development of Siberian timber resources, were
down from $458 million to $415 million. Log sales
registered a slight increase in volume, but lower dollar
prices reduced earnings by 10 percent. Exports of
coniferous sawn lumber to the United Kingdom, the
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USSR: Hard Currency
Natural Gas Exports
Scheduled Actual
Scheduled Actual
Total
541.0
525.0
650.0
625.0
Austria
81.0
86.0
85.0
99.0
West Germany
177.0
198.0
247.0
282.0
Italy
230.0
177.0
247.0
173.0
France
53.0
64.0
71.0
71.0
' Estimates are based on Western reporting which in some instances
is inconsistent. Reconciliation of various reports is hampered by the
fact that in some instances volume data are provided while in other
cases information is provided in thermal units. These problems are
most apparent in the case of West Germany where reporting on 1978
deliveries ranges from 210 billion to 280 billion cubic feet. The latter
figure, taken from a Soviet statement, was used because it is most
consistent with data provided by Eurostat, a European Community
principle forest product the British buy from the
USSR, similarly fell from $151 million in 1977 to $138
million in 1978 on virtually unchanged volume of 1.3
million cubic meters of lumber. Sales to West Ger-
many were down 9 percent to 543,000 cubic meters in
1978; earnings fell from $70 million to $60 million.
Soviet inability to expand earnings from wood and
wood product sales is attributable to softer Western
markets and Soviet production problems. Timber
cuttings were planned to increase 2 percent annually
during the present five-year plan. From 1976 through
1978, however, cuttings fell at a 3-percent annual rate.
Despite Moscow's efforts to move into higher value-
added categories of wood products-pulp, paper, and
plywood-sales of these products have lagged because
of quality problems.
Exports of nonferrous metals climbed substantially in
1978 as a result of impressive gains in exports of
platinum-group metals, nickel, and aluminum. In the
case of ferrous ores and metals, however, export
earnings in 1978 of $128 million were 43 percent less
than in 1977 and 55 percent less than in 1975. The
decline, registered in each of the principal export
categories-iron ore, pig iron, ferroalloys, and scrap-
reflected the raw material supply stringencies that
have beset the Soviet steel industry in recent years. F_
Exports of chemical products were up 47 percent to
$209 million, largely because chemical compensation
agreements concluded several years ago began to
generate exports. Sales to the United States jumped
from $5 million to $33 million as ammonia exports
from the Occidental Petroleum fertilizer project be-
gan. Other countries also took more Soviet chemical
products, but the real surge of chemical shipments to
Western Europe under compensation agreements is yet
to come; most of the projects will come onstream in
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Western chemical industries to these deliveries is likely
to grow as Soviet exports rise, especially if Moscow
continues to price its exports below Western prices.
Exports to the United States have already prompted a
group of ammonia producers to ask the International
Trade Commission to impose a tariff on Soviet 25X1
ammonia.' Nonetheless, the USSR remains a net
importer of chemicals from the West by a 4-to-1
margin.
The 50-percent jump in machinery and equipment
exports to $1.2 billion was a major surprise. Three-
fourths of the equipment exports went to LDCs;
deliveries to Iraq alone rose to $444 million. Soviet
sales to Iraq were highlighted by $140 million in
aircraft sales (compared with $7 million in 1977),
mostly for six IL-76 jet cargo planes for Iraqi Airways. 25X1
Other exports to Iraq included equipment for power
plants ($94 million) and an irrigation project
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($30 million). Equipment exports to Nigeria were also
up sharply-to $82 million, compared with $17 million
in 1977-as a consequence of deliveries for a pipeline
project. Exports to other oil-producing countries are
USSR: Hard Currency Passenger Car Exports
either small or under clearing agreements.
Although the big gain in machinery and equipment
sales to LDCs was doubtless a welcome source of hard
currency, the USSR still has made little headway in
penetrating Western markets. Sales to developed
countries, up by 17 percent, amounted to only $300
million. Exports of machine tools, presses, hammers,
and forging equipment were only $40 million. The only
bright spot has been Moscow's successful auto export
program. Exports of nearly 85,000 passenger cars to
developed countries-a 26-percent rise over 1977-
accounted for half of machinery and equipment
exports to the West (table 5). The Soviet Lada, based
on Fiat design, is priced some 15 percent to 20 percent
below competing models in Western Europe and
Canada and Lada dealerships are reportedly providing
satisfactory after-sale service! Combined sales to
West Germany, France, and the United Kingdom, for
example, grew from 6,000 autos in 1974 to 44,000 in
1978
Hard Currency Payments Balance in 1978
The USSR easily handled its 1978 trade deficit of
$3.8 million; its current account position improved for
the third straight year (table 6). Receipts from gold
sales, arms deliveries, and invisibles more than offset
the trade deficit and other current outlays, yielding an
estimated $312 million current account surplus. This
result was a decided improvement over the $219
million deficit recorded in 1977 and was, in fact,
Moscow's first surplus since 1974.
Quantity Value Quantity Value
(Million (Million
us $) US $)
Developed
Countries
Less Developed
Countries
these years is estimated at 275 tons and 270 tons
respectively. Hard currency receipts from arms deliv-
eries-mainly to oil-rich Middle Eastern nations-also
set a record last year at $1.7 billion
Net income from services declined to $86 million in
1978 from $309 million the year before. High
Euromarket interest rates helped boost net interest
payments by $1.1 billion. Net income from transporta-
tion-although substantial-dropped slightly from the
1977 level. A drop in the carriage of oil exports on
Soviet ships contributed to the stagnation of transpor-
tation revenues, while hard currency outlays for
shipping rose due to an increase in grain imports
carried on Western ships.' Estimated net income from
tourism grew slighly.
Known official transfers carried out in hard currency
and hard currency purchases under bilateral trade
agreements totaled $202 million in 1978, $123 million
The Soviet Union took advantage of the steady rise in
the price of gold last year to market approximately 400
tons earning a record $2.5 billion. In 1977, sales of 330
tons had garnered $1.6 billion. Gold production in
' Welihosky, Toli, "Automobiles and the Soviet Consumer," in Joint
Economic Committee, US Congress, Soviet Economy in a Time of
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USSR: Hard Currency Balance of Payments
Current Account Balance
Balance of sales and purchases of
goods and services
Balance on merchandise trade
Exports, f.o.b.
Imports, f.o.b.
Hard currency trade under
bilateral trade agreements'
Sales of gold
Military sales
Net income from services
Net income from tourism
Merchandise freight balance
Income
Net income from other
transportation
Investment income balance
Income from direct
investment abroad'
Interest on outstanding
assets in Western banks
Interest paid on
outstanding debt
Government transfer outlays
To the UN
Capital account balance
Direct investment abroad'
Borrowing from abroad
Not backed by Western credit
guarantees
Backed by Western credit
guarantees
East European loans for Orenburg
Lending to other countries
Net increase in Soviet assets
held in Western commercial banks
Net increase in outstanding
supplier credits
1970
1971
1972
1973
1974
1975
1976
1977
1978'
- 40
68
-795
118
769
-5,332
-2,747
-219
312
15
125
-729
201
870
-5,234
-2,640
- 94
457
-500
-313
-1,356
-1,757
-978
-6,422
-5,595
-3,300
-3,794
2,201
2,630
2,801
4,790
7,470
7,835
9,721
11,345
13,157
-2,701
-2,943
-4,157
-6,547
-8,448
-14,257
-15,316
-14,645
-16,951
0
0
0
0
0
-450
-200
-200
-57
3
24
289
962
683
750
1,361
1,597
2,522
35
50
5
250
250
600
1,500
1,500
1,700
477
364
333
746
915
288
294
309
86
43
45
53
116
117
136
150
175
200
397
257
220
480
570
390
470
590
560
400
260
250
640
640
520
640
710
700
120
110
120
230
330
330
390
390
410
-83
- 48
- 60
-80
-102
-568
-716
-846
-1,084
0
0
0
0
1
2
8
2
0
NA
87
110
252
405
234
288
292
685
-83
-135
-170
-332
-508
-804
-1,012
-1,140
-1,769
-55
-57
-66
-83
-101
-98
-107
-125
-145
-44
-46
-54
-59
-77
-98
-107
-125
-145
-11
-11
-12
-24
-24
0
0
0
0
266
227
-77
522
386
5,694
2,952
1,917
173
0
-6
0
-9
-11
-3
-31
0
0
291
288
602
1,340
1,426
5,402
4,694
1,777
1,785
NA
NA
452
1,183
746
4,160
2,720
191
458
291
288
150
157
680
1,242
1,554
686
1,041
0
0
0
0
0
0
420
900
286
-25
-55
-679
-809
-1,029
295
-1,711
140
-1,612
NA
NA
-629
-729
-939
395
-1,611
240
-1,512
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less than the 1977 level.10 The decline reflects reduced
purchases of Cuban sugar for hard currency. In all
likelihood, additional transactions in these categor-
ies-that is, other hard currency trade with CEMA
partners and financial support to foreign governments
and movements-account for some of the net funds
outflow recorded under net errors and omissions.F-
By engineering a hard currency surplus in 1978, Soviet
financial managers precluded an increase in the
USSR's $11.2 billion net hard currency debt
(figure 3). Gross debt grew from $15.7'billion in 1977
to $17.2 billion, largely from drawings on Western
government-backed credits. Net debt remained un-
changed as Moscow increased its assets in Western
banks by $1.5 billion to $6 billion.
Nearly 70 percent of the growth in gross Soviet
liabilities to the West in 1978 resulted from an
estimated $1.0 billion increase in debt covered by
Western government guarantees. In contrast, commer-
cial credits accounted for nearly 70 percent of Soviet
borrowing in 1975-76. This shift in financing appar-
ently stemmed from USSR State Bank Chairman
Alkhimov's determination to reduce drastically the
USSR's dependence on Euromarket borrowing in
favor of less costly official credits. Indeed, the USSR's
net exposure to Western banks declined by 20 percent
or $1 billion in 1978 as a result of the reduced reliance
on commercial borrowing and a simultaneous buildup
of Soviet deposits in these banks. Consequently, the
share of net debt secured by government guarantees
grew from 52 percent at yearend 1977 to 62 percent at
yearend 1978.
Government transfers equal the USSR's hard currency contribu-
tions to the United Nations as reported by the United Nations
General Assembly, Report of the Committee on Contributions,
Addendum, Supplement No. 11 (data gathered from reports of the
26th, 28th, 30th, and 32nd sessions, estimates were made for
USSR: Hard Currency Debt to the West'
1 Excludes Soviet hard currency asset position vis-a-visThird World
countries. Preliminary estimates for yearend 1978.
Besides checking the growth of debt, the USSR's
healthy current account position in 1978 enabled
Moscow to restructure much of its medium-term
liabilities to Western banks. During the year, the
Soviets prepaid-or arranged to prepay in early
1979-almost all of the $1 billion raised in Eurodollar
syndications in 1975-76. Moscow took advantage of
the Euromarket's high liquidity in 1978 to refinance a
major share of the prepayments through two syndica-
tions carrying more favorable terms than the old loans.
These credits-Moscow's first syndications since
1976-included a $400 million loan raised in March
and a $250 million loan concluded at yearend. The
March syndication was a seven-year credit carrying an
interest spread of 0.75 percentage point above the
London Interbank Offer Rate (LIBOR); the second
credit was for eight years at a spread of 0.625
percentage point above LIBOR." The prepaid loans
had been five-year credits with interest spreads of I to
1.25 percentage point above LIBOR.
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Moscow's tightened control over hard currency
expenditures and borrowings put the Soviet Union in a
solid financial position at yearend 1978. The rapid
buildup of debt in 1975-76 had sparked concern among
Western bankers and governments about the quality of
Soviet financial management. But by any conventional
measure, the USSR's finances at the end of last year
were in good order: it enjoyed considerable liquidity,
excellent debt service and debt-to-export ratios, sizable
untapped borrowing capacity, and a solid credit rating
with Western banks (figure 4). Since the Soviet
leadership seems most solicitous about protecting the
Soviet Union's standing in the international financial
community, the unfavorable publicity and speculation
of previous years undoubtedly contributed to the
imposition of tighter financial controls. Nonetheless,
the prospect of severe balance-of-payments disequilib-
rium in the 1980s, discussed below, could well explain
some of the policy retrenchment and the reinforcement
in Soviet finances.
Although USSR's short-term commercial debt at
yearend 1978 was a sizable $4.8 billion, the Soviets
should have little problem meeting these obligations.
ave excess liquidity and the USSR manages its
borrowings conservatively, the Soviets should be able
to roll over their short-term debt easily.
Although debt service rose sharply in the wake of the
1975-76 borrowings and higher Eurodollar interest
rates, Moscow can meet interest costs and principal
repayments on medium- and long-term debt without
straining its import capacity. In 1978, debt service
equaled 18 percent of earnings from merchandise
Figure 4
Debt Burden Comparison Yearend 1978
1 Total outstanding debt as a percentage of exports of goods and
services. Export revenues for the USSR equal hard currency earn-
ings from merchandise exports, sales of gold and arms, transporta- 25X1
tion, and tourism. Revenues for Poland comprise exports to non-
communist countries and hard currency earnings from services.
Soviet Union's hard currency revenues.
exports and sales of gold, arms, and services, or
24 percent of earnings from merchandise exports 25X1
alone. These debt service ratios are below levels that
would provoke concern about the USSR's ability to
manage its debt. Debt service is projected to increase to
roughly $3.5 billion in 1979, compared with $3.2
billion last year, but should fall as a proportion of the
that guarantee future,export revenues.
Through its financing strategy, Moscow has addressed
the problem of debt service beyond 1979 as well. By
prepaying and refinancing the syndicated loans, the
Soviets reduced future interest payments and the
bunching of debt-service obligations that would have
occurred in 1979-81 when payments on the 1975-76
loans were due. Greater reliance on Western govern-
ment-backed financing is also beneficial; these credits
typically carry fixed (and usually subsidized) interest
rates and lengthy repayment terms. Furthermore, a
sizable share of outstanding debt is self-liquidating
because of credits tied to compensation agreements
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The debt-to-export ratio, which is often used as a
benchmark estimate of the burden of debt over time,
delineates the improvement in the USSR's financial
position. The ratio peaked in 1976 when outstanding
debt was equal to 111 percent of total hard currency
earnings. By 1978, the ratio had fallen to 92 percent as
the growth of hard currency revenues outpaced the
growth of obligations to the West.
Because of the slowdown in debt accumulation,
substantial untapped borrowing capacity exists. By
yearend 1978, Western governments had committed
nearly $7 billion to finance future exports to the USSR
and extended credit offers for an additional $7 billion.
Furthermore, the Soviet Union markedly improved its
credit rating with Western bankers by regaining
control of its current account and cutting its demand
for commercial bank financing. Thus, the Soviets had
available $4 billion in unused credit facilities with
Western banks.
Despite its continued financial conservatism the USSR
will incur a substantially larger hard currency trade
deficit in 1979. Imports are expected to rise rapidly
despite a forecasted decline in Western equipment
deliveries. This year's harvest shortfall will lead to a
substantial rise in grain and soybean imports; contin-
ued Soviet production problems should lead to a runup
in purchases of Western steel. The rise in Soviet
exports will depend to a great extent on the volume of
Soviet oil exports to the West. Judging from Western
data, export volume may have risen in the first quarter
(over a comparable period in 1978) but may have
fallen off substantially thereafter. Prospects for other
Soviet exports are mixed.
Trade data released by Moscow for the first quarter of
1979 show a hard currency trade deficit of $2 billion.
Imports reached a record level of $4.7 billion, $600
million more than in the first quarter of 1978. Exports,
at $2.7 billion, were up only 7 percent in dollar terms
over the first quarter of last year. The USSR does not
report quarterly commodity data but such data from
several of the major trade partners are available for the
first three to six monthsl
Table 7 Billion US $
USSR: Hard Currency Trade
1978 1979
Projected
Exports 13.2 14.8-15.7
Oil
5.7
6.2-6.9
Natural gas
1.1
1.5
Wood
1.0
1.1 - 1.3
Chemicals
0.2
0.4
Other
5.2
5.6
Imports
17.0
19.0-20.6
Machinery and equipment
6.0'
4.0-5.0
Grain and soybeans
2.6
3.8-4.2
Pipe
1.3
1.8
Other steel
1.2
1.6- 1.8
Chemicals
0.8
1.1
Meat
0.4
0.6
Oil
0.6
0.7
Other
4.4
5.4
Hard Currency Imports
The dollar value of Soviet hard currency imports in
1979 could rise by more than 20 percent over last
year's level of $17 billion (table 7). The strong import
growth was largely unanticipated because of the
substantial drop in Soviet orders for Western plant and
equipment in 1977-78. It is attributable to the ex-
tremely poor domestic economic performance, which
will greatly increase Soviet reliance on imported grain
and steel. The extent of the rise will depend, in part, on
(I) the amount of grain the USSR will be able to
physically import in calendar year 1979, (2) the prices
it will have to pay for its grain, and (3) the magnitude
of the drop in equipment imports.
Thus far machinery and equipment imports have run
only slightly behind last year's $6 billion pace accord-
ing to partner country trade data.'Z They are thus
'2 Six-month data were available for Japan, West Germany, and the
United States; four-month data for France and first quarter data for
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I A five month weighted moving average was employed to smooth
the trend in orders. The weight vector assigned was 0.1, 0.2, 0.4,
0.2, and 0.1.
substantially greater than expected, given the dra-
matic fall in equipment orders from the West in recent
years (figure 5). Equipment orders plummented from a
peak of $5.8 billion in 1976 to $3.8 billion in 1977 and
$2.8 billion last year. They have rebounded in the first
six months of 1979 to an annual rate of more than
$4 billion, in part because Moscow has apparently
decided to wrap up contracts before the end of the
current five-year plan period.
The slowdown in equipment orders seems to have been
in large measure due to nonmonetary considerations. A
substantial backlog of unfinished construction of
plants to house Western equipment probably has
curtailed orders. F-i
the slowdown in orders was due more to construc-
tion and absorption problems than to financial con- I
straints."
251
As a result, while 25X1
25X1
25X1
The history of the Cheboksary Tractor Plant illustrates
how construction problems have impinged on imports.
In the past several years imported equipment worth
about $70 million has been delivered to the lant? a
April 1979, none had been inst
Metallurgimport, the Soviet foreign trade organization
that handles such equipment, has refused to authorize
further purchases for Cheboksary until the equipment 25X1
on hand has been installed. 25X1
A statistical analysis of the past relationship between
known Soviet orders and subsequent Western deliv-
eries strongly indicates that Soviet equipment imports
in 1979 should fall below $4 billion. The pace of
Western deliveries through midspring, if continued,
would lead to well over $5 billion in e ui ment
deliveries in 1979.
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we continue to expect Western deliveries to fall off
substantially, total Soviet equipment imports in 1979
will probably be well above previously predicted levels,
perhaps on the order of $4.5 billion.
We currently estimate this year's grain production at
180 million tons if average weather conditions prevail
for the rest of the growing season. To maintain the
momentum of its livestock program and the current
low level of carryover stocks, the USSR would have to
import nearly 60 million tons of grain. We believe,
however, that Soviet port capacity will, on average, not
allow imports of grain, oilseeds, and oilseed meal in
excess of 3 million tons per month. Imports could run
below this amount should the USSR encounter, as it
has in the past, excessive port congestion and/or
difficulties in railroad car scheduling.
Assuming imports of 2.5 million tons per month in
July-December, we expect the USSR to import a total
of 24 million tons of grain and soybeans in the current
calendar year. Soviet grain and soybean imports in the
first half of the year are estimated at 9.1 million tons,
worth $1.5 billion. At prices of $2.74 per bushel for
corn, $4.26/bu for wheat and $7.00/bu for soybeans,
the remaining 15 million tons of imports would cost an
additional $2.3 billion, bringing total 1979 expendi-
tures on grains and soybeans to $3.8 billion." Should
Moscow be able to handle monthly shipments of
3 million tons in July-December, total 1979 imports
would reach 27 million tons worth, assuming the above
prices, $4.2 billion. The import bill could also be
considerably changed by price movements between
now and the time of shipment; every $1 /bu increase on
the average price of corn or wheat imported in the last
quarter of 1979 would mean an additional $300 million
in Soviet outlays.
Imports of meat and poultry will also rise substantially
this year. Moscow has been unable to translate last
year's record harvest and large grain imports into
improved livestock productivity and is counting on
meat and poultry imports to narrow the gap between
" Closing prices for September contracts as of 12 September 1979.
We further assume that f.o.b. prices would be increased by 0.50 per
bushel to cover transportation costs to US Gulf ports, and that
Moscow 'will import 9 million tons of corn, 5 million tons of wheat,
growing consumer demand and unchanged meat pro-
duction from government packing plants. So far this
year the USSR has purchased nearly 100,000 tons of
meat and poultry, worth $300 million." This amount is
well above last year's total of 9,000 tons but far short of
the heavy volume of imports in 1976-77. Moscow could
conceivably buy an additional 100,000 tons of mutton
and small additional quantities of beef and poultry
without disrupting Western meat markets. Such
imports would cost an additional $300 million to
$350 million.
Soviet imports of Western steel will also be well above
last year's levels. Moscow, which must step up the pace
of constructing oil and natural gas transmission
networks, is known to have ordered 1.65 million tons of
large diameter pipe from the West, 700,000 tons each
from Japan and West Germany, and 250,000 tons
from Italy. Deliveries of this magnitude would repre-
sent a small increase in volume. Partner country data
through midspring indicate, however, that the volume
of deliveries is running at roughly 35 percent above last
year's pace with dollar prices up by 10 percent. Should
this pace continue, pipe imports could total 2 million
tons, worth $1.9 billion.
Domestic production problems that contributed to a
runup in nontubular steel imports last year have
worsened. For the first time in the entire postwar
period Soviet steel production over the first six months
declined from the comparable period in the preceding
year. The decline can be attributed to shortages of raw
materials, particularly iron ore and perhaps coal.
Soviet imports of nontubular steel from Germany
during the first five months of 1979 were 33 percent
higher in volume and 25 percent higher in price
compared with January-May 1979; imports from
France for the first four months are up by 36 percent in
volume and 15 percent in price, while imports from
Italy (January-March) are up 39 percent in volume
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and slightly down in price." Should this trend continue,
Soviet outlays for Western nontubular steel could
easily increase over last year's record $1.2 billion by
some 35 percent to 50 percent, or to between $1.6
billion and $1.8 billion
Imports of nonferrous ores and metals may also
increase but not nearly as dramatically as steel
purchases. The press reported heavy Soviet buying of
various metals early this year, but these reports were
misleading. They exaggerated the volume of trade and
failed to mention the established pattern of substantial
Soviet buying in recent years. We have no firm
evidence of a broadly based surge in Soviet buying
above those recent levels, but believe-in view of
continuing problems in expanding ore mining capac-
ity-that a further moderate increase in Soviet imports
is possible.
Chemical imports should be up. Large deliveries of
phosphoric acid from the United States under the
chemical exchange agreement with Occidental Petro-
leum have begun and could amount to more than $100
million for the full year. Purchases of pesticides and
other chemicals may also increase
Hard Currency Exports
The dollar value of Soviet hard currency exports in
first quarter 1979 rose by 7 percent over the compara-
ble period in 1978, to $2.7 billion. But Moscow will
have to push up exports even faster if it is to keep this
year's hard currency trade deficit close to last year's
level. Its willingness and/or ability to do so is doubtful.
The USSR will be able to count on increased earnings
from natural gas and chemical exports; its export
policy regarding oil, the major factor in Soviet export
earnings, remains unclear. We estimate 1979 exports
at between $14.8 billion and $15.7 billion.
In 1979 at least, growth in Western Europe and Japan
should be adequate to sustain demand for the USSR's
exports. Real GNP in the Big Six18 foreign countries
" Imports from Japan in January-May were down 58 percent in
volume but relatively unchanged in value terms, suggesting a major
grew at rapid rates in the first quarter, particularly in
Japan and Italy. The OPEC price increases, both
throughout the first half of the year and the rises
resulting from the Geneva meeting, will inflict a drag
on the West. This resulting growth rate, albeit lower
than would otherwise have occurred, will still be close
to the 1978 rate of 3.8 percent. Accordingly the effect
on Soviet nonoil exports will be negligible.
The chief constraint on Soviet exports this year is likely
to be producing enough to have surpluses available for
export. Figures for plan performance in the first
months show slow growth in industrial production and
actual declines from first-half of 1978 in several
important sectors (table 8). As in 1978, these shortfalls
can be expected to have an impact on hard currency
trade
According to mounting evidence, Soviet oil exports for
hard currency will be down from last year's estimated
1.1 million b/d rate. Soviet oil output for the first seven
1978
Over
1977
1st Qtr 1979
Over
1st Qtr 1978
2nd Qtr 1979
Over
2nd Qtr 1978
Electric Power
4.5
3.4
3.6
Fuel
3.4
3.5
2.8
Ferrous metals
2.2
-1.6
0.9
Forest and
paper products
-0.1
-5.1
Construction
materials
0.6
-5.6
-2.4
Chemicals
3.1
-6.1
3.2
Civilian
machinery
Consumer
nondurables
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months of 1979 remained at the same level as the last
half of 1978, averaging almost 11.6 million b/d, about
250,000 b/d below the 1979 annual plan. Increasing
tightness in the domestic energy balance, combined
with Moscow's continued determination to make good
on (a) standing export commitments to CEMA, (b)
new commitments to Turkey (60,000 b/d), and (c)
increased deliveries to India may well reduce the
availability of oil for export for hard currency despite
the attractiveness of substantially higher prices.
Soviet oil trade during the early part of the year as
revealed by partner country data can be characterized
by business-as-usual in crude oil movements but
reduced product deliveries:
? During the first quarter crude oil deliveries to Italy
and France were up by a combined 41 percent at
roughly unchanged prices.
? Soviet deliveries of petroleum products to West
Germany in January-June fell by 16 percent in volume
from a similar period in 1978. Prices on average
doubled to $32 per barrel. Similarly, product deliveries
to Japan during the first half of 1979 were down by 12
percent in volume with prices rising, on average, by 31
percent. In both cases Moscow after reducing export
volume in February-April, increased substantially
exports in May and June, presumably to take advan-
tage of higher spot prices.
? Deliveries of petroleum products to France were
down by 14 percent in volume in the first four months
of the year, but average prices rose by almost 50
percent. Exports of petroleum products to Italy rose
slightly in both volume and price in the first quarter of
1979 as compared with the first quarter of 1978.F_
The increased volume of exports of oil to Italy and
France was reflected on the movement of oil from the
Black Sea ports in the first quarter of 1979. Subse-
quent shipping data indicate a sharp falloff in deliv-
eries. Total deliveries of oil from Black Sea ports to
non-Communist countries were estimated at 353,000
b/d in the first quarter of this year, compared with
deliveries of 327,000 b/d in first quarter 1978.
Shipments to non-Communist countries in April-June
averaged 351,000 b/d as opposed to the 545,000 b/d
registered in the second quarter of last year, a dropoff
of 195,000 b/d. Although part of the falloff in exports
from Black Sea ports might have been offset by
shipments from other Soviet ports, such as those in the
Baltic Sea, we have no evidence to this effect.
On balance, we now estimate that hard currency oil
exports for the year as a whole could fall by as much as
20 percent to roughly 900,000 b/d. This order of
magnitude is based on (1) expected levels of produc-
tion and consumption in the USSR, 25X1
(3) some increase in 25X1
exports to CEMA countries, albeit considerably below
the rate early in the year claimed by Moscow, and
(4) increased exports to India and new commitments to
Turkey.
The good news for the USSR is that the boom in prices
that began early this year permits increased hard
currency oil earnings on a lower volume of oil
shipments to the West. Although the wide range of
price due to various surcharges and to the volatile spot
market makes an accurate estimate of average Soviet
prices difficult, prices this year should average some
40 percent to 50 percent higher than in 1978. At an
average annual price of $19 per barrel, Moscow
would earn $6.2 billion on exports of 900,000 b/d,
$500 million more than in 1978. Should export volume
fall less-to 1.0 million b/d-Moscow could earn $6.9
billion, a rise of $1.2 billion over 1978. This figure is
highly sensitive to (1) the timing and volume of oil
exports, (2) the mix between sales of crude oil and
products, and (3) Soviet sales volume on the lucrative
spot market
Natural gas exports should pull in substantially more
hard currency this year. Deliveries under long-term
contracts are scheduled to total 710 billion cubic feet,
an increase of 70 billion cubic feet over last year's
estimated shipments. Italy and Austria hope to receive
additional gas this year, but despite rapid growth in
Soviet gas production, both countries experienced
significant shortfalls in deliveries in the first few
months of 1979. The reasons cited were the cutoff of
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Iranian gas in effect until this April, the unusually cold
winter, and pipeline problems." In June, Moscow
promised Austria an additional 10 to 20 million cubic
feet to make up for the delays in the first part of the
as well, with British pound prices up 20 percent to 30
percent above last year's level. In addition, the volume
of Soviet timber ordered by UK buyers in the first
quarter of the year was 62 percent more than that
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Whatever the final volume of deliveries, Moscow will
clearly benefit from higher gas prices. Moscow prob-
ably cannot extract price increases as large as in 1978,
when it was able to reduce substantially the gap
between the price of its gas and alternative West
European energy suppliers. Nonetheless, booming oil
prices should lead to increased natural gas prices in
1979, particularly in cases where Soviet prices are
explicitly tied to West European fuel oil costs.F_~
Moscow will probably increase moderately its sales of
manufactured goods, especially automobiles, to the
developed West. Iraq, with at least $2 billion in
outstanding development contracts with the USSR,
shows no sign of cutting back on its equipment imports.
In first quarter 1979, exports of all goods to Iraq were
up by 85 percent from a comparable period last year.
Soviet timber sales could also rise considerably this
year on the strength of higher prices and the possibility
of increased export volume. Although exports to Japan
in the first five months were running slightly below last
year's pace, higher dollar prices have led to a 20-
percent rise in earnings. The Soviets have received
higher prices for their exports to the United Kingdom
contracted for in a similar period last year
Prospects for exports of metals are mixed. The USSR
probably is counting on continued heavy sales of
platinum-group metals, aluminum, and nickel, but, in
the aggregate, sales of nonferrous metals are not likely
to earn more than in 1978. As for ferrous ores and
metals, the odds are against a reversal of the recent
decline in exports. In fact, top Soviet officials, con-
cerned about raw material supplies for their steel
industry, have ordered further cuts in exports to non-
Communist countries. Some of the cuts reportedly are
being carried out." The Soviets, however, have not
pulled out of the market completely, and, in the case of
'chrome ore, may sell more than in 1978. On balance,
considering the drastic cuts in recent years, exports of
ferrous ores and metals probably will fall only margin-
ally this year.
Coal exports to Japan through May are running 15
percent below last year's volume pace as a result of a
substantial decline in Soviet exports of coking coal.
Given Soviet production problems mentioned earlier,
this trend is unlikely to be reversed
Financing the 1979 Deficit
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As in 1978, Moscow should be able to cover this year's
trade deficit, as much as $5.5 billion, without too much
difficulty. With continuing excess liquidity in the 25X1
Eurocurrency market, record Soviet Eurocurrency
holdings, and the high price of gold, Moscow has a
good deal of flexibility. If it opts to sell large quantities
of gold, the USSR may well be able to balance its
current account this year (table 9). In any event,
Moscow should-under most foreseeable conditions-
be able to limit the growth of its gross debt in 1979.
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USSR: Financing the 1979 Trade Deficit
The Soviets could raise $2.5 billion or more from gold
sales this year if prices remain high and substantial
quantities are marketed during the second half of
Projected trade deficit -4.5 to -5.5
Errors and omissions ' 0 to -1.0
Amount to be financed -4.5 to -6.5
Possible sources of financing trade deficit:
Gold sales 2.0 to 3.0
Other current account earnings 1.5 to 2.0
Reduction in Eurocurrency assets 1.0 to 2.0
Increase in Eurocurrency liabilities 0 to 1.0
' Available data consistently underestimate Soviet hard currency
expenditures leading to substantial errors and omissions in past
years.
' Net earning from arms receipts, tourism, and transportation
earnings, transfer payments, interest payments, and hard currency
trade not otherwise specified.
The USSR's current account deficit net of gold sales
should rise markedly this year, however, because of the
higher trade deficit and a potential drop in earnings
from hard currency receipts from arms shipments:F_
? A decline in new sales to Moscow's traditional hard
currency arms customers portends a decline in 1979
revenues. Contracts under negotiation could change
this projection dramatically, however.
? Increases in world shipping rates should boost
transportation earnings, although outlays for import-
ing grain on Western ships late in 1979 will limit this
growth.
? Net tourism income will probably increase substan-
tially since nearly all visitors who have made advance
bookings for the 1980 Olympics must make full
payment by the end of the year
? Although the dollar gains are not large, the Soviets
have been resorting to various ploys to squeeze
additional hard currency out of foreigners living in or
doing business with the USSR
During the first seven months of the year the Soviets
thus earned a total of roughly $1.2 billion from gold
sales.
Since the gold market boomed in August-September
and should continue to remain strong over the next few
months, the Soviets should be able to market a large
amount of gold at attractive prices. If Moscow
continued to sell gold at its second quarter pace and
earned an average of as little as $350 per ounce, it
would chalk up close to $3 billion in earnings from gold
for the year as a whole.
The gold market is not the only source available to
Moscow to cover its projected 1979 trade deficit.
Moscow ended 1979 with record assets in Western
banks and could probably tap up to $2 billion in
Eurocurrency holdings to finance imports without
endangering its ability to meet trade related financial
requirements. In this regard the chairman of the Soviet
Bank for Foreign Trade
stated that the USSR is "suffering" from
borrowing in the West.
How Soviet financial managers choose between asset
drawdowns and gold sales will depend on their
perceptions of the future market for gold compared
with the desirability of hard currency liquidity. The
likelihood of an even greater trade deficit in 1980 and
of a recession-induced weakening of the gold market
and lowering of Eurodollar rates by next year may
prompt Moscow to opt for gold sales now and leave its
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other sources of funds available for the future.
However, according to Western press reports, the
Soviets did not sell much gold in August despite the
continuing price surge. This indicates that either (a)
Moscow's gold traders are awaiting still higher prices
before stepping up sales or (b) the USSR has opted to
rely less heavily on gold sales this year. If Moscow has
adopted the latter strategy, total sales for 1979 could
be closer to $2 billion.
The Soviet Union probably did not increase its
borrowings from Western banks in early 1979, limiting
its activities largely to rolling over maturing
obligations. More recently, however, the need to
finance grain purchases may have induced the USSR
to begin increasing short-term and medium-term
borrowings which it could later replace with major
Unless the hard currency trade deficit is much larger
than anticipated, Moscow should not have to borrow
heavily in 1979. The projected drop in deliveries of
machinery and equipment indicates that drawings on
officially backed credits would only equal repayments
on outstanding officially backed debt. Thus Moscow,
to the extent that it relies on gold sales and asset
drawdowns, will be able to keep the growth of its gross
debt in check for the third straight year.
An additional factor impinging on Moscow's ability to
finance its trade deficit may be the need to provide
hard currency support to Poland. This issue is assum-
ing ever greater significance as the likelihood of
Poland's defaulting on its obligations mounts. In the
past Soviet officials asserted to Westerners that the
USSR is not the guarantor of Eastern Europe's debts
and specifically ruled out a Soviet role as creditor of
last resort for Poland. Nevertheless, two Soviet econo-
mists recently stated that the USSR would probably
help Warsaw if the Poles could not meet their
obligations to Western creditors, but that the decision
would have to be made at the highest political level of
faltering ally.
The amount of hard currency Moscow might advance
to Poland would almost certainly be small. Soviet
support would be forthcoming only as a last resort and
presumably on very strict terms. At most, the USSR
would probably help bridge a short-term cash shortfall,
buying some more time for the Poles to correct their
financing problems. Moscow's current need for hard
currency and its own uncertain earnings prospects
preclude an open-ended commitment of support to a
We are far less sanguine regarding Soviet trade and
payments after this year. Higher grain imports and the
likelihood of reduced oil export volume will, all else
equal, lead to an increased trade deficit in 1980 and
may force Moscow to seek balance-of-payments fi-
nancing from the West. Over the medium term, the
USSR faces the prospect that the continued decline in
oil exports to the West will force an adjustment in its
merchandise trade account. It is unlikely that the
USSR will opt for sustained balance-of-payments
financing or that Western bankers would respond
positively to such requests for many years at a time
when Soviet oil exports are declining. The decision over
what imports to reduce or nonoil exports to expand (at
the cost of reduced domestic availability) will not be
easy.
Outlook for 1980
Soviet grain imports in response to this year's poor
harvest will continue well into calendar year 1980.
Moscow will probably import at or near the maximum
rate allowed by port capacity through September 1980
or longer; in addition the USSR will continue it's
practice of importing grain even in years of good crops.
Thus grain and soybean imports for the year as a whole
will be 30 to 35 million tons and possibly at higher
average prices than this year's estimated imports of
24-27 million tons. Equipment imports will likely
remain at or below 1979 levels, but there will continue
to be upward pressure on pipe and nontubular steel
imports.
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Although natural gas export revenues should climb in
response to higher prices and export volume, we expect
oil earnings to level off or turn down in 1980. Moscow
is also expected to continue to have problems in
meeting its increased export obligations under
compensation agreements, primarily chemicals. Ex-
ports of other commodities may be hurt if there is a
marked economic slowdown in the West; demand for
Soviet goods will slow and the recent runup in'
commodity prices could be reversed.
The resultant increase in the Soviet hard currency
trade deficit in 1980 will almost certainly push
Moscow's current account back into the red and may
produce the largest jump in Soviet debt since 1976.
The USSR cannot hope to offset a substantial deterio-
ration in its merchandise trade balance from increased
arms sales or invisible earnings. In addition, the
prospects for heavy gold sales seem less favorable than
in 1976-79. Western market observers predict that
recession in the West will likely weaken the gold
market;" moreover, Moscow would probably want to
cut back marketings after selling out of its reserves for
four straight years (assuming sales in excess of 235
tons in 1979).
The USSR should nonetheless be able to borrow the
funds needed to cover the 1980 deficit without undue
strain. Government backed credits tied to imports of
capital goods will provide some financing. However,
the likely magnitude of the current account shortfall
and of repayment obligations indicate that the USSR
will have to approach Western banks for balance-of-
payments financing. Since recession in the West will
likely keep loan demand from prime borrowers weak,
Moscow should be able to raise the needed funds from
the Euromarket on reasonably favorable terms.
Hard Currency Trade in the 11th Five-Year Plan
In a sense, 1980 will probably turn out to be a
transition year for Soviet foreign trade officials. The
USSR faces hard choices in establishing a hard
currency trade and payments strategy for the 1980s.
2' "Gold Hits New High in London," The Journal of Commerce,
26 July 1979; "Gold Analyse der DG-Bank; Eine Hausse mit
Hindernissen," Handelsblatt, 6 August 1979: "Rambunctious Gold
Market Has Traders Pacing the Floor, Wondering What's Next,"
Increasingly severe economic problems in the domestic
sector are likely to intensify import demand for
agricultural commodities and steel products. The need
to spur productivity and boost energy production will
be greater than ever before, pressuring the leadership
to boost imports of Western equipment and technology
above present levels
Moscow had originally hoped that the import expan-
sion begun in the early 1970s could be financed by a
rapid growth in manufactured products exports and-
via compensation agreements-by sales of products
produced with imported equipment. In truth, import
growth was possible largely as a result of heavy
borrowing and increased world market prices on a
higher volume of oil sales. Domestic production
problems combined with growing domestic-and East
European demand has made it increasingly difficult to
expand, or even sustain, traditional exports such as oil
and wood products or to make good on its export
commitments-natural gas, chemicals-under
compensation agreements. Most importantly, Moscow
faces almost certain prospect of a severe drop in oil
exports to the West unless it is willing to accept a
reduced growth in domestic production or reduce
substantially its exports to CEMA trading partners.'
The balance-of-payments problems looming in 1980
can be managed in the short run by increased
borrowing. These problems, however, would lead to
increasingly severe strains in the longer term. Moscow
must devise a balance-of-payments strategy for the
1980s consistent with rising demand for Western
imports and the declining oil exports. Within a
balance-of-payments framework, the strategic options
open to Soviet foreign trade planners are (a) boosting
earnings from nontrade current account items, (b)
sustaining a net inflow of resources on the capital
account, and/or (c) correcting the fundamental dis-
equilibrium in the USSR's trade position.
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Unlike the 1970s, the Soviets will not be able to count
on rapid increases in revenues from gold sales, arms
deliveries, and services to cover widening trade deficits.
The prospects for sustained rapid growth in gold sales
are limited by the rate of Soviet gold production-and
the uncertainties of industrial and speculative demand
for gold. The large drop in new commitments for arms
sales in 1978-79 will probably result in lower arms
deliveries, possibly as early as 1980. Increasing resist-
ance by Western governments to the predatory pricing
of Soviet shipping companies operating in the West
will likely slow the growth of Soviet transportation
earnings. Future increases in tourism receipts, with the
exception of Olympic-related earnings in 1980, will
probably be steady but not substantial.
That the USSR could, or would even attempt to, cover
large repeated current account deficits by large
balance-of-payments financing is quite unlikely. Of
course, Western competition for Soviet contracts
should assure an ample supply of government-backed
financing for purchases of capital goods while untied
financing would be available for short-run emergencies
such as a harvest shortfall or a drop in exports due to
Western recession. Western bankers, however, would
be loath to provide massive balance-of-payments
financing to cover deficits resulting from a long-term
downturn in oil exports. Moscow probably would not,
in fact, try to offset such a downturn by large
borrowings, particularly if exports were expected to be
a problem over the loan repayment period
In view of the limited potential for increasing revenues
from nontrade current account items or from the
capital account, the Soviet leadership has little choice
but to squeeze the merchandise account. Yet, as
outlined above, the available options in this regard all
carry high costs. Moscow is unwilling to commit more
raw materials to hard currency markets in view of
production problems, increasing extraction costs, and
rising demand in the USSR and Eastern Europe.
Soviet ability to expand exports of manufactured
goods, on the other hand, depends greatly on the
willingness of the USSR to allow Western participa-
tion, particularly quality control, in Soviet production.
Failure to take positive action in either of these areas
would carry the cost of a diminished import capacity.
The calculus that the USSR will employ in weighing in
relative cost/benefits of export expansion is still
uncertain. What is clear is that the fall in oil exports
will cause a major disequilibrium in the USSR's
traditional trade and payments strategy. It will force a
compensating readjustment in the merchandise ac-
count-either by a reduction in imports or by a rapid
expansion of nonoil exports.
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