WESTERN COMPETITION FOR SOVIET CONTRACTS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP08S01350R000200510001-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 17
• Document Creation Date: December 22, 2016
• Document Release Date: March 23, 2012
• Sequence Number: 1
• Publication Date: May 1, 1985
• Content Type: REPORT

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Intelligence
Directorate of
Western Competition for
Soviet Contracts
An Intelligence Assessment
Secret
SOV 85-10095X
May 1985
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Soviet Contracts
Western Competition for
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This paper was prepared by the Economic
Performance Division, Office of Soviet Analysis, with
contributions from Strategic Policy Division,
SOYA, West European Division, EURA, and
Northeast Asia Division, OEA.
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Division, SOYA,
Comments and queries are welcome and may be
directed to the Chief, Economic Performance
Secret
SOV 85-10095X
May 1985
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Western Competition for
Soviet Contracts
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Key Judgments Soviet orders for machinery and equipment in 1984 reached their lowest
Information available level in over a decade because of Moscow's disappointment with the overall
as of 1 May 1985 benefits of previously imported equipment and its desire to reduce depen-
was used in this report.
dence in the wake of Western sanctions. Nevertheless, the USSR continues
to look Westward for select technologies, often integrated in complete plant
purchases, to address key bottlenecks and technological lags.
The Soviets are currently involved in intensive project negotiations with
Western firms that are likely to result in sizable contracts in the near
future. Judging from ongoing negotiations and our assessment of Soviet
domestic shortfalls, technology and equipment purchases during the 12th
Five-Year Plan (1986-90) will be concentrated in:
? Oil and gas field equipment to stem falling oil production, increase
offshore exploration, and accelerate natural gas production.
? Chemical equipment to boost Soviet fertilizer and synthetic fiber
production.
? Agricultural production and food-processing equipment to support con-
sumer welfare goals
Once import priorities are set and allowances made for broader political
considerations, the typical Soviet purchasing strategy is to obtain the
needed technology and equipment on the best terms possible. While
Moscow used the lure of major contracts to keep West Europeans from
adopting US proposals to limit energy and advanced technology trade,
contracts ultimately went to those firms offering the best commercial
terms. In addition, Moscow has only paid lipservice to Western demands
for preferential treatment such as redressing trade imbalances.
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West European firms-which generally have the necessary technology,
offer attractive financing, and have longstanding ties with Soviet buyers-
are likely to continue to get the lion's share of Soviet business. While
Japanese technology is highly competitive, Japanese unwillingness to agree
to Soviet countertrade demands will limit their equipment sales.F 25X1
Recently the USSR has tantalized US businessmen with the prospects of
lucrative deals and has toned down allegations that US suppliers are
unreliable. This marks a sharp reversal from recent years when US-
imposed sanctions and export controls led Moscow to avoid US businesses.
iii Secret
SOV 85-10095X
May 1985
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Improved US-Soviet relations coupled with some movement on the
sanctity-of-contract issue could open the door for increased US sales,
especially where the United States has a clear-cut technological advan-
tage-indeed some small deals have already been concluded. But events
over the last 10 years have eroded the competitive position of US firms,
and thus it is not likely that the United States will regain the position in
Soviet trade it once had.
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Outlook for Hard Currency Imports
Status of Project Negotiations
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Western Competition for
Soviet Contracts
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a 2-percent decline in average prices.
Current Trade Position
The USSR's surplus on hard currency trade fell only
slightly in 1984 to $4.3 billion in spite of record
imports of grain and a decline in the value of hard
currency exports of arms to the less developed coun-
tries (LDCs). Imports of machinery and equipment
and of pipe fell substantially because of the comple-
tion of deliveries for the Siberia-to-Western Europe
gas pipeline. Purchases of nongrain agricultural prod-
ucts also declined. The value of oil exports increased
slightly as a 5-percent rise in volume more than offset
deficit.
The USSR continued to run trade surpluses with
nearly all of its West European partners, the largest
being with Italy ($2.3 billion), West Germany ($1.4
billion), and the Netherlands ($1.6 billion) (see figure).
Moreover, most of the USSR's hard currency credits
continued to be provided by West European countries.
Moscow also ran surpluses with most LDCs. The
countries with which the Soviets ran deficits were for
the most part the ones from which they imported
sizable amounts of agricultural products (the United
States, Australia, Canada, Argentina, and Brazil).
The USSR has used the bulk of its excess earnings
from energy exports to Western Europe to pay for
imports from those countries with which it has a
About 83 percent of Soviet exports to the West
European countries consist of oil and oil products and
natural gas. Nearly all of the USSR's imports from
these countries, on the other hand, consist of machin-
ery and equipment and other manufactures and semi-
manufactures. Real imports of machinery and equip-
ment declined an estimated 40 percent in 1977-81,
rose nearly 45 percent with deliveries for the new gas
export pipeline in 1982-83, and declined roughly 15
percent in 1984.
West European countries-most of which are facing
high unemployment and economic stagnation-have
been pressing Moscow to step up its purchases but to
little avail. But because these countries must import
USSR: Hard Currency Trade Balances,
Selected Countries, 1984
United States
Canada
Japan
United Kingdom
France
West Germany
Netherlands
Italy
oil and gas, they have little leverage in forcing
Moscow's hand. The other possible energy suppliers
are not apt to increase imports from Western Europe
either. The USSR, for its part, will continue to
welcome these surpluses since they can be used to help
pay for purchases of grain and other agricultural
goods from countries such as the United States that
are unlikely to try to narrow their surpluses by greatly
increasing imports from the Soviet Union.
Outlook for Hard Currency Imports
Beyond 1985 our projections of Soviet oil production
and export spell trouble for the Soviet hard currency
payments position. Unless Moscow revises its cautious
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borrowing policy, constraints on exporting oil for hard
currency could well force the USSR to reduce the
volume of imports from hard currency countries at
least through 1990. According to our analysis, under
the worst case scenario for energy exports, imports
from the West could drop by as much as 20 percent
over the remainder of the decade.' Our best guess is
that Moscow will face a less severe drop in energy
exports and will step up borrowing somewhat to keep
import volumes at roughly current levels.
The extent to which the 1982 Food Program succeeds
in making the USSR more self-sufficient in agricul-
tural production will largely determine how much the
Soviets can spend on nonagricultural goods. With
hard currency resources limited Moscow will have to
choose between competing domestic requirements:
? As a first priority, we believe the USSR will try to
import sufficient quantities of grain and feedstuff to
keep the livestock program on track.
? A second objective probably will be to obtain the
industrial materials needed to prevent production
bottlenecks, and the equipment and technology to
help develop and exploit energy sources.
? The third priority might well be the importation of
equipment and technology for other key areas.
Although Moscow no doubt expects much of the
increase in imports of machinery and equipment to
come from Eastern Europe, which now provides about
two-thirds of such imports, it is likely to continue to
import sizable quantities from hard currency coun-
tries. These purchases totaled $7 billion in 1983. The
Soviets will need Western machinery and equipment
for the energy industries, agricultural and food-
processing industries, machine-tool production, con-
struction and transportation projects, process-control
and other electronics industries, and chemical produc-
tion. If unable to acquire Western machinery and
technology, the Soviets could go it alone but would
sustain appreciable losses in quality, reliability, and
productivity in some sectors.
Status of Project Negotiations
Current Soviet project negotiations with Western
firms indicate that Soviet purchases of machinery and
equipment for the next five-year plan will focus
heavily on energy-related equipment and technology.
Of the more than $20 billion in potential sales to the
USSR, over 70 percent are for the energy sector.
The USSR has expressed the most interest in Western
participation in the development of major oil and gas
fields. Initial contracts for the Tenghiz and Astrakhan
II fields have already been signed, and additional
contracts for these projects as well as one at Karacha-
ganak are expected to be awarded soon. Other pro-
jects such as the Barents Sea Petroleum Development
and Irkutsk and North Star liquefied natural gas are
in early stages of discussion but have the potential for
generating billions of dollars in orders by the end of
the century.
There has also been a resurgence of Soviet interest in
purchases of Western technology and equipment for
the chemical sector, particularly in the form of turn-
key projects. We expect that such purchases for the
12th Five-Year Plan could exceed $2 billion. The
USSR is also negotiating projects in the metallurgy,
automotive, electronics, and machine-tool sectors that
are designed to selectively improve the quality and
assortment of output in those sectors.
remain small.
Finally, the adoption of the Food Program in 1982 has
resulted in increased interest in Western equipment
and technology in the agricultural and food-
processing sectors. Although most of Moscow's im-
ports are likely to come from Eastern Europe, pur-
chases from Western firms of selective types of
equipment are likely to expand. Because most of the
projects will be on a much smaller scale than those
projects being negotiated in the energy and heavy-
industry sectors-under $50 million-the relative
share of these purchases in total Soviet orders will
S
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ganak.
Competing Western Interests
The major contenders for projects likely to be signed
in the near future are German, French, Italian, and
Japanese firms. The West Germans, as in the past,
probably will capture the lion's share of the contracts
for projects included in the next five-year plan. In-
deed, a West Ger-
man firm has already been chosen to be the general
contractor for the gas-processing plant at Karacha-
billion are reportedly approaching conclusion.
The French are also likely to win sizable contracts
with the Soviets. It was announced in early April, for
example, that contracts for the gas-processing plant at
Astrakhan and the gas-desulfurization unit at
Tenghiz, valued at $400 million, would be signed
soon. Meanwhile, the Italians have already signed
contracts worth about $300 million this year, and
negotiations for several other contracts worth over $2
The West Europeans currently have an edge over
other competitors in obtaining lucrative Soviet orders.
Their governments have long pursued a policy of
expanding trade with the USSR. Government-backed
credits at attractive interest rates are frequently
offered, and COCOM restrictions are generally less
rigidly interpreted than in the United States. In
contrast, US policy since the mid-1970s, and particu-
larly the 1980 and 1982 sanctions, has driven the
USSR to find alternatives to US grain and machinery
and equipment. US firms received only 7 percent of
Soviet equipment orders last year compared with a
25-percent share in the early 1970s. Similarly, since
the 1980 partial US grain embargo, the US share in
total Soviet grain imports has been below 40 percent
compared with an average of about 60 percent
throughout the 1970s. The Japanese Government has
likewise discouraged expanded trade relations with
the Soviets but to a lesser extent than the United
States.
The geographic proximity of Europe and Japan to the
USSR and their import requirements for most essen-
tial raw materials make these countries more amena-
ble to Soviet desires for countertrade arrangements.
If, as we expect, the USSR's hard currency position
deteriorates, Soviet officials could well increase ef-
forts to negotiate such arrangements to assure their
ability to pay for the required technology. Joint
Soviet-Japanese development of Siberian resources, in
particular, will depend on these types of arrange-
ments. Japanese businessmen, however, do not see
sufficient future demand for Siberian resources to
justify expanded cooperation on that basis. Thus,
many of the projects proposed by the Soviets will
proceed slowly at best, and the Japanese role in Soviet
projects during the 12th Five-Year Plan will likely be
limited.
The trade deficits that most West European countries
have run with the USSR in recent years may also give
these countries an added advantage in their efforts to
secure Soviet business, albeit marginal. Despite agree-
ments signed in early 1984 committing the USSR to
balance its trade with both France and Italy, equip-
ment orders have not, been forthcoming. Indeed, Re-
nault recently canceled a deal to design and construct
an automobile plant after the Soviets placed most of
the actual equipment orders for this plant with West
German firms. In contrast, French pressure may have
been partially behind the increased EC-mainly
French-grain sales to the USSR during the 1984/85
marketing year (July-June), but subsidized prices and
the strong US dollar also made EC grain competitive.
Aside from France and Italy, other West European
countries have not made much of an issue over the
trade imbalances.2 (See appendix B for a discussion of
selected developed countries' attitudes toward trade
with the USSR.)
On the other side of the coin, non-European developed
countries-the United States, Canada, Japan, and
Australia being the most important-generally run
sizable trade surpluses with the USSR. Soviet offi-
cials have cited these large surpluses as being a
hindrance to trade expansion and have pressed firms
in these countries to purchase Soviet commodities to
' In an economic sense, bilaterally balanced trade is not a necessary
criterion for a sound trade position. Many countries, however, use
the issue of bilateral trade deficits to increase exports. The issue
takes on a greater urgency when a country, such as France or Italy,
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at least partially offset Soviet purchases from these
firms. In a rare statement of candor, however, Deputy
Foreign Trade Minister Zhuravlev stated that the
large US trade surplus is not a problem because the
USSR could not produce what the United States
needed. As long as Moscow requires the products
produced by these countries, particularly the agricul-
tural commodities supplied by the United States,
Canada, and Argentina, these surpluses will remain
1980s from the failure of US efforts to block West
European agreements to purchase large quantities of
Soviet natural gas, and from the subsequent willing-
ness of West European governments and corporations
to defy US efforts to prevent the sale to the USSR of
gas pipeline construction equipment. Ongoing Soviet
efforts to circumvent US restrictions on high-technol-
ogy exports by purchasing these items in Western
Europe undoubtedly have this political goal in mind,
along with the principal goal of securing denied
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large.
Political Considerations
Once import priorities are set and allowances are
made for broader political considerations, the USSR's
purchasing strategy is to obtain the needed items on
the best commercial terms possible. Although political
considerations have influenced the choice of countries
from which firms are requested to bid for Soviet
projects (and the choice of firms within those coun-
tries), the final choice among competing offers has
almost invariably been made on the basis of economic
criteria by foreign trade functionaries. The decision to
seek a foreign source for a particular type of plant and
equipment is made as part of the overall economic
planning process; individual ministerial "wish-lists"
are prioritized according to broader production goals
and foreign exchange availabilities. Although indus-
trial representatives may provide initial guidance re-
garding potential suppliers and technical evaluation of
foreign bids, the responsibility for commercial negoti-
ations is closely guarded by Ministry of Foreign Trade
personnel.
Judging by the emphasis given to select aspects of
commercial negotiations, Ministry of Foreign Trade
officials are held responsible for demonstrating that
they meet the technical demands of the industrial
ministry-guaranteed delivery and on-site perfor-
mance of imported equipment-at the "best" terms
available-lowest purchase price and availability of
long-term loans carrying a low nominal rate of inter-
est. (See inset on Politics in Soviet Negotiating Strate-
gies.)
In Western Europe, commercial considerations clear-
ly have been reinforced by Soviet hopes that closer
trade ties would complement longstanding political
efforts to divide the United States from its allies.
These hopes received encouragement in the early
technology for economic and strategic reasons
The Soviets sometimes attempt to use their trade ties
with Western Europe as a stick rather than a carrot
for political purposes. In recent weeks, Soviet officials
have indicated that West German trade with the
USSR will suffer if West Germany continues to
support the United States on the Strategic Defense
Initiative and other security issues. The Soviets, how-
ever, invoked similar threats during their campaign in
1983 to dissuade West Germany from approving
NATO INF deployments, then backed away from
them after the Bundestag made its affirmative
decision.
A number of Soviet statements indicate that calls for
improved trade ties with the United States have been
motivated by the hope of using businessmen to influ-
ence US policies, including US positions at the arms
control talks in Geneva. In a recent example, a Soviet
academician reportedly said in February that if the
arms negotiations show clear prospects for success,
the USSR intends to broach expanded trade relations
as an "adjunct" to the talks. Similarly, visiting Polit-
buro member Shcherbitskiy claimed in a meeting
with US officials in early March that progress in the
talks could result in increased bilateral trade.
LDC Role in Soviet Trade
In general, the USSR runs a sizable surplus in its
trade with the less developed countries. Military
exports account for almost 70 percent of Soviet
exports to the LDCs, while imports consist primarily
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Politics in Soviet
Negotiating Strategies
by the Soviets. We agree
US Embassy officials say that they frequently cannot
tell whether commercial concerns-credit terms, in-
terest rates, and reliable delivery-or political fac-
tors have more influence on the awarding of contracts
trade.
that commercial terms probably are at the heart of
their negotiating strategy. Nevertheless, Soviet trade
experts inject politics into negotiations both as a ploy
to obtain better terms by wearing down negotiators
with superfluous demands and as a political message
for other governments. The US Embassy in Moscow
has noted that, in the case of a single import com-
modity, the Soviets-to obtain better terms-may
tell a Japanese exporter that his government supports
the United States too much, a German exporter that
he should object to the Pershing II, and a Canadian
that his country's trade surplus with the USSR is too
big. Since the early 1970s, the Ministry of Foreign
Trade leaders have repeatedly argued with US diplo-
mats and businessmen that credit restrictions, US
trade legislation, and other US Government actions
and policies are barriers to expanded US-Soviet
Western businessmen have noted that officials of
Foreign Trade Organizations become more discrimi-
nating in selecting foreign firms since economic
Moscow into increasing imports from them.
of agricultural commodities and fuels. Those LDCs-
mainly in the Middle East and Africa-that actually
run large trade deficits with the USSR because of
their limited export offerings and dependence on
Moscow for arms are in no position to pressure
In contrast, Soviet trade with LDCs in Latin America
and the Far East has usually been in deficit. These
countries are the major LDC suppliers of agricultural
commodities to the USSR. At the same time, the
generally poor quality of Soviet manufactured goods
and the distance that separates these countries from
the USSR make Soviet exports generally unattrac-
tive. The USSR has complained about these imbal-
ances and has gone so far as to state that future
sanctions were imposed after the Soviet invasion of
Afghanistan in 1979; those sanctions resulted in
delayed deliveries of equipment and long, fruitless
negotiations. According to one Western business jour-
nal, a European company with a longstanding rela-
tionship with purchasing officials might win a con-
tract even if another competitor, particularly a US
firm, offered cheaper terms, more reasonable financ-
ing, or a better product because the Soviets trusted
that European company to make every effort to
deliver on time.
We note, however, that Soviet trade officials some-
times follow these strategies inconsistently. Some
deputy foreign trade ministers, Foreign Trade Orga-
nization officials, and industrial leaders at times
lobby with their superiors for favored US firms with
whom they have done considerable business in the
past, according to US Embassy commercial officers.
At other times, under pressure from the Kremlin,
they refuse to deal with those same firms.
purchases from Argentina and Brazil-two of its
largest LDC trade partners-depend on efforts by
those countries to increase imports from the USSR.
Imports from Latin America and the Far East have
indeed fallen since their peak in 1981, but largely
because of an overall reduction in agricultural imports
and falling world commodity prices rather than a
deliberate shift in trade away from these regions.F_
These same countries can and, to some extent, do
provide Moscow with an alternative to the developed
West not only for agricultural products but also for
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some manufactured commodities, including machin-
ery and equipment. Although imports of manufac-
tures other than textiles remain small-only about
$530 million in 1983-the Soviets have shown in-
creased interest in such commodities in recent years.
Brazilian startup devices were used on the Siber-
ia-to-Western Europe pipeline, for example, and in
late 1982 the USSR reportedly purchased $100-125
million worth of offshore oil equipment from a Singa-
pore firm. It is unlikely, however, that such interest
will soon translate into either sizable or sustained
purchases, given traditional Soviet preferences for
dealing with established firms in the industrialized
West, its penchant for advanced technology, and the
aftersales services that only the larger firms in the
West can provide.
Outlook for the United States
Although few of the major contracts currently being
negotiated probably will be awarded to US firms,
there are increasing opportunities for US firms to
expand their sales to the USSR. According to the US
Embassy in Moscow, since the January Working
Group meeting of the Joint Commercial Commission,
Soviet foreign trade organizations are no longer with-
holding bid invitations, and a number of US firms
have been requested to bid on major projects. A few
firms have actually signed contracts recently-though
the dollar amounts involved have been relatively
small. Soviet officials have also toned down allega-
tions that US suppliers are unreliable. This shift in
Soviet attitude combined with the continued Soviet
belief that US technology and equipment are superior
will put US firms in an improved position to compete
against foreign firms.
Soviet traders have shown particular interest in US
petroleum equipment such as electric submersible oil
pumps, oil-refining technology and equipment, a plant
for sour gas processing, and a facility to manufacture
subsea oil- and gas-production equipment. In addi-
tion, Western firms bidding as prime contractors for
major field development projects are soliciting US
suppliers as subcontractors. Gorbachev's role in the
Soviet agricultural sector in recent years may spur
Soviet efforts to obtain Western technology for this
sector, and the large US agribusiness sector probably
will give US firms an advantage over other Western
firms. Soviet firms reportedly are already stepping up
negotiations for the purchase of US agricultural
technology and equipment.
Despite these increased opportunities for US business,
the United States is not likely to regain the position it
held in the early 1970s. Events over the last 10 years
have eroded US competitiveness. Moscow has since
developed and deepened its ties with non-US firms,
and Soviet concern over the reliability of US suppliers
will take a long time to dispel. In addition, the hard
currency stringencies that we anticipate Moscow will
face, at least through 1990, will constrain the size of
the pie that the United States must share with
Moscow's other hard currency trading partners.'
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Appendix B
Attitudes of Western Governments
Toward Trade With the USSR
West Germany
Bonn is currently not overly concerned about its trade
deficit with the USSR and is not applying pressure on
Moscow to end the imbalance. The West German
trade deficit increased from $954 million in 1983 to
$1.4 billion last year.4 Bonn continues to run a
comfortable global trade surplus.
scheduled to increase again this year. On the export
side, almost one-half of all French sales to the USSR
are agricultural goods, while semimanufactured goods
and finished manufactured goods each account for
about another 25 percent.
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large portion of the Soviet contracts.
West Germany has not initiated any projects or set up
any special credit facilities to boost exports to the
USSR. Officially backed export credits are available
to the USSR and to other countries with good credit
ratings. During a January 1985 meeting of the Soviet-
German Joint Economic Commission in Bonn, West
German participation in development projects during
the 12th Five-Year Plan was discussed. The West
Germans expect, as in past Soviet plans, to capture a
to buy more West German products.
Bonn may focus more on its trade imbalance with the
USSR if the deficit becomes chronic. Gas deliveries
over the next decade will rise about 25 percent in
volume, while West German exports associated with
pipeline development are winding down. If its global
trade surplus is reduced by a future decline in the US
dollar, Bonn might begin to actively pressure Moscow
France
In contrast, France has complained the most to the
Soviets over its continuing trade deficit. Although
France recorded a trade surplus with the USSR
through 1978, after the second oil shock the trade
balance has been consistently in the red. The deficit
peaked at $1.3 billion in 1982 and exceeded $800
million last year. Energy imports, which account for
over 85 percent of French imports from the Soviet
Union, increased by 10 percent in 1984 as deliveries
from the Siberian pipeline began; gas imports are
' This memorandum uses Soviet official trade statistics only. Soviet
data can differ substantially from Western statistics. For example,
West German trade data show that the trade balance shifted from
a $240 million surplus in 1983 to a $750 million deficit in 1984.
Much of the large discrepancies can be explained by differences in
France and the USSR signed an agreement in early
1984 that committed the Soviets to move toward
balancing trade by increasing their purchases from
the French. Nonetheless, exports to the USSR in
1984 fell in volume terms. From the French perspec-
tive, the most disturbing trend in Franco-Soviet trade
is the Soviet failure to place orders for capital equip-
ment. Orders have fallen from over $1.5 billion in
1981 to less than $120 million last year-the lowest
level since the late 1960s.
Until recently, the French had done little more than
verbally protest over the deficit problem. In the last
several weeks, however, they have adopted a more
active approach. Renault has canceled a deal to build
an automobile plant, stating publicly that the Soviets
had placed most of their equipment orders with West
German firms, rather than with Renault or other
French companies. In addition, press stories before
the early April meeting of the Franco-Soviet Large
Commission meeting suggested that France would
reduce purchases of natural gas if Moscow did not
increase imports of French capital equipment.
At the same time, the French will continue to actively
court the Soviets as customers. Paris is currently
trying to get the Soviets to accept credits in European
currency units to offer lower interest rates and com-
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United Kingdom
Britain does not view its trade deficit with the USSR
as a serious problem. The deficit with the Soviets
grew from $216 million in 1970 to $430 million in
1979. After enjoying a surplus in 1980 and 1981,
Britain's trade reverted to a deficit in 1982, which was
$700 million last year, down slightly from 1983.
Despite their relative lack of concern, the British are
attempting to increase exports to the USSR. London
and Moscow recently have resumed trade talks cur-
tailed following the Soviet invasion of Afghanistan.
British companies hope to land major contracts to sell
petrochemical, chemical, and biotechnology processes
to the Soviets this year. In his December visit to
London, General Secretary Gorbachev said he saw
"good opportunities" for British companies in the
areas of machinery, agriculture, food processing, and
chemicals in the Soviet Union
In the past, the United Kingdom has been willing to
offer attractive credit terms to promote exports to the
USSR, and we believe London will continue using
export credits to increase trade in the future. In 1983,
for example, the government Export Credits Guaran-
tee Department (ECGD) offered a Soviet company
financing for the purchase of oilfield equipment at a
rate of 7.5 percent, well below the market rate. Such
terms represent a common practice of the ECGD and
are not unique to trade with the Soviets.
Italy
Like the French, the Italians have been greatly
disturbed by the size of the Soviet trade surplus,
although they have yet to take strong measures to deal
with the problem. The trade imbalance with the
USSR has been increasing steadily since 1974. The
deficit climbed over the billion-dollar plateau in 1980,
and last year's deficit reached a record $2.3 billion.
In this regard, the Siberian gas accord, pushed strong-
ly by the Italian business community, was accompa-
nied by a commercial agreement committing the
Soviets to cut the $2.1 billion 1983 deficit in half by
1986 and to spend the income from the new gas
contract on Italian goods and services. The Soviet
commitment was made, however, with the stipulation
that Italian goods be competitive both in price and
financing. A multitude of cooperation and collabora-
tion agreements followed in almost every industrial
field, but, despite initial business euphoria over the
prospects of stepped-up sales, actual contract signings
have not lived up to expectations.
Nonetheless, Italian officials remain optimistic that
they are on the verge of expanding exports to the
Soviet Union and cutting back the trade deficit.
Numerous small contracts were signed in 1984, and
two fairly large contracts have been concluded this
year. One contract, a joint venture between an Austri-
an and an Italian firm, is for producing steel cord for
radial tires. The contract is valued at $220 million for
the Italian firm Danieli, which absorbed 1 point to
lower the financing cost to 7.5 percent over five years.
The Italian company Cogolo will construct three shoe
factories in the USSR for a total of $60 million.
Italian officials also report that negotiations are under
way for about $5 billion in additional contracts.
Several contracts are reportedly ready to be signed,
including the construction of a turnkey steelplant to
produce 1 million metric tons per year at Volgograd
valued at about $1 billion, a $200 million oil-drilling-
pipe plant, a $750 million coal slurry pipeline project
in Novosibirsk, and up to $750 million in contracts for
automotive and agricultural equipment.
Italian companies also hope to conclude contracts for
=turnkey textile, chemical, and agro-industrial pro-
Because of the lack of progress in reducing the trade
imbalance, Italian officials considered cutting back on
fuel purchases during 1984, according to the US
Embassy in Rome. More recently, however, they
appear to have shelved this option because Italy faces
a possible protracted renegotiation of its gas contract
with Algeria that may make Soviet supplies more
necessary.
jects. IRI, the Italian state holding company, expects
to participate in Soviet plans to modernize its steel
industry, and the Soviets have expressed interest in
Italian technology for flexible manufacturing equip-
ment, automated assembly lines, and gas injection
equipment to increase output from aging oilfields.
25X1
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imports.
Japan
Since 1982, trade between Japan and the Soviet
Union has fallen sharply. Following a 20-percent drop
in 1983, two-way trade in 1984 declined another 12
percent to $3.6 billion, with a Japanese surplus of $1.5
million. The Soviet share of Japan's 1984 global trade
was only 1.5 percent of exports and 1.0 percent of
gas.
Japan has traditionally imported primary products
from the USSR, but Japanese demand for Soviet
goods has not been boosted by the recovery of the
Japanese economy. Japanese interest in Soviet energy
projects is based principally on the desire to sell
equipment rather than to purchase coal, oil, or natural
thaw in relations between Tokyo and Moscow.
On the other hand, Soviet efforts to expand exports,
especially of nonenergy items, have led Moscow to
push strongly for counterpurchase or barter trade,
which the Japanese have rejected. In addition, Tokyo
has refused Soviet requests for a major reduction in
the interest rates charged by the Japanese on deferred
payments for imports. Japan's own policies to support
US moves to check Soviet initiatives, moreover, have
discouraged expanded trade relations. The net effect
of Tokyo's behavior has been to shelve official trade
and economic contacts with the Soviets. As recent
changes in US-Soviet relations and in Soviet leader-
ship have emerged, both Prime Minister Nakasone
and Foreign Minister Abe have made smoothing
relations with Moscow a priority. In fact, the resump-
tion of political and economic exchanges since mid-
1984 has been viewed in Japan and elsewhere as a
Japanese industrial leaders-especially in the trading
companies-anticipate that the expanding bilateral
dialogue, Gorbachev's rise to power, and the prepara-
tions under way for a new Soviet five-year plan will
bring increased trade. We believe, however, that
Japanese industry, although willing to discuss new
development projects, will be slow to make commit-
ments. Ongoing joint resource development ventures
are progressing slowly, if at all. Japanese equipment
manufacturers are interested in sales to the Soviet
Union, which such projects promote, but problems in
developing the Siberian infrastructure and continued
low demand for Siberian resources will continue to
discourage a larger Japanese role in Siberian joint
development
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Secret
is
Secret
Declassified in Part - Sanitized Copy Approved for Release 2012/05/14: CIA-RDP08SO135OR000200510001-9