GORBACHEV'S MODERNIZATION PROGRAM: A STATUS REPORT

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP08S01350R000401320001-7
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 46
• Document Creation Date: December 27, 2016
• Document Release Date: March 5, 2012
• Sequence Number: 1
• Publication Date: August 1, 1987
• Content Type: REPORT

Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
Gorbachev's Modernization
Program: A Status Report
DDB-1900-140-87
August 1987
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
Gorbachev's Modernization Program:
A Status Report
Information Cutoff Date: 19 March 1987
A paper presented by the Central Intelligence Agency
and the Defense Intelligence Agency for submission to
the Subcommittee on National Security Economics
of the joint Economic Committee,
Congress of the United States
This document has been produced for official use within the US Govern-
ment and distribution is limited to US Government agencies. Requests for
this document from outside the US Government must be referred to the
Defense Intelligence Agency, Washington, D.C. 20340-0001.
DDB-1900-140-87
August 1987
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
Gorbachev's Modernization Program: A Status Report
SUMMARY
GorbacheVs efforts to shake the Soviet economy out of its doldrums began to pay off in 1986.
Partly as a result of his leadership, partly as a result of some policies instituted by his predecessors,
and partly as a result of some good luck, the economy rebounded sharply in 1986. On the strength
of record farm output and reduced loss of work time, Soviet GNP grew by an estimated 4.2 percent
and industry by an estimated 3.6 percent - the highest rates in a decade.
Gorbachev pressed forward with efforts to make modernization of industry a major source of
growth by the end of the 1980s. Investment growth soared to 7.5 percent last year, with greatest
emphasis on renovating and reequipping facilities that produce machinery critical to modernization.
The Soviet consumer, in contrast, did not fare, nearly as well. Per capita consumption grew by
less than 1 percent, in part because legal sales of alcohol - historically a major component of
Soviet consumption - fell sharply as a result of the antialcohol campaign.
Information on defense spending in 1986 is less solid than that for consumption and investment,
but our preliminary estimate is that overall defense expenditures in constant prices increased by
about 3 percent. Although somewhat above the rate of recent years, this growth does not appear
to represent a change in defense spending policy since GorbacheVs arrival.
Although the economy's vital signs looked good, several major problems cropped up during the
year. The most serious involved:
. Poor progress in the regime's efforts to improve the quality, reliability, and technological
level of Soviet machinery.
? A sharp decline in Soviet hard currency export earnings.
? The first significant bureaucratic resistance to specific policies.
None of these problems had a major impact on growth last year, but they must be corrected or
offset if modernization is to proceed on track.
Despite these problems, the 1987 plan shows no letup in Gorbachevs drive to revitalize the
economy. The goal for overall economic growth is high - over 4 percent. Heavy demands are
again placed on industry, as the Soviets are apparently banking on the sharp rise in investment in
civil machinebuilding in 1986 to spur an acceleration in output this year.
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
However 1987 turns out, we expect some improvement in Soviet economic performance over
the next few years relative to 1981-85. Nonetheless, Moscow probably will fall well short of its
goal of 4 percent average annual growth in GNP during 1986-90 because of the huge gains in
productivity this would require. Based on Gorbachevs program so far and realistic assumptions
about productivity, we project GNP to grow at an annual average rate of about 2-3 percent during
1987-90.
Growth at this rate - while better than in the recent past - would be inadequate to relieve
resource allocation pressures and could eventually lead to some major policy adjustments. The
toughest decisions are likely to be in the investment arena. Several branches of industry probably
will require increases in investment above current plans if output targets are to be met, but
additional investment in the consumer area will also probably be necessary to enhance worker
productivity. At the same time, defense industries will require substantial investment to support
weapon production plans for the 1990s. New weapon programs are under way to update or replace
major systems with improved models in every mission area, with many systems likely to begin series
production in the mid-1990s.
We do not know how Gorbachev will respond to these pressures, but we do not expect major
shifts in military production, at least through 1990. Past heavy investment in defense industries and
the momentum of ongoing production programs argue strongly for their continuation. Although
there could be some competition for basic materials, intermediate goods, and skilled labor which
might cause the pace of production of some new weapon systems to be somewhat slower and
their introduction to be somewhat delayed, most major weapon programs should go forward as
planned.
Failure to sustain the 1986 economic upturn might also induce Moscow to increase demands on
its East European allies for more and better quality goods, especially advanced machinery. This could
heighten tensions within the Bloc because Soviet allies need advanced machinery for their own
modernization programs. Moscow might also look more to the West for technologically advanced
equipment, although its current hard currency bind would probably preclude a sharp increase in
purchases.
Finally, if economic modernization begins to stall, Gorbachev eventually could decide to adopt
bolder economic measures, such as a major decentralization of price-setting or an introduction
of real competition among enterprises. Movement toward more "radical reform," however, would
generate strong political opposition.
As long as the economy shows improvement - which seems probable - Gorbachev will be in
a position to declare his program a "success" over the next few years. But the course Gorbachev
is pursuing is inherently risky. How he fares over the longer term will depend on such factors
as continued economic progress, the military environment - including possible arms control
agreements - and external conditions such as weather and oil prices. The decisions Gorbachev
will have to make over the next few years will be controversial and could well solidify opposing
interests in the party and government.
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
Page
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Gorbachev's Challenge: Accelerate Growth, Upgrade Technology . . . . . . . . 1
Gorbachev's Economic Agenda . . . . . . . . . . . . . . . . . . . . . . . . . 3
1986 Economic Performance . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Growth Good, But Some Problems . . . . . . . . . . . . . . . . . . . . . . 5
Trends in Resource Allocation . . . . . . . . . . . . . . . . . . . . . . . . 7
1987 Plan: Full Speed Ahead . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Priority for Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Maintaining Momentum . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Prospects for Modernization Over the Longer Term . . . . . . . . . . . . . . . 12
Emphasis on Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Growth Through 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Coping with Shortfalls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Battles Over Resource Allocation . . . . . . . . . . . . . . . . . . . . . . . 16
Seeking Foreign Economic Support . . . . . . . . . . . . . . . . . . . . . . 19
Prospects For Economic Reform . . . . . . . . . . . . . . . . . . . . . . . 21
Gorbachev's Political Standing . . . . . . . . . . . . . . . . . . . . . . . . . 22
APPENDIXES
A. 1986 Economic Performance: A Good Showing . . . . . . . . . . . . . . . . 25
B. Tables on Soviet Economic Performance . . . . . . . . . . . . . . . . . . . 31
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
Gorbachev's Modernization Program: A Status Report
Since coming to power in March 1985, Mikhail
Gorbachev has put forward the most ambitious
program for economic, political, and social change
since Nikita Khrushchev, often linking the USSR's
ability to maintain its status as a military "super-
power" to the success of his efforts. This joint
CIA-DIA report provides an initial evaluation of
Gorbachev s program. It begins by describing
Gorbachev's policies and assessing their impact
on the economy s performance in 1986. The
paper then analyzes the future direction of his
economic modernization program in light of the
1987 Plan and the demands for continued military
force development. Finally, the paper addresses
Soviet economic prospects over the longer term,
highlighting problems the USSR will face if Gor-
bachev s program fails to bring about the intended
acceleration in economic growth.
Gorbachev's Challenge:
Accelerate Growth, Upgrade Technology
At the time Gorbachev took over, the Soviet
economy was in the midst of a prolonged growth
slowdown, averaging just over 2 percent GNP
growth per year in 1976-85. Of the other major
industrialized countries, only the United Kingdom
had a lower average growth rate during this
10-year period. Although Soviet economic growth
after 1980 was as good or better than that of
most other major industrialized nations except
for the United States and Japan, this was more a
reflection of a slide in economic growth in the
developed West than a recovery of the Soviet
economy (see table 1). Indeed, it was clear at
the time Gorbachev became General Secretary
that overall GNP growth during the 1981-85
Five-Year Plan (FYP) was going to be the smallest
percentage increase of any FYP period. In fact,
GNP had increased by less than 1.5 percent in
1984, and during the first quarter of 1985 - just
before Gorbachev took over - production was
essentially flat.
Table 1
USSR and the Developed West:
Comparative Growth of GNP
USSR
5.0
5.3
3.4
2.3
1.9
US
4.7
3.0
2.5
3.4
2.4
Japan
10.0
11.0
4.3
4.0
3.9
France
5.8
5.4
4.0
3.3
1.2'
West
4.8
4.2
2.1
3.3
1.2
Germany
Italy
5.2
6.2
2.4
3.8
0.8'
UK
3.2
2.5
2.1
1.6
1.7'
' Data are for gross domestic product (GDP). The difference between GNP and
GDP, net factor income from abroad, is small.
Note: Growth rates are measured in national currencies.
Sources: USSR: CIA estimates
Western countries: 1961-80, OECD, National Accounts
1981 -85, IMF, International Financial Statistics
Growth rates by themselves do not reflect the
scope of the USSR's problem. Low growth in the
Soviet Union was occurring in an economy that
did not compare favorably in size or technological
level with that of the United States. Soviet GNP in
1960 was roughly half that of the United States.
After narrowing the gap during the 1960s and
1970s and peaking in the early 1980s, Soviet GNP
as a percent of US GNP fell to about 55 percent
in 1985 (see figure 1). Even more striking, both
the USSR and its East European allies continued to
lag far behind major Western countries in terms
of per capita GNP (see figure 2).
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
One reason for the economy's comparatively
poor showing is the USSR's relatively antiquated
industrial base. According to one estimate, for
example, the average length of service of Soviet
industrial equipment is about 20 years, compared
with average use times of 10 years in France,
West Germany, and Italy, and 12 years in the
United States. In contrast to the West, where
the rapid introduction of advanced manufacturing
technologies has sustained productivity growth,
the combined productivity of labor and fixed
capital in the USSR has declined in absolute terms
over the past decade.
We believe Soviet leaders worried about the
implications of these trends for the USSR's future
military strength. By dint of two decades of a
sustained, costly military buildup, the USSR has
secured its position as a military superpower
whose global interests were increasingly recog-
Index: USA = 100
100r I
, ee aCJ c oe ~oF
nized. In the past 10 years alone (1977-86),
more than 22,000 tanks, 21,000 infantry fighting
vehicles, and 27,000 armored personnel carriers
and like vehicles have been delivered to the Soviet
ground forces. Soviet strategic forces received
over 3,200 strategic missiles and about 20 new
and converted ballistic missile submarines, and
Soviet air power was augmented with over 7,100
new fighter aircraft and almost 4,600 helicopters.
Even before the US Strategic Defense Initiative
(SDI) became an issue, however, Soviet mili-
tary authorities had expressed concern that the
level of technology embedded in such US pro-
grams as the D-5 sea-launched ballistic missile, the
Stealth bomber, "smart" conventional weapons,
and cruise missiles would offset the numerical
superiority that the USSR had achieved in most
classes of weapons and thus threaten some of
their hard-fought military gains. The USSR has
Note: Estimates for the USSR were derived as a geometric mean
percentage of a CIA US-Soviet purchasing power parity comparison carried
out in rubles and dollars. Estimates for Western Europe were derivea
using purchasing power parities calculated with international price weights.
(See United Nations, World Comparisons of Purchasing Power and Real
Product for 1980. United Nations, New York, N.Y., 1986.) Estimates for
Hungary, Poland, and Romania are based on benchmark figures from Irving
Kravis, Alan Heston, and Robert Summers, World Product and Income:
International Comparisons of Real Gross Product. Johns Hopkins University
Press, Baltimore, Md., 1982. Benchmark estimates for 1970 for Bulgaria,
Czechoslovakia, East Germany, and Yugoslavia were taken from the UN
Economic Bulletin For Europe, vol. 31 no. 2, 1980. These figures were
brought forward using estimates of real growth rates and adjusted to reflect
differences with the 1975 ICP results for Hungary, Poland, and Romania.
n
1-1 I-1 I-I r-i r-i r-,
ay *, a
`aa~a `ac
a ac a at ao 0a ai
Gr?y\oJ QoF ~~c b'>
Qa Gtie
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
made significant advances in many weapon sys-
tems technologies, cutting into the US technology
lead in deployed systems in some areas. But
the leadership recognized that in most advanced
manufacturing technologies the USSR remains
years behind the United States (see figure 3).
Moreover, SDI, by concentrating competition in
those high tech areas where Moscow is weakest,
has clearly been viewed by the Soviets as a new
and even greater threat.
Gorbachev's Economic Agenda
Gorbachev's commitment to revitalizing the
country's economic base - and hence to un-
derwriting future military modernization - has
been evident since before he became General
Secretary. Even when he assumed power, how-
ever, Gorbachev may not have fully grasped the
scope of the country's economic problems and
the magnitude of the effort needed to attack
them. In fact, despite his frenetic efforts over
the past 2 years, we still do not see a viable,
integrated plan for modernization; rather, we see
many individual programs being put forth, each
dealing with one facet of the economy.
Essentially, Gorbachev has set out a two-step
approach. Initially, he is relying on a combination
of measures to strengthen party control, improve
worker attitudes, and weed out incompetents -
what he refers to as "human factor" gains. The
most visible part of these efforts has been his
campaigns for discipline and against corruption
and alcoholism. These measures - which do not
call for structural change - have had a positive
impact for the most part.
Over the longer term, Gorbachev is counting
on achieving major productivity gains as a result
of organizational changes, reform initiatives, and,
most importantly, an ambitious modernization
Index: USA = 100
100r I
P aca coe Qac oay a0F
J Ga~co ~~a )a re~~a ~`co,
ti
V ey~ +e~ea
\A $k
`a
Coa ro5
tea`' Gti0
SQ a~CC a Xla c~a
Jc~ ~JCO, o~a ~J\o Qo~a
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
Approximate Length of US Lead in Years
01234567891011121314
Microprocessors
Computer-Operated Machine Tools
Minicomputers
Mainframes
Supercomputers
Software
Flexible Manufacturing Systems
I
I
I
I
I
I I
I
I
I
I
1
I
I
I
I
I
I
a
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I I I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I I I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
US lead is based on projections of length of time required
for Soviets to achieve series production of levels of each
technology similar to those in US series production today.
program to upgrade the country's stock of plant
and equipment (see box insert). To this end, the
current five-year plan (1986-90) calls for doubling
retirement rates for fixed capital, replacing up to
one-third of the country's plant and equipment
by 1990, and increasing the level of investment
in the civilian machine-building and metalwork-
ing ministries (MBMW) by 80 percent during
1986-90 over the level achieved during 1981-85.
Gorbachev has also instituted an ambitious new
program to improve quality control in industry.
Known as State Acceptance (Gospriy+emka), the
program establishes permanent quality control by
state employees at the plant level, a program
Defining Modernization
The phrase "modernization program" often has been used by Western observers as an umbrella
term to describe any policy instituted by Gorbachev for dealing with the country's economic
problems. As Gorbachev has used it, however, the term has a more limited meaning and refers
to his efforts to upgrade the country's stock of plant and equipment. Basically, it involves
substantially increasing the productive capacity of the machine building sector, the primary source
of manufacturing technology and equipment. As part of the efforts to modernize the USSR's
industrial base, Gorbacheds plan calls for:
. Improving the quality of machinery that embodies existing levels of technology by
manufacturing it under a stricter system of quality control.
a Replacing existing machinery with machinery embodying a higher level of technology, what
Soviet planners sometimes refer to as "world standards."
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
not unlike that used by the military to ensure
the quality of defense goods. At present, it
encompasses 1,500 enterprises which produce an
estimated 15 percent of all industrial products
and nearly one-third of the output of the critical
machine-building sector.
Through these actions, Gorbachev has indi-
cated that he wants to upgrade the country's
technological base so as to put the country on
a higher, self-sustaining growth plane. Soviet
plan targets imply an average annual GNP growth
rate of about 4 percent during 1986-90, which is
to accelerate to a 5-percent average annual rate
during the 1991-2000 period.
Although many of the specific policies Gor-
bachev has adopted are not new, the intensity
Gorbachev has brought to his efforts and his
apparent commitment to finding long-term solu-
tions are attributes that his immediate predeces-
sors lacked. Nonetheless, Gorbacheds program
appears too ambitious on a number of counts:
e Meeting output targets for many key
commodities would require unrealistic gains
in productivity, given planned investment
targets.
. Even if output targets can be achieved,
high growth rates and improved quality
are not readily compatible objectives. The
industrial output goals for 1986-90, for
example, appear too high to allow for a
slowdown in production to install new, more
technologically advanced equipment.
e Finally, despite considerable rhetoric, none
of the proposals so far would greatly change
the system of economic incentives that has
discouraged management innovation and
technological change.
1986 marked the initial year of the 1986-90
FYP and the first full year of Gorbachev's steward-
ship. As the result of his leadership, changes in-
stituted by his predecessors, and good luck, 1986
turned out to be a very good year for the economy
(see table 2). On the strength of record farm
output and reduced loss of work time, Soviet GNP
grew by more than 4 percent, the highest rate
in a decade. Industry, the focus of Gorbachevs
modernization efforts, also did well, recording
its best growth in a decade. Nonetheless, a
number of problems surfaced during the year
that could spell trouble for Gorbachev's economic
program over the longer term. For example,
the first significant resistance to specific policies,
although not overall goals, surfaced in both the
massive government and party bureaucracy, par-
ticularly among many enterprise managers who
complained that they were being asked to carry
out conflicting goals - such as to raise quality
standards and output simultaneously.
Table 2
USSR: GNP by Sector of Origin'
1981-85
1981
1982
1983
1984
1985
19862
GNP
1.9
1.4
2.6
3.2
1.4
1.1
4.2
Agriculture'
1.9
-0.7
7.2
6.0
-0.7
-1.7
7.3
Other
2.1
2.2
1.2
2.6
2.3
2.3
3.2
Sectors
of which:
Industry
2.0
1.3
0.7
2.7
2.6
2.7
3.6
CIA estimate calculated in 1982 rubles at factor cost.
Preliminary.
This measure for agricultural output excludes intra-agricultural use of farm
products but does not make an adjustment for purchases by agriculture from
other sectors. Value added in agriculture grew by 8.6 percent in 1986 and at an
annual average rate of 1 percent in 1981 -85 as a whole.
Record farm output led the surge in GNP.
Production of potatoes and vegetables increased
substantially over depressed 1985 levels, and new
highs were established for production of all major
livestock products. Meanwhile, a 210-million-ton
grain harvest - the highest since 1978 - helped
Moscow reduce grain imports and contributed to
a 5-percent increase in net livestock production.
Overall, net farm output increased by 7.3 percent.
(See appendix A for a more detailed description
of Soviet economic performance in 1986.)
While not growing as rapidly as agriculture,
industry also turned in a respectable showing.
Production targets for the majority of the most
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
important items produced in the machinery sec-
tor - including metal-cutting machine tools and
computer equipment - were exceeded. The
energy branches, despite problems caused by
the Chernobyl nuclear power accident, exhibited
healthy growth, with the output goals for coal
and natural gas being exceeded. Similarly, those
branches producing industrial materials, short-
ages of which have caused bottlenecks in the past,
did well. Several ambitious plan targets for the
year were met or exceeded.
Underlying industry's improved performance
was an improvement in productivity. After dec-
ades of steady decline, overall factor productivity'
in industry nearly stabilized in 1986. Faster
growth in labor productivity substantially offset
a continuing though slowing decline in capital
productivity. Much of the improvement in labor
productivity appears to have come from reduced
loss of worktime through increased discipline,
less drunkenness on the job, and more effective
management. The room for such reduction is
substantial. According to a Soviet economist, on
an average workday 18 percent of the work force
does not show up because they are on vacation
or sick leave, and those who do show up "waste,"
on the average, 20 percent of their time.
Although the leadership could take comfort in
the overall figures on growth and productivity,
several serious problems cropped up during the
year. While not unexpected given all that Gor-
bachev was trying to accomplish, they will have
to be corrected or offset if his modernization
program is to proceed on track. The most
serious of these problems are associated with the
regime's efforts to improve the quality, reliability,
and technological level of Soviet manufactured
machinery and equipment over a short period.
Soviet planners have established lofty targets for
raising product quality during the 12th FYP - 85
to 90 percent of all machinery is to meet what
they call "world standards" by 1990. To date,
however, progress in meeting this goal has been
poor.
Leadership statements describe the problems
encountered:
At the 27th Party Congress (March 1986),
several speakers pointedly referred to
continued problems in the quality of ma-
chinery, noting that some of the machinery
installed during reconstruction was still
grossly outmoded, while "new machinery"
scarcely exceeded older models in terms of
productivity.
e At a special conference in September
1986, Politburo member Lev Zaykov
criticized the recent performance of civilian
machine-builders, indicating that targets for
improving the quality of machinery were not
being met and that poor quality machinery
was being turned out even in showcase
factories.
A recent TASS report of a Council of
Ministers' evaluation of the 1986 plan results
noted that there was enterprise resistance
to the new state system of quality control
and stated that the machine-building and
other ministries "did not achieve a decisive
breakthrough in ... raising the technical level
and quality of output."
A sharp decline in the Soviets' real import
capacity in 1986 - the result of falling oil prices
and the depreciation of the dollar - also does
not bode well for GorbacheVs modernization
program over the longer term. While the ultimate
success of that program hinges largely on internal
factors, its goals imply that some highly spe-
cialized imports from the West for such sectors
as energy, machine tools, microelectronics, and
telecommunications must be continued, if not
increased. Moscow was able to cope fairly well
with a difficult situation in 1986 by remaining an
active borrower, increasing gold sales, and reduc-
ing imports, especially of agricultural products.
Such adjustments may not be as easy in the future,
however, unless Moscow is willing to increase
sharply its debt to the West.
Factor productivity measures the difference between the growth of gross national product and the growth of weighted sum of
inputs of land, labor, and capital.
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
Finally, bureaucratic foot-dragging and outright
opposition appear to have threatened some of
Gorbachev s policies. Gorbachev apparently has
become convinced that success in revitalizing
the Soviet economy will depend on introducing
major political and social as well as economic
reforms. These reforms, particularly his cam-
paign for greater "openness" and "democratiza-
tion" of political life, have met with resistance
within the party and government bureaucracy. A
party plenum scheduled for December 1986 was,
by Gorbacheds own admission, postponed three
times. We believe the delay was the result of
difficulties in gaining support within the Central
Committee for the personnel reforms that he
wished to introduce.
While economic growth was picking up, Gor-
bachev tried to lay the ground work for future
gains through his resource allocation policies. In
line with the goals laid out in the FYP, invest-
ment growth surged, with the greatest attention
being given to renovating and reequipping those
facilities that produce machinery critical to the
modernization effort (see table 3). According to
Soviet statistics:
Total new fixed capital investment increased
by 7.5 percent in 1986, the highest increase
in over a decade and slightly above the 1986
plan.
e State productive capital investment chan-
neled into the reconstruction and retooling
of existing enterprises increased by a hefty
17 percent, a good beginning to a plan that
calls for about an 11 percent annual increase
in renovation expenditures during 1986-90.
e On a negative note, the overall amount of
new (gross) capacity brought on stream was
far less than planned - 6.4 percent growth
compared with a 1986 plan target of 14.1
percent. This suggests that Moscow's plans
to reduce new construction and concentrate
on finishing uncompleted projects were not
realized.
Table 3
USSR: Selected Indicators
of Capital Formation
Plan
1976-80
1981-85
1986
1986-90
New fixed capital
investment
3.3
3.5
7.5
4.9
State productive
capital'
investment in
the reconstruction
and retooling of
existing enterprises
NA
7.0
17.0
11.0
Commissionings of
new capacity
4.4
3.0
6.4
NA
' State capital investment is equal to total investment less investment by
cooperatives, kolkhozes, and individuals (in housing). State productive capital
investment further excludes investment by the government for services and
housing.
Although there were a few surprises, the in-
vestment priorities laid out in the 12th FYP
appear to have been adhered to in 1986. Within
industry, the 11 civilian machine-building min-
istries apparently received the biggest boost. No
yearend data were released, but based on 9-month
results, investment in this sector increased by 17
percent. Similarly, plan goals and press commen-
tary on the 1986 results suggest that investment
in the energy industries rose sharply, although
again no figures were released. Somewhat unex-
pectedly, investment in the agro-industrial com-
plex increased by almost 10 percent in 1986
- far more than the 3-percent average annual
rate recorded during the first three years of the
program which was established in May 1982.
The largest gains were in the nonfarm sector -
industries that supply inputs to agriculture and
process farm products. While the increase seems
somewhat high, the structure of agro-industrial
investment appears consistent with Gorbachev s
emphasis on providing more resources to agricul-
tural support sectors.
In contrast to the rapid growth in investment,
the consumer did not fare nearly as well from the
economy's strong showing in 1986. Per capita
consumption grew by less than 1 percent in
1986, in part because legal sales of alcohol - a
major component of consumer expenditures -
fell by 37 percent as a result of the antialcohol
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08S01350R000401320001-7
campaign. Nonetheless, gains in key components
of consumption - food (excluding alcohol) and
housing - may have earned Gorbachev some
points with the populace and helped underscore
his commitment to improving worker incentives.
Food supplies - one of the main indicators
by which citizens judge their well-being - im-
proved in 1986. Fruit and vegetable production
in particular rebounded from depressed 1985
levels. Construction of housing reached 118
million square meters, up 4.4 percent from 1985
and the largest gross increment to the housing
stock in 20 years.
Despite improved supplies in some areas, un-
satisfied consumer demand is reflected in contin-
ued queuing in state stores (with fixed prices)
and rising prices in collective farm markets. Con-
tinued growth in wages, coupled with the drop
in alcohol sales, resulted in a large increase
in the amount of cash held by the consumer.
One indication of the regime's concern over the
imbalance between expanded disposable income
and goods to buy was its failure to publish a figure
on the addition to household savings in 1986.
While our information on defense spending
in 1986 is less solid than that for consumption
and investment, our preliminary estimate is that
overall defense expenditures in constant prices
increased by about 3 percent (see box insert
for a discussion of Soviet defense spending in
current prices). Although somewhat above the
rate of recent years, it does not appear that
this growth represents any change in defense
spending policy since GorbacheVs arrival. Rather,
it was largely driven by the startup or acceleration
of production of several new weapon systems
that were under development before Gorbachev
took office. In 1985 and 1986 at least, these
programs helped raise procurement growth to
about 3 percent per year.
Measuring Soviet Defense Spending in Current Prices
In Western estimates of defense spending, constant prices are used to measure the real growth
in defense - that is changes in military manpower, the volume of procurement and construction,
and the scale of RDT&E and operations and maintenance - excluding the effects of inflation.
The Soviets, however, do not use Western-style constant prices. Rather, most references in Soviet
literature to defense spending are in terms of current prices, and presumably the leadership uses
this measure, along with various physical indicators, to assess trends.
Because current prices show higher rates of growth, the leadership might have a different sense
of defense spending trends than constant price estimates would suggest. Indeed, CIA and DIA agree
that defense's share of Soviet GNP rose from about 12-14 percent in 1970 to about 15-17 percent
in 1982. Although the real growth in defense activities and overall economic output was roughly
the same in this period, defense's share of Soviet GNP increased when measured in current prices
because costs and prices of defense-related goods and services increased more rapidly than those
of nondefense goods and services. Our estimate of defense's claim on the output from individual
sectors of the economy supports this view of a rising defense burden when measured in current
prices. These shares generally grew between 1972 and 1982.
This notion of a rising defense burden is also consistent with leadership statements over the past
decade. Although Soviet leaders have always made passing references to the high costs of defense
from the late Brezhnev period onward, they have increasingly linked the USSR's inability to provide
more rapid gains in consumer welfare and generate high economic growth to the high costs of
its defense efforts. Gorbachev has been particularly vocal on this topic. In February, for example,
Gorbachev said that defense spending was "a load on the economy... because it diverts enormous
resources that could be redirected" to other sectors.
Declassified and Approved For Release 2012/03/05: CIA-RDP08S01350R000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
The largest jump in expenditures in 1985 was
in aircraft procurement. The initial stages of
production of the new BLACKJACK bomber -
whose development dates back to the early 1970s
- and Moscow s continued emphasis on fighter
production helped drive up aircraft expenditures,
while increases in both tactical and strategic
missile procurement - led by outlays for the
SA 10 and SA-12 air defense systems - also raised
missile procurement in 1985 and 1986 following
a cyclical decline in the early 1980s. At the
same time, we believe Gorbachev has told military
leaders that - like their civilian counterparts -
they will have to use resources more effectively.
One apparent manifestation of this has been a
great emphasis on conservation and less costly
training practices. For example, at a major naval
conference in December 1985 attended by newly
appointed Commander of the Soviet Navy Admiral
Chernavin, it was reported that some comman-
ders had failed to understand the need for "an in-
tensification of combat training" during 1985 and
instead had "decided on an unnecessary increase
in the number of sea exercises, which leads to
overuse of engine capacity, overconsumption of
fuel, and premature aging of equipment."
The 1987 Plan: Full Speed Ahead
Building on a fast 1986 start, the 1987 Plan
shows no letup in Gorbacheds drive to revitalize
the economy by modernizing the industrial base,
improving management, and motivating worker
effort. The goals for overall economic and indus-
trial growth are high - both over 4 percent -
but appear consistent with the targets originally
laid out in 12th FYP (see figure 4).
The industrial plan focuses on producing more
and better machinery for modernization and more
goods for the consumer. The Soviets are appar-
ently banking on the sharp rise in investment in
civil machine building in 1986 to spur an accelera-
tion in output this year. Machinery output - after
increasing by 4.4 percent last year - is slated to
jump by 7.3 percent in 1987, a pace not achieved
since the early 1970s. Machine builders are
to concentrate their efforts on high-technology
products for investment and durables for the
consumer. The output of advanced machine tools,
instrumentation equipment, and computers is to
grow almost 50 percent faster than production
of machinery as a whole. Machinery quality also
is to improve substantially, with the share of
equipment corresponding to "world standards" to
rise to 60 percent in 1987.
Moscow's plans for some critical sectors re-
main unclear. A number of important agricultural
targets have not been released, although grain
production is to rise to 232 million tons. Simi-
larly, targets for other consumer-related sectors
have not been released, nor has information on
production goals for such commodities as cement
and other construction materials. The plan does
make clear, however, that growth in steel output
is to be achieved primarily from efficiency gains,
not increases in production of inputs such as coke
and pig iron.
Priority for Investment
In line with GorbacheVs modernization pro-
gram, investment once again seems to have been
given priority. Total new fixed capital investment
in 1987 is slated to grow at 4.6 percent - faster
than overall economic growth - and apparently
somewhat above the rate originally called for
in the 1986-90 Plan. The central role of the
machinery sector in the modernization program
and the need to invest more in the energy sectors,
partly as a result of the Chernobyl' accident,
may have resulted in these sectors getting higher
allocations. In a speech outlining the Plan for
1987, State Planning Chairman Talyzin suggested
that more investment than was originally planned
would also go to sectors serving the consumer.
Based on the ambitious target for construction,
housing is apparently scheduled for a particularly
sharp rise.
As usual, no meaningful information was re-
leased on Soviet plans for defense spending in
1987. Given the defense industrial capacity al-
ready in place, the overall priority afforded the
military, and Soviet concern about ongoing West-
ern defense programs, we would expect alloca-
tions to remain at levels high enough to allow for
continued modernization of the USSR's strategic
and conventional forces. Major weapon systems
such as the SS-25 ICBM, SA 10 surface-to-air mis-
sile, the T-80 tank, and the BEAR bomber should
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
1981-85 1986 1987 1986-90
Plan Plan
Investment
8 -
Industry
5 r-
1981-85 1986 1987 1986-90
Plan Plan
1987
Plan
1986-90
Plan
Figure 4. USSR: Selected Economic Indicators (Average Annual Percent Rate of Growth).
continue to enter the inventory at a steady pace,
adding to Moscow's strategic and conventional
capabilities.
Maintaining Momentum
Gorbachev is apparently counting on payoffs
from past investments and continued returns
from his "human factors" campaign - particularly
his efforts to increase labor productivity through
increased material incentives - to meet the
ambitious 1987 targets. To this end, average
wages are scheduled to increase by 3 percent in
1987, with the increases distributed in favor of
good performers and technical personnel. The
goals for wages, consumer durables, housing,
and paid services exceed the targets called for
in the 1986-90 Plan. As a further incentive
to improved worker effort, Gorbachev also has
enacted legislation - scheduled to take effect
in mid 1987 - that will allow some expansion
of private production of consumer goods and
services.
One dilemma Gorbachev faces in this regard
is the circular loop of material incentives and
productivity. Pay raises will not provide mean-
ingful worker incentives without corresponding
improvements in the quality and availability of
food, housing, and consumer goods and services.
Yet, higher productivity is needed to increase
the supply of such incentives. Workers will have
to be persuaded to change their fundamental
attitudes toward work based on the expectation
of improved consumer welfare in the future.
Besides trying to improve worker incentives,
Gorbachev probably is hoping that some of the
numerous economic reforms and organizational
changes that have been promulgated since he
took over will begin to bear fruit. Most of the
changes in these areas are just beginning to take
effect, however, and Gorbachev probably realizes
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
that, whatever the benefits to be reaped, they insert for a discussion of economic reform under
will materialize over the longer term. (See box Gorbachev.)
Gorbachev has repeatedly stressed that major structural changes are needed in the Soviet
economy if a real breakthrough in performance is to be achieved. His efforts have focused primarily
on four areas: streamlining the bureaucracy, increasing enterprise autonomy, improving workers'
incentives and encouraging personal initiative. None of the measures adopted so far, however, could
be classified as the "radical reform" that Gorbachev said was needed at the 27th Party Congress.
Moreover, many of these measures have been only partially implemented and all are encountering
the kinds of problems endemic to changing old institutions and creating new ones.
Reorganizing the Bureaucracy - The cornerstone of Gorbachev's reform program has been
his efforts to reorganize and streamline the bureaucracy. According to his own statements, these
policies are designed to achieve more effective centralized control over the main direction of the
economy, while at the same time leaving more of the day to day management to lower levels. His
insistence that the bureaucracy shift its focus to strategic planning has been reflected in a number of
organizational changes. New superagencies answering directly to the Council of Ministers have been
created to oversee key economic sectors. Such coordinating bodies have been set up for machine
building, the agro-industrial complex, energy, construction, foreign trade, and social development
(see chart). Most of these bodies are not yet fully operational, however, and progress in achieving
intended sharp cutbacks in personnel has been spotty.
Increasing Enterprise Autonomy- An impressive number of new initiatives attempt to increase
the authority and responsibility of the enterprise and to motivate them through "economic" rather
than "administrative" levers.
? A new enterprise law codifies enterprise rights (including election of enterprise managers) and
attempts to give them legal protection from bureaucractic meddling.
? The so-called five-ministry experiment, which makes contract fulfillment the major measure of
enterprise success and expands enterprise control over investment and incentive funds, is
being extended industrywide during 1987.
? The self-financing experiments in Sumy and Tolyatti will be expanded to additional ministries
this year.
? Selected enterprises are given the right to trade directly with foreign firms.
Improving Workers' Incentives - Gorbacheds chief accomplishment in this area has been the
passage of a wage reform designed to reverse the leveling trend of the Brezhnev years and to create
a closer relationship between workers' pay and their performance. Although this reform calls for a
pay increase for many categories of workers, no state funds have been set aside for it.
Encouraging Personal Initiative -Gorbachevs promise to provide greater scope for individual
initiative has brought new legislation sanctioning expanded business opportunities outside the state
sector for individuals and small businesses, especially in consumer goods and services. Permissible
action is greatly circumscribed, however, and the impact these actions will have remains to be
seen.
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08S01350R000401320001-7
Prospects for Modernization
Over the Longer Term
While counting on the human factors cam-
paign in the short run, Gorbachev is depending
mainly on the proliferation of more technologi-
cally advanced equipment to improve productiv-
ity across the economy over the longer term. He
has repeatedly said that the USSR must replicate
the ongoing Western technological revolution in
which advanced machine tools, robots, microelec-
tronics devices, computers, and telecommunica-
tion systems are making operations more flexible,
thereby raising quality and cutting costs. At the
same time, Gorbachev is hoping that as a result
of a series of organizational and administrative
measures enterprises will have more incentives
to demand and use the best equipment available.
Major Reorganizations Since Gorbachev Took Over
Date
Sector Established Action Taken
Machine Oct 85 Machine Building Bureau
Building established to oversee 11
civilian machine building
ministries. Bureau to carry
out "unified technical policy."
Given authority to redistribute
resources of ministries but
no line operational authority
over enterprises. Management
structure to be reduced.
Agriculture Nov 85 USSR State Agro-Industrial
Committee (Gosagroprom)
established by merging five
ministries, one state committee,
and elements of three other
ministries. Similar reorganiza-
tions carried out at regional
levels. Central staff reportedly
reduced by 47 percent. Rights
and responsibilities of regional
and farm officials enhanced.
Fuel and, Mar 86 Fuel and Energy Bureau created
Energy to coordinate energy policy and
Complex carry out unified conservation
and technological policies.
Given authority over budgetary
allocations within broad
parameters set by Gosplan, but
no operational authority over
enterprises.
Nuclear Jul 86 Separate All-Union Ministry of
Energy Nuclear Power Industry of the
USSR was created following the
Chernobyl' incident.
In February 1987 Soviet press
charged ministries were
circumventing the order to
streamline management and
sharply reduce central staffs.
Thus far, the only "super-
ministry" to be created.
Some Soviet officials claim
it has paid off in greater
efficiency, but numerous
press complaints suggest
Gosagroprom still in state
of confusion.
Still apparently in initial
phase of organization with
its responsibilities yet to be
decided.
Declassified and Approved For Release 2012/03/05: CIA-RDP08S01350R000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
Date
Sector Established Action Taken
Construction Aug 86 Four existing construction
ministries reorganized into
regionally-focused ministries.
Four specialized construction
ministries unchanged. Reor-
ganized to State Construction
Committee and given enhanced
authority over all construction
ministries.
Foreign Trade Sep 86 Foreign Economic Commission
established to formulate and
coordinate foreign trade policy,
but does not have management
authority of Gosagroprom and
Gosstroy. Commission members
include heads or deputy heads
of all ministries or agencies
concerned with foreign trade.
21 ministries and 70 enterprises
given right to engage directly in
export and import trade.
Social Welfare Nov 86 Bureau for Social Development.
Responsibilities have not
yet been defined and may
be still undecided. Gosplan
Chief implied in November
1986 speech that the bureau
would have broad oversignt
over various ministries and
institutions concerned with
consumer goods and services,
health education and social
policy.
Emphasis on Supply
Unlike the West where modernization has
been driven by both supply and demand factors
- with interaction between the two stimulating
self-sustaining growth - GorbacheVs modern-
ization program has concentrated primarily on
increasing the supply of more technologically
advanced equipment. To this end:
? Production of computer equipment is slated
First serious attempt in over
20 years to bring some order
into chaotic construction
sector. Reorganization aimed
at strengthening centralized
direction while allowing
regional authorities more
control over local projects.
Too soon to assess. Reor-
ganization ends Ministry
of Trade's long-standing
monopoly over foreign trade.
Should give end-users more
say in contract negotiations.
Enterprise right to buy
foreign goods limited to
foreign exchange they are
able to generate through
sale abroad of above-plan
production. Should help
facilitate establishment of
joint ventures.
Still being formed.
to grow by 18 percent annually through
1990. By that time, the Soviets plan to
produce 1.1 million personal computers
annually, compared with almost none until
the mid-1980s.
? Output of the main producer of instrumen-
tation equipment is slated to grow by 11
percent per year in the 1986-90 period,
up from 6 percent in the previous 5 year
period.
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
Production of robots in the 1986-90 period
is to increase by 120 percent, numerically
controlled machine tools by 90 percent, and
machining centers by 330 percent compared
with 1981-85 production.
While the Soviets probably will not meet all of
these targets, they have already taken a number of
major steps to provide more and better machinery
in each of these areas. Most significantly, as
indicated above, investment in the 11 civilian
machine-building ministries is to increase by a
massive 80 percent during 1986-90 compared
with the 1981-85 period. Meanwhile, funding for
"science" - a rough indicator of the resources
committed to R&D - is also to increase sharply.
The USSR has created interbranch scientific and
technical complexes to expedite development
and incorporation of new technologies into the
machine-building production base. Finally, foreign
support is to fill in the gaps that cannot be
met domestically. Moscow probably plans to
increase the imports of capital equipment from
both Eastern Europe and the developed West.
Large, cooperative R&D programs have also been
established with Eastern Europe in key manufac-
turing technologies.
In contrast, the Soviets have put far fewer
mechanisms into place on the demand side to
promote the innovation and diffusion of the ap-
propriate technologies into machine building and
the rest of the economy. They have yet to
change the system of plan targets and incentives
sufficiently to make it generally advantageous for
managers to favor innovation over maintaining the
status quo. Instead, they have tinkered with estab-
lished programs - like the enterprise production
development 'funds - to give factory managers
greater authority and ability to procure new
machinery and equipment. This will not work if
managers are penalized for stopping production
to accommodate modernization or cannot induce
machinery suppliers to produce the right equip-
ment and provide reliable installation and main-
tenance support. These are still likely obstacles
confronting the innovation-minded manager.
The Soviets also continue to rely on admin-
istrative measures to regulate effective demand
for new technology. They have attempted to im-
prove quality by establishing independent quality-
control inspectors in selected enterprises. They
also have directed the State Committee for Sci-
ence and Technology and the Academy of Sci-
ences to act as proxies for machinery customers
to determine just what technologies are suited for
industrial users. But this is imposition from the
top down and assumes that these agencies will
make the right choice.
In short, given what we know of Gorbachev's
modernization plans - and the results we have
seen so far - we believe that the Soviet focus
on supply-side factors will certainly result in the
machine-building sector producing higher vol-
umes of more modern equipment. It is not at all
clear, however, whether the sector will be able to
transform itself or the rest of the economy unless
managers throughout the economy demand, and
are given the opportunity to select, the correct
products.
Growth Through 1990
Judging the success of Gorbachev's moderniza-
tion program will not be easy. Even approaching
some of the technology goals or output targets
for key items such as computers or numeri-
cally controlled machine tools would be quite an
achievement. Since the beginning of the Brezhnev
era in the mid-1960s, the Soviets have generally
missed the major FYP targets, and this plan is
likely to be no different. Gorbachev probably
realizes this. While talking tough and saying
that no excuses will be brooked, he has also
acknowleged that the targets for 1986-90 were
set at the upper limit and that their attainment
will be difficult.
Gorbachev, however, is probably counting on
a reasonable degree of success. At a minimum,
he would like to reverse the decline in the rate
of growth that has occurred in nearly all sectors
of the economy over the last decade. While
the measure of acceptable performance is some-
what arbitrary, Soviet leaders would probably
give Gorbachev good grades if national income
(the Marxist measure of overall production) and
industrial growth increased by one percentage
point per year over the depressed levels of the
11th FYP (1981-85).
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
We believe that Gorbachev probably will have
some success for the following reasons:
. The full potential of the "human factors"
campaign - particularly the discipline
and the antialcohol program, as well as his
efforts to increase managerial and worker
incentives - has yet to be tapped.
Similarly, there should be some improvement
in higher-level planning and management.
Gorbachev has promoted a number of
younger officials, many of whom appear
more willing to consider new approaches
to solving economic problems. His efforts
to improve incentives for enterprise
managers and workers and to reorganize
the machinery, trade, and agricultural
bureaucracies could also pay some dividends,
although how much is impossible to say.
Finally, for the reasons just given, the
massive jump in investment in the civilian
machine-building sector should yield some
dividends in higher output growth and
improved quality, even if the needs of major
industrial users are not fully taken into
account.
It would be misleading, however, for US and
Soviet leaders to look at only aggregate measures
of output and industrial growth. Gorbachev is
interested not only in raising rates of economic
growth over the next few years, but also in
changing the structure of the economy so that
even higher rates can be achieved during the
1990s. In this context, observations of a number
of other variables will give us a better handle on
how modernization is proceeding. These include:
The Rate of Capital Renewal - Gorbachev
has decreed that by 1990 more than
one-third of the country's capital stock
will be replaced. Of all the major goals
Gorbachev has established, achieving this
particular one will probably be the least
difficult. Our calculations show that even
with no increase in retirement rates, this
goal will be achieved as long as the current
target for overall investment is met.
The Level of Technology Embodied in
New Equipment - Measuring this will
be extremely difficult. Machine builders
will be under intense pressure to declare
major quality improvements whether they
are warranted or not, and we are likely
to be bombarded by a host of statistics
- some positive, some negative. A good
surrogate measure of the USSR's ability to
produce world-class machinery will be its
success in increasing hard currency sales
of manufactured goods - the test of the
market place.
Factor Productivity Trends - Success
in meeting the first two goals should be
reflected here. Of all the variables to watch,
this is the most critical because - unless
the positive results achieved in 1986 can
be sustained - there is little hope of
accelerating growth during the 1990s.
Our overall assessment is that, while we expect
some improvement in Soviet economic perfor-
mance over the next few years, we doubt that
sufficient progress can be achieved in improving
the level of technology and reversing productivity
trends to permit substantially faster growth in
the 1990s. More concretely, we believe that
the Soviets will fall well short of their implied
goal of 4-percent average annual GNP growth
during 1986-90. Similarly, the 5-percent target for
1991-2000 appears to be out of reach.
The regime's implicit goal of 4-percent average
annual GNP growth during 1986-90 is question-
able because of the huge gains in productivity it
would require. According to Gorbachev, "human
factor" gains are to account for one-third of
the increase in productivity, and modernization
the remaining two-thirds. Using an econometric
model to project what this implies, the elasticity
of output with respect to capital - the model's
measure of the percentage change in output re-
sulting from a 1-percent increase in fixed capital
- would have to increase by nearly 26 percent
compared with the 1981-85 period, and workers
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
would have to be, on average, 7 percent more
productive than they were in 1981-85.2
This much improvement in either factor seems
implausible. In the late 1960s and early 1970s,
output-capital elasticities of this magnitude were
approached, but the relative cost of material
inputs - fuels, ores, minerals - was much
less. Material input costs since then have risen
dramatically and are likely to continue to do so
in the years ahead, making the required gains
from capital expansion difficult to achieve. As
for "human factors," while we still look for some
improvements, there are limits to the gains that
can be expected. Absenteeism, for instance, can
only be reduced so much, and the slow growth
in the supply of consumer goods and services
is likely to rule out any significant increases in
worker incentives in the years ahead.
Based on what we believe are more realis-
tic assumptions about productivity, we project
growth of GNP at an annual average rate of 2
to 3 percent during 1987-90. This assumes a
substantial improvement in capital productivity
over the 1981-85 period, but less than half of what
would be required to meet plan.
Coping With Shortfalls
We believe growth in the neighborhood of 2
to 3 percent, while better than that in the recent
past, would still be insufficient to solve the coun-
try's economic problems and could eventually
lead to:
. Greater reliance on foreign economic ties,
and, depending on Gorbachev's political
standing;
. A push for more ambitious economic
reforms.
The severity of Moscow's resource allocation
bind during the current FYP will depend primarily
on its ability to sustain the recent economic up-
turn. If, in fact, the economy's strong showing in
1986 proves transitory, then increasingly difficult
resource allocation decisions will have to be made
between competing civilian and defense interests,
as well as among competing interests within the
civilian and defense sectors themselves.
Over the next few years, the toughest deci-
sions are likely to be in the investment arena
Despite the high investment growth targets for
those branches of industry key to the moderniza-
tion program, we believe achieving output targets
in critical areas like the machine-building and
the energy sectors will require further increases
in investment above those currently planned for
1987-90. Investment is already being given pri-
ority, however, and finding additional resources
will not be easy. A major part of Gorbachev 's
human factors campaign depends on increasing
workers' incentives and, as noted earlier, the
leadership has already deemed it necessary to
boost investment in consumer-related areas in
1987. Further increases will probably be needed
if momentum is to be maintained.
Soviet defense industries also will require sub-
stantial investment over the next few years. Anal-
ysis of Soviet requirements and programs under
way indicates that the Soviets will maintain their
historic level of weapons development - about
150-200 major new and modernized systems -
into the 1990s. Our evidence shows that new
programs are in progress to update or replace
older systems with improved models in every
mission area, with many likely to begin series
production in the mid-1990s. The Soviets commit
investment resources to prepare for weapons
CIA's macroeconomic model of the Soviet economy, SOVSIM, was modified for use in evaluating Gorbachev's plans. Features were
built into the model to assess the regime's efforts to modernize the capital stock. (An example would be the assimilation of more
modern, domestically produced automation facilities or imported technology.) This was done by assigning higher returns to new
capital than to old capital. In addition, the model was modified to allow for productivity gains originating from "human factors" -
policies intended to increase the work effort - the other major element of Gorbachev's economic strategy. Model results suggest
that without these initiatives the best the Soviets would be able to do in the 1986-90 Plan would be about 2-percent growth in
GNP. Some gains from capital modernization and human factors will be realized, however, and growth rates approaching 3 percent
may even be possible.
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
production roughly during the 10 years prior to
initiation of series production, with the largest
expenditures, including those to put in place
most of the machinery and equipment, occurring
in the last half of this period. This suggests
that they will be allocating substantial investment
resources in the late 1980s and early 1990s to
prepare for systems entering production during
the last half of the 1990s. At least some of
these funds, however, would have already been
included in the budget allocations for this FYP and
the Soviet military would undoubtedly resist any
efforts to renege on these commitments. Indeed,
depending on the pace of major US defense
programs - particularly SDI - the military might
argue that their requirements have increased and
press for additional funding.
We do not know how Gorbachev will respond
to these pressures, but the state of the economy,
Moscow's perception of the military threat, and
Gorbachevs domestic political standing would
all come into play. Even if economic growth
has not picked up, however, Gorbachev would
be unlikely to push modernization to the point
whereby key military requirements would not be
met. Lagging economic growth would, however,
certainly make arms control agreements more
attractive (see box on impact of Soviet economic
problems on arms control positions).
Impact of Soviet Economic Problems on Soviet Arms Control Positions
Military requirements based on political and doctrinal objectives remain the dominant factor
in formulation of Soviet arms control policy. Gorbachev 's economic modernization program,
however, is apparently viewed by the Soviet leadership as the key to long-term military-industrial
self-sufficiency As such, it has created an important additional incentive to meet these requirements
in ways that would minimize the immediate need for significant growth in military costs. One
potential means of accomplishing this might be for the Soviets to defer or stretch out the weapons
programs that have been designed in response to these requirements, thereby easing the military
demand for scarce resources. This approach, in turn, would be facilitated by arms control
agreements that would reduce the growth or the absolute size of US military forces, especially
in the defensive arena.
The greatest potential economic benefit to the Soviets from an arms control agreement would
almost certainly be the avoidance of substantial new military cost growth. The near-term benefit
to the civilian economy from reducing or even eliminating particular strategic systems, however,
would probably be minimal. Production facilities take time to correct and spending on strategic
offensive systems currently represents only about 10 percent of total military spending.
Arms control related savings achieved through the avoidance of SDI costs during the 1990s,
in contrast, could be substantial. To counter a successful SDI program we expect Moscow would
continue as well as initiate a number of technical and operational countermeasures to insure that its
weapons arrive on target. Depending on how the Soviets respond, defense spending could increase
substantially. Also, any major attempt to offset SDI probably would draw from key technical and
industrial resources - like those engaged in software and sensor development - vital to other
Soviet military and civilian programs. Although we do not know precisely how important these
economic considerations are, given that the Soviets are committed to SDI related programs, the
potential for long-term savings is significant.
Apart from an agreement on strategic forces, the Soviets have also proposed an accord involving
conventional forces. Although the precise details of such an agreement remain unclear, Soviet
and Warsaw Pact leaders have been publicly talking about a pact that could eventually lead to a
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
reduction of several hundred thousand men. In early June 1986, Warsaw Pact leaders issued an
appeal to NATO to join the Pact in reducing conventional and nuclear forces - both troops and
weapons - in Europe from the Urals to the Atlantic. The appeal follows statements by Gorbachev
in April that called for initial reductions of 100,000 to 150,000 troops by each side. Further cuts,
to be completed by the early 1990s, would result in overall reductions of about 25 percent (more
than 500,000 men) from each side's present force level.
One benefit to the economy of reducing conventional forces would be the availability of more
workers to an already tight labor force. The Soviets have been having trouble filling jobs in industry,
especially in the RSFSR, and adjustments have had to be made in conscription policy in recent years
to maintain the active duty strength of the armed forces. In a speech to a party plenum in June,
Gorbachev indicated that industry was already short 700,000 workers. Troop reductions on the
scale suggested could have an impact at the margin, particularly in certain areas such as the USSR's
western industrial regions. The release of a few hundred thousand soldiers would not, however,
have an appreciable impact on the overall civilian labor force now numbering some 130 million
workers.
On balance, we do not believe the military and economic imperatives of Gorbachev's program
would lead the Soviets to accept any arms control agreement that would prevent them from
achieving key military objectives. Fundamentally, what they appear to want are agreements that
constrain Western defense efforts, facilitate Soviet force modernization, and allow them time to
complete the USSR's economic development program while staying within the bounds of current
defense spending trends.
While we believe that Gorbachev will face
difficult decisions in the investment sphere over
the next few years, we do not expect his focus
on the civilian economy to have a major impact
on military production at least through 1990.
As last year's joint CIA-DIA assessment argued,
the defense establishment is well positioned to
accommodate the shifts in machinery demands
implied by the industrial modernization program.3
Most of the weapons we expect to be delivered to
Soviet forces through 1990 will be manufactured
in plants already built, equipped, and operating.
Although competition could be stiff for some
basic materials and intermediate goods needed
for both industrial modernization and weapons
production - and might result in the delay or
scaling back of some weapons systems - most
major programs should go forward as planned.
As a result, we anticipate little change from
the picture we presented in last year's assess-
ment. Even with little growth in procurement
over the next few years, the absolute magnitude
will remain high enough to permit substantial
upgrades of Soviet strategic and conventional
forces. New generations of land and sea-based
ballistic and cruise missiles recently have entered
or will soon enter production, which should
result in a comprehensive modernization of the
USSR's strategic offensive forces by the early
1990s. Strategic defense force improvements, al-
though less substantial, also will permit sustained
improvements in capabilities.
Conventional forces will undergo a similar
upgrade. Two late-generation fighters, the MiG-29
and Su-27, are entering the inventory, while new
submarines and warships, including the USSR's
first full-size aircraft carrier, are improving naval
capabilities. Meanwhile, a variety of improved
3 See the Soviet Economy Under a New Leader, a joint CIA/DIA report published by DIA as DDB-1900-122-86, July 1986.
18
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
land arms (most notably new artillery weapons
and the T-80 tank) are being deployed to the
ground forces.
While this analysis suggests that the overall
level of spending on weapons procurement need
not be a major source of contention in this FYP,
the picture would change if the military and some
influential leaders wanted to undertake large new
initiatives in either the USSR's conventional or
strategic forces. In this case, the leadership would
have to decide whether to reduce spending on
other types of forces or increase the resources
allocated to defense at the expense of civilian
programs. Marginal increases at the expense
of conventional forces might be possible, for
example, if the Soviets decided to boost spending
on strategic forces in reaction to SDI. Any large
cuts, however, would almost certainly generate
strong protests from those service elements being
cut. The same would be true, of course, -if
the Soviets decided to raise spending sharply on
conventional forces, as some elements in the
military are currently arguing. The alternative,
however, would be to shift resources from the
civilian economy at the expense of industrial
modernization.
Seeking Foreign Economic Support
Besides complicating resource allocation, fail-
ure of the modernization program to supply
industry with the necessary machinery and equip-
ment to sustain higher growth levels probably
would also lead Moscow to make adjustments in
its trade relations.
Eastern Europe. In the first instance, we
would expect Moscow to increase demands on
Eastern Europe. Gorbachev has pushed for greater
CEMA integration since becoming General Secre-
tary and demanded more and better quality goods
from Eastern Europe. Existing trade protocols for
1986-90 probably call for the East Europeans to
increase exports to run trade surpluses and pay
back outstanding debts owed Moscow.
A serious shortfall in the modernization pro-
gram would likely lead Moscow to demand even
more capital goods from the region. Such de-
mands, however, would be resisted. The USSR
already absorbs a large share of East European pro-
duction in most high-tech industries, and even in
those countries best able to meet Soviet requests
- most notably East Germany and Czechoslovakia
- there is a tremendous need for advanced
machinery for domestic investment.
Eastern Europe, moreover, finds itself in a
better position to oppose Moscow's demands
because of its improving terms of trade. The value
of Soviet energy deliveries to Eastern Europe
- which comprise the bulk of exports to the
region - will decline over the next few years
as the CEMA pricing mechanism incorporates the
drop in world oil prices. Without adjustments
to current trade plans, the USSR could begin to
run large trade deficits with its East European
allies. Moscow would then have to rely on these
countries to finance large trade credits if it wishes
them to maintain or increase the net flow of
resources to the Soviet Union.
Developed Countries. Faced with a precipi-
tous drop in its hard currency earnings as a result
of falling oil prices, the Soviet leadership has said
that it hopes to increase machinery exports to
the West. In fact, one of the rationales Gorbachev
has used to sell his modernization program has
been the need to produce machinery that will be
competitive on world markets.
Failure of the modernization program to raise
the technological level of new equipment sub-
stantially would seriously hinder any sharp in-
crease in machinery sales, which now account
for roughly 5 percent of Soviet hard currency
exports. Even with the recent Soviet moves to re-
organize the foreign trade sector and to promote
joint ventures with Western firms, we believe
that unless Moscow abandons its conservative
borrowing strategy, the USSR's hard currency
imports could fall even further over the next few
years (see box insert for a discussion of Moscow's
recent initiatives in the international trade area).
Regardless of the trends in Soviet hard cur-
rency earnings, we expect Moscow to continue
its massive efforts to steal Western technology.
In numerous instances, illegal acquisition of tech-
nology has reduced development time and/or
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08S01350R000401320001-7
Recent Soviet Initiatives in the World Economy
Over the past year the Soviet Union has embarked on a far-reaching campaign to increase its
role in world economic affairs. Soviet moves include restructuring the foreign trade apparatus,
permitting the establishment of joint ventures with Western firms, and seeking greater participation
in international economic organizations. Moscow's major objective is to raise both the quality and
technical level of its domestic output, partly as a means to expand exports of manufactured goods.
The leadership believes it must reduce its reliance on sales of energy and other raw materials and,
instead, create a trade structure more suited to a large industrial nation.
Foreign Trade Reorganization
In September 1986 the Soviets announced a major overhaul of the foreign trade apparatus aimed
at breaking the Ministry of Foreign Trade's monopoly over foreign trade. As of 1 January 1987,
more than 20 ministries and 70 large associations and enterprises had been granted the authority to
conduct trade directly with foreign partners. At present, the Ministry of Foreign Trade has retained
control of trade in raw materials, food, and about 60 percent of machinery imports, although
additional ministries and enterprises could eventually also be given the power to conduct trade
transactions. Moscow also created the State Foreign Economic Commission composed of the heads
of the major ministries and departments involved with foreign trade. This new body appears to
have limited power over resources, however, with its function limited largely to giving guidance
on trade matters.
Joint Ventures With the West
A second major initiative was the establishment of guidelines in early 1987 that permit formation
of joint ventures with Western trading partners. The new resolution allows up to 49-percent
foreign equity, repatriation of profits, and Western participation in management, although Soviets
must occupy the positions of chairman of the board and director-general. In addition, Soviet law
will apply to the wages, work hours, and vacations of Soviet citizens. The current joint venture
resolution is somewhat vague on many key points of interest to Western firms, and further details
are likely to be spelled out as the Soviets begin setting up these projects.
Soviet interest in joint ventures is widespread, with proposals sought on everything from the
light and food industries to machinebuilding, petrochemicals, electronics, and communications.
Indeed, Moscow is probably looking to joint ventures as a means of acquiring Western technology
with little to no up-front hard currency expenditures. Moreover, the Soviets may also believe that
joint ventures will allow for an easier transfer of technology and management skills than has been
the case with traditional purchase of machinery and equipment.
The Soviet leadership has also explored expanding relations with international economic
institutions such as the European Community and the General Agreement on Trade and Tariffs.
Some interest in the International Monetary Fund has also surfaced, but Moscow does not appear
to be as serious about this organization, at least at this time. Political motives may partly explain
Moscow's actions, as the USSR may feel that its world power status requires that it be a player
with major world bodies. But the Soviets have said that they are counting on the association
Declassified and Approved For Release 2012/03/05: CIA-RDP08S01350R000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08S01350R000401320001-7
with important economic institutions to open up new trade opportunities, especially through tariff
reductions.
In conjunction with recent trade activity, Moscow has also broadened the scope of its financial
dealings. For example, Soviet or Soviet-owned banks in the West have stepped up the use of
acceptance facilities and some of the newer financial instruments. Last year the USSR invested
in an international bond issue for the first time and reached a settlement with the British on
outstanding Tsarist bonds, prompting speculation that the Soviets may soon issue their own bonds.
These actions not only help diversify Moscow's sources of funds but also cut borrowing costs.
Although Moscow will continue with its recent trade-related endeavors, it will proceed
cautiously. Moreover, continued hard currency shortages act as a further constraint on the USSR's
ability to become a major player in international trade circles anytime soon. The reorganization of
the trade apparatus is noteworthy, but most trade still remains dominated by central planners.
In fact, many systemic weaknesses - such as distorted prices and the lack of incentives -
remain and will continue to thwart the qualitative improvement of Soviet-manufactured exports.
Some joint ventures will be established, but most Western firms appear unenthusiastic so far,
especially considering the problems they have encountered with joint ventures in other socialist
countries. Finally, the foreign trade sector does not operate in a vacuum, and rapid expansion
in the international arena is unlikely until numerous shortcomings in the domestic economy are
corrected.
allowed Moscow to field a weapon system more
capable than otherwise would have been the case.
On occasions this technology has also benefited
the civilian economy. Diversion of advanced
manufacturing technology - for example, micro-
electronic processing know-how and equipment
- has raised the quality and performance of de-
vices used in both military and civilian products.
Indeed, this probably will be even more the case
in the future. Many of the products needed
for Gorbachev s modernization program in the
areas of information processing, computers, and
micro-electronics also have military applications.
talked about) - would be aimed at stimulating
production and innovation, and would certainly
be consistent with the direction in which Gor-
bachev is already heading. Still, he would have
to overcome stubborn political and bureaucratic
opposition, which could be expected to intensify
if his programs were faltering.
. Abroad spectrum of the apparat would
probably oppose moving too far in this
direction on the grounds that economic
decentralization would threaten a loss of
political control.
Prospects for Economic Reform
Ultimately, under the pressure of hard de-
cisions on resource allocation and insufficient
foreign support for his modernization program,
Gorbachev may decide to put more teeth into
his calls for "radical reform." Adopting some of
the bolder proposals that have been put forward
- such as a major decentralization of price
setting or real competition among state enter-
prises (see box for a discussion of reforms being
A major decentralization would threaten
the jobs, status, power, and privileges of
thousands of officials now running the
economy.
The specter of unemployment, inflation,
and widening class divisions within society
would undermine what Soviet citizens and
leaders consider to be some of the principal
advantages of socialism.
Declassified and Approved For Release 2012/03/05: CIA-RDP08S01350R000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08S01350R000401320001-7
Some reform-minded economists in the USSR have taken advantage of the more open
environment under Gorbachev to advocate bold measures that could transform the economy. Some
of the more far-reaching ideas now being discussed include:
. Increased competition among state enterprises. Abel Aganbegyan, an economic adviser to
Gorbachev, has indicated that inefficient enterprises should be allowed to fail.
. A major decentralization of the price formation and supply systems. Articles in the Soviet
press have called for allowing suppliers to deal directly with their customers and set prices by
negotiation, bypassing the central supply system.
. The use of "family contracts" for agriculture production and long-term leases of land and
machinery by small groups of farmers. Such measures have been used successfully on an
experimental basis, and their broad introduction is being promoted by some Soviet economists.
Indeed, there has been significant opposition
to some of Gorbachev s political reform efforts
in 1986, and Gorbachev certainly recognizes the
threat posed to his programs. Many of the actions
he has taken since coming to power can be
explained as an effort to trim the bloated party
and government bureaucracies so that they will
be more receptive to his policies. Since taking
over, he has made sweeping personnel changes,
replacing about half of the government ministers
and over one-third of the provincial party lead-
ers. Substantial changes have taken place at the
mid-and-lower levels of the bureaucracy as well.
Gorbachev's Political Standing
Despite the opposition shown to some of his
policies, Gorbachev is likely to benefit politically
from his modernization program over the next
few years. As long as the economy shows some
improvement over the record posted in the re-
cent past - which seems probable - Gorbachev
will be in a position to declare his program a
"success."
Over the longer term, how Gorbachev fares
politically is much more open to question. Under
a favorable scenario, if:
Just how far Gorbachev will go on reform is
impossible, to say, although we should have a
clearer idea over the next year or so. During the
major party plenum dedicated to the economy
scheduled for June 1987, issues of economic
reform almost certainly will be debated. At
the recently completed Party Plenum in January
1987, Gorbachev also called for an All-Union Party
Conference to be held in 1988. Second only to
a Party Congress in expressing the official "will
of the Party," the All-Union Party Conference,
said Gorbachev, should address changes in the
political system - changes that might lay the
groundwork for more substantial reform. The fact
that Party Plenum did not endorse his call for an
All Union Party Conference, however, shows just
how hard changes in these areas are likely to be.
the economy continues to show some
progress (even if the FYP goals are not met),
the military environment appears less
threatening either because of an arms
control agreement, a slower Western
defense buildup, or other factors, and
external factors (e.g., weather, oil prices) are
favorable,
then Gorbachev could emerge at the end of the
decade in a much stronger position politically.
But the course Gorbachev is pursuing is in-
herently risky, and things could just as easily go
Declassified and Approved For Release 2012/03/05: CIA-RDP08S01350R000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
wrong. Although he may be able to claim some future. The decisions he will have to reach over
success in the immediate future, his repeated the next few years in areas ranging from resource
attacks on those slowing the process of recon- allocation to political and economic reform will
struction and the strenuous nature of his goals be controversial and could well solidify opposing
suggest that he is by no means confident of the interests in the party and government.
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
Appendix A
1986 Economic Performance: A Good Showing
The 12th FYP got off to a fast start in 1986. Record farm output and a relatively solid performance
in industry helped propel GNP growth to more than 4 percent, the highest in nearly a decade.
On the strength of a strong showing in the livestock sector and a good grain crop, agriculture
rebounded from a poor performance last year and increased by a hefty 7.3 percent. Industry,
meanwhile, also did well, growing by over 3.6 percent with all major branches doing as well or
better than last year.
Despite the strong start, a number of problems cropped up during the year that were not
captured in the aggregate growth figures. In particular, the machine-building sector - the key
to longer term growth - attracted repeated criticism from the leadership for its failure to meet
goals for output quality, product mix, and deliveries. Meanwhile, shifting terms of trade resulted
in a decline in hard currency imports and led Moscow to cancel a number of important projects
scheduled for the 12th FYP.
Industry
Industrial output increased by 3.6 percent in 1986 (see table A-1), the best in nearly a decade
and only slightly below plan. Growth slowed during the year, however. Industrial growth during
the first quarter of 1986 was up by nearly 6 percent compared with the first quarter of 1985,
reflecting the very poor industrial performance during the winter of 1984-85 when severe cold
and heavy snows hampered production and transportation. During the last three quarters of 1986,
industry grew at an annual rate of about 3 percent.
Machinery. While substantially better than the 1.7-percent average annual growth rate
achieved during 1981-85, the performance of the machinery sector was probably somewhat of
a disappointment to the leadership. Output grew by 4.4 percent, well below plan. One of the
reasons for the below-plan output may have been that the very heavy investment in the civil
machinery sector last year - the 1986 plan called for a 30-percent increase - increased the
amount of downtime in enterprises as they installed new equipment or renovated their facilities.
Whatever the reason, targets were not met for a number of important types of equipment,
including industrial robots, electric motors, chemical equipment, forging and pressing machines,
and petroleum equipment. Production targets were exceeded, however, for the majority of items
- including metal-cutting machines and computer equipment.
In addition to failing to meet plan targets for some key items, machinery producers also had
trouble getting their products to their customers. As indicated in figure A-1, 10 of the 11
civilian machine-building ministries were criticized during the course of the year for not meeting
contractual deliveries. In most machine-building ministries, fulfillment of contractual commitments
deteriorated compared with 1985. According to the Central Statistical Administration's report on
1986 plan fulfillment, "violations of contract discipline were committed by one in four enterprises."
Industrial Materials. Output of industrial materials (ferrous and nonferrous metals, chemicals,
construction materials, and forest products) grew by 3.9 percent in 1986, reflecting in part poor
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
Appendix A (Continued)
performance in 1985. Most individual sectors performed well, exceeding the growth rates achieved
in 1985. Shortages of industrial materials caused bottlenecks throughout the economy during the
late 1970s and early 1980s. Continued strong showing by these branches is needed if Gorbacheds
modernization program is to stay on track:
? Production of ferrous metals increased by 2.8 percent from the previous year, led
by healthy increases in crude steel and rolled products. Output plans were not met,
however, for specialty steels, a key product in the modernization program.
? Helped by Gorbacheds "chemicalization" drive, the chemical industry registered healthy
production increases.
? Timber output, while exhibiting the sharpest growth for basic materials, still did not
reach the 1975 level. Rapid growth was fueled by the opening of new timber tracts
along the Baikal-Amur Mainline railroad (BAM) corridor.
? Construction materials were able to shake off the lingering effects of the 1985 harsh
winter and posted a rebound in growth to 3.2 percent.
? Light industry continued its slow, but steady progress, with the largest gains in textiles
and knit goods.
Developments over the past 3 years - the modernization and expansion of capital stock,
administrative reforms, personnel reshuffling, and better transport - built a strong foundation for
USSR: Growth of Industrial Production by Branch'
Annual Percentage Growth Rate
1981-85
1981
1982
1983
1984
1985
1986
Industry
2.0
1.3
0.7
2.7
2.6
2.7
3.6
Machinery
1.7
0.2
-0.2
1.8
2.7
4.2
4.4
Industrial materials
2.2
1.6
0.5
3.8
2.4
2.8
3.9
Ferrous metals
1.2
-0.3
-0.4
3.0
0.9
2.8
2.8
Nonferrous metals
2.0
0.3
0.8
3.0
3.0
3.0
3.0
Chemicals
3.8
3.8
2.0
5.8
3.4
4.3
4.4
Wood products
2.1
2.0
0.6
3.0
2.8
2.1
5.4
Construction materials
1.5
1.5
-0.9
3.5
1.7
1.5
3.2
Energy
2.3
1.8
2.3
2.4
2.8
2.0
3.7
Fuels
1.2
1.3
1.7
1.3
0.9
0.7
3.9
Electric power
3.6
2.5
3.1
3.7
5.2
3.5
3.6
Consumer nondurables
1.7
2.2
1.3
2.4
2.4
0.2
1.1
Soft goods
1.6
1.8
-0.5
1.2
2.8
2.4
1.5
Processed foods
1.8
2.5
2.9
3.4
2.1
-1.6
0.7
Value added at 1982 factor cost. Based on CIA's index of Soviet industrial production.
26
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
Appendix A (Continued)
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Power Machine Building
?
?
Heavy and Transport Machine Building
?
?
?
?
?
?
?
Electrical Equipment Industry
?
?
?
?
?
Chemical and Petroleum Machine Building
?
?
?
?
?
?
Machine Tool and Tool Building Industry
?
?
?
?
?
Instrument Making, Automation
Equipment, and Control Systems
Automotive Industry
?
Tractor and Agricultural
Machine Building
?
Machine Building for Animal Husbandry
and Feed Production
?
?
?
?
Construction, Road, and Municipal
Machine Building
?
Machine Building for Light and Food
Industry and Household Appliances
?
?
?
?
Source: Central Statistical Administration plan fulfillment reports. Ten of the 11 civilian machinery ministries
have been criticized. These problems take several forms: ""contractual obligations not met," "contractual
deliveries not met," "contract discipline breaches," and "output delivery shortfalls."
Figure A-1. Civilian Machine- Building Ministries Criticized for not Meeting Delivery Goals,
January-December 1986.
the 1986 acceleration in output. Expanded use of contract fulfillment indicators, while not without
problems, improved the flow of raw materials. Meanwhile, managers - feeling the heat from new
ministers in the ferrous metal and construction materials branches - apparently succeeded in
finding hidden caches of labor, materials, and equipment. Finally, several key industrial facilities
initiated a second work shift under an intensification program.
Energy. The energy industries recorded a strong performance in 1986. Targets for coal and
natural gas were exceeded, oil production recovered most of the ground lost over the past 2 years,
and the electric power industry coped well with the disruptions caused by the Chernobyl nuclear
power accident and by reduced hydroelectric output. The price of that success was a large fuel
bill, however, another setback in Moscow's drive to conserve energy.
Reversing a 2-year decline in output, oil production in 1986 rose to 12.3 million barrels per day
(b/d), 400,000 b/d above the 1985 level. All of the increase resulted from growth in West Siberian
output, based largely on the return of idle wells to production and a sharp increase in the pace of
drilling and well completions. The cost of raising output was apparently high. Although figures on
investment have not been released so far, it was slated to rise by 31 percent in 1986.
Natural gas output grew by 6.7 percent to 686 billion cubic meters last year, once again
outstripping growth in other energy industries. The increase was, however, smaller than the
record 56 billion cubic meters posted in 1985. Production at Urengoy supplied most of last year's
increment. Yamburg, the USSR's second largest field, did not begin producing until the final quarter.
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
Appendix A (Continued)
Coal production in 1986 soared to 751 million tons, an increase of 25 million tons above the
1985 level and one of the largest gains since World War II. Improvements in labor productivity
(possibly through lengthening work hours in selected mining activities), as well as higher output
from surface mines located east of the Urals, accounted for most of the production gains. Because
most of the coal from the Eastern basins is much lower in heat value than that produced elsewhere
in the USSR, the net addition to energy output was probably less than the amount implied by the
reported production.
Electricity output was only slightly below plan, despite a troubled year for the power industry
- the loss of capacity in the Chernobyl nuclear accident and drought-reduced hydroelectric
production. Electricity output grew by 3.6 percent to 1,599 billion kilowatt hours. A strong
performance from fossil-fuel power plants - electricity from this source grew by 5 percent during
the year - boosted total output enough to assure an adequate power supply to most of the USSR
(For a discussion of the economic impact of Chernobyl, see the box insert.)
Agriculture
Farm production reached a new high in 1986. Continued growth in the livestock sector
combined with substantially increased production of important crops such as grain, potatoes, and
vegetables resulted in a 7.3-percent increase in farm output (net of feed, seed, and waste) - nearly
5 percentage points above the previous record in 1983.
A 210-million-ton grain crop - the largest grain harvest since the record crop of 237 million
tons in. 1978 - helped Moscow reduce grain imports and contributed to a 5-percent increase in
Economic Impact of the Chernobyl Accident
Analysis of the Chernobyl accident indicates that the ultimate cost to the economy
and in human lives will be high, even though the direct damage to agriculture, industrial
facilities, and the environment last year was limited to a fairly small area.
The biggest economic cost so far has been the loss of electricity generated by the
Chernobyl reactors and the resultant increase in fossil fuel used by replacement power
plants. We estimate that an additional 15 million barrels of fuel oil (40,000 b/d), 3 billion
cubic meters of natural gas, and 5 million tons of coals were used in 1986. In addition,
Eastern Europe, particularly Hungary, may have been asked to bear the burden of some
electricity cuts during the 1986-87 winter period of peak demand.
Longer term consequences for the Soviet civilian nuclear industry include the investment
writeoffs of one or more Chernobyl' reactors and the costs of modifications to improve
safety at other reactors. A rough total of these capital costs shows them to be equivalent
to 1 to 3 years' investment in the industry. Nevertheless, we expect that the Soviets
will strive to minimize the impact of the Chernobyl accident on their long-term plans for
nuclear power and will continue to expand the role of this energy source.
In contrast, Chernobyl's impact on agriculture was small. According to the Soviet press,
the area contaminated by radioactive fallout is largely restricted to about 1,000 square
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
Appendix A (Continued)
kilometers, implying a radius of 18 kilometers, and a few outlying pockets. Over half of
the contaminated area consists of forest and swampland. Soviet data show that the region
accounts for a minuscule share of total Ukrainian farm output. Damage to farming regions
beyond the Chernobyl area was probably minimal.
In addition to the economic costs, human costs will be substantial. The initial casualties
- reportedly 29 people died of acute radiation sickness - will probably account for only
a part of the ultimate human toll of the Chernobyl disaster. Many thousands of persons
were exposed to radiation, increasing their long-term cancer risk. Theoretical calculations
indicate that over the next 70 years radiation exposure from Chernobyl could result in
an additional 500 deaths from cancer among the 135,000 people evacuated. This would
increase cancer risk from the natural population incidence of 12.5 percent to 12.7 percent.
The potential death rate due to radiation-induced cancer among those involved in the
cleanup is double that of the evacuees. This cancer threat poses unique medical and
psychological problems, even though the overall statistical increase in cancer rates will be
minimal.
net livestock production. Probably most welcome from the consumers' view, meat production rose
by 3.5 percent to 17.7 million tons, exceeding planned output by a surprising margin of 400,000
tons. Meanwhile, potato production reached the highest level since 1979, increasing by nearly 15
million tons from the depressed 1985 level, and vegetable production was up by nearly 2 million
tons.
Most of the growth in agricultural output was the result of productivity gains according to the
Soviet press. Milk yields increased markedly, as did average slaughter weights, and the period of
time required to raise animals to marketable size - nearly twice as long as in the United States -
was reduced. After a 1 year hiatus, feed efficiency also appeared to improve somewhat.
Transportation
Helping to support industry's and agriculture's strong showing was the improved performance
of the transport sector. Better weather in 1986 spurred the general recovery of major industrial
customers and increased the demand for transport services, particularly rail freight. This traffic rose
by 4.8 percent and rail passenger turnover by 3.8 percent - both well ahead of planned rates. A
good year for agriculture also increased shipments on rail and highway carriers, and the increase in
oil production during 1986 raised the overall growth rate for freight traffic by reversing last year's
fall in oil pipeline traffic.
The railroads squeezed an extra 2.8 percent more tonnage on the mainlines and met the
increased demands of industry and agriculture by increasing train weights and reducing turnaround
times for freight cars. In addition, as part of their overall campaign to increase efficiency and control
rising costs, the railroads began trimming excess labor last year. As a result, labor productivity soared
by 7.5 percent last year.
Meanwhile, the volume of traffic moved by highway carriers increased by 5.2 percent last year,
reversing a 3-year decline. We suspect that the turnaround in performance reflects the adjustments
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
Appendix A (Continued)
of carriers to policies in the early 1980s - notably higher fuel prices, an increased emphasis on
conservation, and a crackdown on padding trucking statistics.
The USSR's trade sector was battered for the second consecutive year, although the Soviets
coped fairly well with a difficult situation. The collapse of world oil prices coupled with a sharp
drop in the dollar relative to other major Western currencies resulted in an estimated 15-20 percent
deterioration in the USSR's hard currency terms of trade. The dollar value of hard currency exports
in 1986 dropped by 8 percent, based on Soviet trade data for January - September 1986. Despite
Soviet attempts to mitigate the effects of the falling oil price by boosting sales, the value of oil
exports to the West fell by an estimated 35 percent. While Moscow increased the dollar value
of arms exports to the Third World by roughly 15 percent, the beleaguered position of many
of Moscow's principal arms customers probably has limited the Soviets' ability to increase hard
currency receipts from these sales.
Reduced hard currency earnings contributed to an estimated 9-percent decline in the dollar
value of hard currency imports in 1986, with real purchases dropping more. The largest decline
in imports was registered in grain, as improved domestic agricultural performance and lower
world grain prices allowed reduced foreign expenditures without jeopardizing consumption goals.
Deliveries of machinery and equipment last year increased slightly in dollar terms, but dropped in
real terms. The Soviets were able to limit the extent of import cuts, however, by selling markedly
more gold at higher prices last year, as well as by borrowing actively in world financial markets.
Moreover, Moscow sought to expand its financial horizons by tapping new sources of credit outside
of traditional syndicated loans and export financing.
In contrast to trade with the West, Soviet trade with the Communist World grew slightly,
increasing to about two-thirds of total trade compared with about 61 percent a year earlier.
Moscow's terms of trade with its Communist trading partners improved slightly last year because
the large drop in world oil prices has not yet been factored into the CEMA oil pricing formula.
One outcome was an increase in the USSR's trade surplus with its East European partners, despite
Moscow's repeated calls for more balanced trade.
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
Appendix B
Table 1 USSR GNP by Sector of Origin at Factor Cost
(billion 1982 rubles)
Table 2 USSR Value Added in Industry at Factor Cost
(billion 1982 rubles)
Table 3 USSR Average Annual Growth of Per-Capita Consumption
(1982 established prices)
Table 4 USSR Growth of GNP and Factor Productivity
(average annual percentage change)
Table 5 USSR Growth of Industrial Output and Factor Productivity
(average annual percentage change)
Table 6 USSR Gross Fixed Capital Investment
(billion rubles, 1984 prices)
Table 7 USSR Estimated Hard Currency Balance of Payments
(million current US dollars)
Table 8 USSR Total trade, 1981-85 (billion current US dollars)
Table 9 USSR Selected Indicators of Agricultural Output
USSR: GNP by Sector of Origin at Factor Cost
(billion 1982 rubles)
Preliminary
1955
1960
1965
1970
1975
1980
1981
1982
1983
1984
1985
1986
GNP'
248.9
327.3
415.3
531.5
616.8
691.6
701.4
719.7
742.8
753.2
761.1
793.4
Industry
59.3
86.1
118.1
159.8
208.3
237.8
240.8
242.5
249.0
255.4
262.2
271.6
Agriculture
91.1
110.5
127.2
149.8
133.1
135.4
132.6
144.1
152.3
149.2
143.2
155.4
Construction
14.0
22.6
28.4
36.9
46.0
53.1
55.5
56.9
58.7
59.9
61.4
63.7
Transportation
10.6
18.8
30.5
43.0
59.1
70.6
73.5
74.4
76.5
77.7
79.3
82.4
Communications
1.4
1.9
2.8
4.2
5.7
7.2
7.5
7.7
7.9
8.3
8.7
9.1
Trade
11.6
17.1
21.8
31.0
38.6
44.2
45.1
45.1
46.3
47.4
47.8
48.8
Services
49.1
60.0
74.8
92.4
109.8
125.8
128.9
131.0
134.0
137.2
140.5
143.9
Other (includ-
11.9
10.3
11.7
14.3
16.0
17.5
17.6
17.9
18.1
18.2
18.2
18.4
ing military
personnel)
' Components may not add exactly to total because of rounding.
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
Appendix B (Continued)
USSR: Value Added in Industry at Factor Cost
(billion 1982 rubles)
Preliminary
1955
1960
1965
1970
1975
1980
1981
1982
1983
1984
1985
1986
Industry'
59.3
86.1
118.1
159.8
208.3
237.8
240.8
242.5
249.0
255.4
262.2
271.6
Ferrous
metals
4.8
7.0
10.0
12.9
15.9
16.5
16.5
16.4
16.9
17.0
17.5
18.0
Nonferrous
metals
2.1
2.8
4.1
6.0
7.9
8.5
8.6
8.6
8.9
9.1
9.4
9.7
Fuel
5.4
8.6
12.1
15.8
20.6
24.3
24.6
25.0
25.4
25.6
25.8
26.8
Electric
power
2.5
4.2
7.3
10.6
15.0
18.6
19.1
19.7
20.4
21.5
22.2
23.0
Machine
building
and metal
working
17.6
23.7
33.0
46.1
64.0
77.3
77.5
77.3
78.7
80.9
84.3
88.0
Chemicals
2.2
3.9
6.9
10.5
15.6
18.1
18.7
19.1
20.2
20.9
21.8
22.8
Wood, pulp,
and paper
7.5
9.9
11.3
12.9
14.6
14.1
14.4
14.5
14.9
15.4
15.7
16.5
Construction
materials
2.9
5.8
7.6
10.3
13.2
14.1
14.3
14.2
14.7
14.9
15.2
15.6
Light industry
6.6
8.8
10.0
13.7
15.5
17.5
17.8
17.7
18.0
18.5
18.9
19.2
Food industry
5.5
8.2
11.4
15.1
18.5
19.8
20.3
20.9
21.6
22.0
21.7
21.8
Other
industry
2.2
3.2
4.4
6.0
7.8
8.9
9.0
9.1
9.3
9.5
9.8
10.2
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
Appendix B (Continued)
USSR: Average Annual Growth of Per-Capita Consumption
(1982 established prices)
Preliminary
1956
1961
1966
1971
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
-60
-65
-70
-75
Total consumption
3.9
2.6
5.2
2.8
1.7
2.0
0.9
2.5
2.6
1.3
-1.1
1.1
1.8
-0.5
0.8
Food
3.1
2.0
4.5
1.8
0.1
1.1
-0.5
2.1
1.7
-0.2
-1.5
1.2
0.8
-4.5
-1.3
Soft goods
5.6
2.2
7.2
2.7
3.4
2.5
1.9
3.0
3.3
2.1
-1.5
0.6
2.4
3.2
1.4
Durables
10.4
3.9
9.5
9.7
5.4
7.9
3.3
3.6
6.7
6.3
-2.6
1.7
4.6
5.2
5.0
Services
3.3
4.6
4.2
2.9
2.4
0.9
2.3
2.3
2.2
1.4
1.4
1.3
1.8
1.8
2.1
Housing
3.1
2.5
2.1
1.7
1.4
1.4
1.4
1.2
1.2
1.3
2.0
1.9
1.6
1.6
1.5
Utilities
4.7
7.8
5.4
5.3
5.0
3.0
3.8
3.3
3.7
2.7
3.1
3.2
4.1
3.3
2.9
Transportation
9.3
9.0
8.2
6.4
5.2
-3.9
2.4
4.1
3.5
3.2
1.1
1.4
1.6
1.4
2.7
Communications
5.4
5.7
7.6
5.4
4.2
3.6
3.4
3.9
3.9
3.5
1.3
2.5
3.7
3.7
4.0
Repair and
Personal Care
3.7
5.0
6.4
4.4
4.0
3.2
4.8
4.2
4.4
3.4
2.1
3.5
3.1
3.5
4.8
Recreation
5.3
3.6
2.6
4.1
-3.2
-2.1
1.3
2.4
3.8
-1.8
-0.6
-0.5
-1.0
1.1
1.0
Health
3.5
2.3
3.3
1.5
1.0
0.8
1.8
1.0
-0.2
-0.0
0.9
0.6
1.0
0.3
0.8
Education
1.5
5.3
3.0
1.5
1.7
1.2
1.3
1.4
1.5
-0.1
0.9
-0.2
1.0
1.4
1.0
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
Appendix B (Continued)
USSR: Growth of GNP and Factor Productivity
(average annual percentage change)
Preliminary
1966-70'
1971-75'
1976-80'
1981
1982
1983
1984
1985
1986
Gross national product2
5.1
3.0
2.3
1.4
2.6
3.2
1.4
1.1
4.2
Combined inputs3
4.1
4.2
3.4
3.0
3.1
2.9
2.8
2.5
2.5
Workhours
2.0
1.7
1.2
0.9
1.0
0.7
0.5
0.4
0.6
Capital
7.4
8.0
6.9
6.4
6.3
, 6.3
6.3
5.8
5.5
Land
0.0
0.1
-0.1
-0.1
-0.1
0.1
-0.1
-0.7
0.0
Total factor productivity
0.9
-1.1
-1.1
-1.6
-0.4
0.3
-1.3
-1.4
1.7
Workhour productivity
3.0
1.3
1.1
0.5
1.6
2.5
0.9
0.7
3.6
Capital productivity
-2.2
-4.6
-4.3
-4.7
-3.4
-2.9
-4.6
-4.5
-1.2
Land productivity
5.0
2.9
2.5
1.5
2.7
3.1
1.5
1.8
4.2
For computing average annual rates of growth, the base year is the year prior to the stated period.
Based on indexes of GNP (1982 rubles) by sector of origin at factor cost.
Inputs of workhours capital, and land are combined using weights of 56.5 percent, 40.5 percent, 3.0 percent, respectively in
a Cobb-Douglas (linear homogeneous) production function. These weights represent the distribution of labor costs (wages,
social insurance deductions, and other income), capital costs (depreciation and a calculated capital charge), and land rent
in 1982, the base year for all indexes underlying the growth rate calculations.
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
Appendix B (Continued)
USSR: Growth of Industrial Output and Factor Productivity
(average annual percentage change)
Preliminary
1966-70'
1971-75'
1976-80'
1981
1982
1983
1984
1985
1986
Industrial production
6.2
5.5
2.7
1.3
0.8
2.7
2.6
2.7
3.6
Combined inputs2
6.0
5.2
4.7
4.4
4.0
3.8
3.8
3.7
3.4
Workhours
3.1
1.5
1.4
0.7
0.8
0.4
0.5
0.4
0.4
Capital
8.8
8.7
7.7
7.8
7.0
6.9
6.8
6.6
6.1
Total factor
-0.2
-0.2
-1.9
-3.0
-3.2
-1.1
-1.1
-0.9
-0.2
productivity
Workhour
3.1
3.9
1.3
0.6
0.0
2.2
2.1
2.2
3.1
productivity
Capital productivity
-2.3
-3.0
-4.7
-6.1
-5.9
-4.0
-3.9
-3.7
-2.4
' For computing the average annual rates of growth, the base year is the year prior to the stated period.
2 Inputs of workhours and capital are combined using weights of 47.4 percent and 52.6 percent, respectively; in a Cobb-
Douglas (linear homogeneous) production function. These weights represent the distribution of labor costs (wages, social
insurance deductions, and other income) and capital costs (depreciation and a capital charge) in 1982, the base year for all
indexes underlying the growth rate calculations.
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
Appendix B (Continued)
USSR: Gross Fixed Capital Investment
(billion rubles, 1984 prices)
Total Investment
1965
64.2
1970
92.2
1975
128.5
1980
150.9
1981
156.5
1982
161.9
1983
171.0
1984
174.3
1985
179.5
By source:
State
55.3
79.4
111.8
133.1
138.5
143.2
150.7
153.7
157.9
Collective farms
5.5
8.6
12.2
13.3
13.4
13.9
14.8
14.7
15.4
Cooperative enterprises
1.7
2.6
2.7
2.9
2.9
3.1
3.5
3.6
3.7
and organizations
Private housing and
1.7
1.6
1.8
1.6
1.7
1.7
2.0
2.3
2.5
apartments
By sector:
Industry
23.6
32.5
44.9
53.3
55.4
57.0
60.1
62.7
65.5
Agriculture
10.6
16.0
26.1
29.8
30.5
31.0
32.1
31.1
31.5
Transportation and
6.4
9.0
14.4
18.1
18.9
19.9
21.4
22.3
21.9
communications
Construction
1.6
3.3
4.8
6.0
5.8
6.3
6.3
5.8
6.1
Housing
11.2
15.8
19.2
21.1
22.4
24.0
25.9
27.3
28.1
Trade and services
10.8
15.6
19.1
22.6
23.5
23.7
25.2
25.1
26.4
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
Appendix B (Continued)
USSR: Estimated Hard Currency Balance of Payments
(Million Current US Dollars)
1970
1975
1980
1981
1982
1983
1984
1985
1986'
Current account
balance
114
-4,624
-1,904
-175
4,333
4,663
4,484
317
220
Merchandise trade
balance
-306
4,814
1,714
200
4,433
4,713
4,434
517
700
Exports, f.o.b.
2,405
9,443
27,784
27,978
31,977
32,428
31,726
26,370
24,200
Imports, f.o.b.
2,711
4,257
26,070
27,778
27,544
27,715
27,292
25,853
23,500
Net interest
-80
-570
-700
-1,375
-1,200
-1,150
-1,050
-1,300
-1,580
Other invisibles and
transfers
500
760
890
1,000
1,100
1,100
1,100
1,100
1,100
Capital account
balance
265
6,520
1,630
5,840
-1,340
1,650
500
5,800
9,200
Net foreign
borrowings2
290
5,400
-185
3,000
-865
500
-100
6,000
6,400
Net change in assets
held in Western
banks3
25
-395
-235
-140
1,575
-400
400
2,000
1,000
Gold sales
negl.
725
1,580
2,700
1,100
750
1,000
1,800
3,800
Net errors and
-379
-1,896
-3,534
-5,665
-2,993
-6,313
-4,984
-6,117
-9,420
omissions4
Preliminary.
z Including additions to short-term debt.
A minus sign signifies a decline in the value of assets.
Includes hard currency assistance to and trade with Communist countries, credits to the LDCs under military and economic
aid programs, credits to developed Western countries to finance sales of oil and other commodities, as well as errors and
omissions in other line items of the accounts. Among the omissions is an adjustment for fluctuations in the US dollars
vis-a-vis other Western currencies.
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
Appendix B (Continued)
USSR: Total Trade, 1981-85'
(Billions of Current US Dollars)
Annual
Average
1981-85
1981
1982
1983
1984
1985
19862
USSR Exports by
region
Total
87.3
79.4
87.2
91.7
91.5
86.9
94.7
Communist
49.3
43.4
47.1
51.0
51.9
53.2
63.1
Developed countries
25.2
24.4
26.2
26.7
26.4
22.5
19.2
Less developed
countries
12.7
11.6
13.8
13.9
13.2
11.2
12.4
USSR Imports by
region
Total
78.3
73.2
77.8
80.5
80.3
82.9
90.2
Communist
44.3
37.2
42.5
45.5
47.0
50.6
59.0
Developed countries
24.6
25.4
26.2
25.4
24.2
23.3
23.2
Less developed
countries
9.4
10.6
9.1
9.6
9.1
9.0
8.0
Includes both hard currency trade and trade conducted with soft currency partners on a
clearing account basis.
2 Preliminary.
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
Appendix B (Continued)
USSR: Selected Indicators of Agricultural Output
1955
1960
1965
1970
1975
1980
1981
1982
1983
1984
1985
1986
Value of output' 63.8
78.8
94.0
112.5
109.4
114.6
113.7
121.9
129.3
128.3
126.2
135.3
(billion rubles)
Commodity production
(million metric tons)
Grain2
103.7
125.5
121.1
186.8
140.1
189.1
158.2
186.8
192.2
172.6
191.7
210.1
Potatoes
71.8
84.4
88.7
96.8
88.7
67.0
72.1
78.2
82.9
85.5
73.0
87.2
Sugar beets
31.0
57.7
72.3
78.9
66.3
81.0
60.8
71.4
81.8
85.4
82.1
79.3
Sunflower seed
3.80
3.97
5.45
6.14
4.99
4.62
4.68
5.34
5.06
4.53
5.23
5.3
Cotton
3.88
4.29
5.66
6.89
7.86
9.96
9.64
9.28
9.21
8.62
8.75
8.23
Vegetables
14.1
16.6
17.6
21.2
23.4
27.3
27.1
30.0
29.5
31.5
28.1
29.7
Meat
6.3
8.7
10.0
12.3
15.0
15.1
15.2
15.4
16.4
17.0
17.1
17.7
Milk
43.0
61.7
72.6
83.0
90.8
90.9
88.9
91.0
96.5
97.9
98.6
101.1
Wool
.256
.357
.357
.419
.467
.461
.460
.452
.462
.465
.447
.465
Eggs (billion)
18.5
27.5
29.1
40.7
57.4
67.9
70.9
72.4
75.1
76.5
77.3
80.3
Net of feed, seed, and waste, in constant 1982 prices.
2 Bunker weight. To be comparable to Western measures, an average reduction of 11 percent is required.
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
DISTRIBUTION LIST
C121000, 0124000, 0123000, 0529320, AI17000, (111000,
(119950, CI19910, CI22000, C121200/UR,WV,WW,WX
AU27 1 DEF SEC ASST AGCY
A085 1 NAT DEF UNIVERSITY
A100 1 OSD
A102 1 OUSD(P)
A109 1 OSD/ODUSD(P)/IP&S
A117 1 OASD PA&E
A124 1 OSD NET ASSESSMENT
A126 1 JCS/JCS REP SALT
A128 1 SDIO
A151 1 OUSDRE (IP&T)
A152 1 OUSDRE (SAA)
A153 1 ASD (C31)
A246 1 JCS/J-3 (JOD)
A253 1 JCS/J-3 (SOSDD)
A302 1 JCS/CHAIRMAN
A304 1 JCS/SECRETARY
A305 1 JSOC
A308 1 JCS/DIR JT STAFF
A310 1 JOINTSPECOPSAGCY
A315 1 JCS/JAD
A330 1 JCS/J-3 NWSB
A332 1 JCS/J-3 STRAT OPS
A335 1 JCS/J-4
A340 1 JCS/J-5 MIL SEC
A342 1 JCS/SPRAA
A350 1 USDOCO USNMR SHAPE
A353 2 JSTPS
A365 1 US DEL (UN MSC)
A368 1 USRMC/NATO
A708 1 OSD/OES
A724 1 DUSDP
B003 1 DIA/DR (PROD REV)
8004 25 DIA/DI-1
B030 1 DIA/ED
B032 5 DIA/JSJ
B033 15 DIA/DI-3
8038 1 DIA/ESO
8040 5 DIA/DIO
B043 1 DIA/OA-10
8045 1 DIA/OA-2
B047 1 DIR/OA-4
B051 1 DIA/OA-6 (M. EAST)
B053 1 DIA/DT-5A
B060 1 DIA/RTS-2A5 PENT
8079 2 DIA/DIC-2C
8080 1 DIA/NWS
8091 1 DIA/DIA REP NMCC
8096 1 DIA/DI
B097 1 DIA/DI (NFIB)
BIUU 20 DIA/DB
8102 1 DIA/DB (SPEC ASST)
B131 1 DIA/DE
B132 1 DIA/VP-TAO
B134 1 DIA/DE-1
B136 1 DIA/DE-2
8137 1 DIA/DE-3
B138 1 DIA/DE-4
8142 2 DIA/DE-1 (POL/MIL)
8150 1 DIA/DT
6163 1 DIA/DT-5B
B177 1 DIA/DT-5
B332 1 DIA/JSO
B345 1 DIA/RTS-2C(VJ)
8351 1 DIA/RTS-3A4
8352 200 DIA/RTS-2F
8363 1 DIA/DB-1B1B
8367 1 DIA/DB-4G
B369 1 UTA/DB-8C
8537 1 DIA/VP-TPO
B539 1 DIA/OA
8542 1 DIA/DB-1J3
8545 1 DIA/VP
8549 1 DIA/DB-PDO
B55U 1 DIA/DI-2
8551 1 DIA/VP-SO/P
B552 36 D1A/DI-6B
B555 1 DIA/JS
8564 1 DIA/JSI
8571 1 DIA/DB-4G1
B573 1 DIA/DB-1J
8574 1 DIA/DB-4B
8575 1 DIA/DB-1
B58U 1 DIA/DB-1B3
8581 1 DIA/DB-1B
B582 1 DIA/DB-1C
8583 1 DIA/DB-1D
B586 1 DIA/DB-5D1
8587 1 DIA/DB-4F
B588 1 DIA/JSI-2C
8589 1 DIA/JSW
B591 1 DIA/DI-5
8593 1 DIA/DB-lE
8594 1 DIA/DB-1F
B596 1 DIA/DI-5A
B598 1 DIA/DB-2
B600 1 DIA/DB-1G
8602 1 DIA/VP-I
B603 1 DIA/DB-6
B605 1 DIA/DB-6B
8606 1 DIA/DB-2B
B609 1 0IA/DB-1J2
8611 1 DIA/DB-2C
8615 1 DIA/JSI-3
B617 1 DIA/DB-3
B618 1 DIA/DB-4D4
B620 1 DIA/DB-8
B621 1 DIA/DB-3B
8623 1 DIA/D8-8B
B629 1 DIA/DB-3C
8632 1 DIA/DB-4G2
8635 1 0TA/DB-8D
B636 1 DIA/JSI-4
B642 1 DIA/JSI-5
8644 1 DIA/DB-5D
8645 1 DIA/DB-5D3
8670 1 DIA/DB-5
B671 1 DIA/DB-5A
8674 1 DIA/DB-5B
8678 1 UTA/DB-5E
B680 1 DIA/DB-4
6681 1 DIA/DB-6C PENT,
8720 1 DIA/DX
8722 1 UTA/DX-4
B724 1 DIA/DX-P
B731 1 DIA/DX-6
8734 1 DIA/DX-7
8735 1 DIA/DX-7B2
B737 2 DIA/RTS-2B (LIB)
8760 1 DIA/DB-6E
B762 1 DIA/DB-6E2
B777 1 DIA/JSI-2A
6782 1 DIA/DB-1C2
8785 2 DIA/JSI-2
8786 1 DIA/DB-1H
B789 1 DIA/OB-1H1
B792 1 DIA/DB-1S
B795 1 DIA/DB-2D
B820 1 DIA/DIA REP JEWC
8822 1 DIA/DIA REP PACOM
8823 1 DIA/DIA REP SHAPE
B824 1 DIA/DIA REP SAC
8825 1 DIA/DIA REP EUCOM
8826 2 DIAREP USSOCOM
6854 1 USDAO CANBERRA
8855 1 USDAO VIENNA
B858 1 USDAO BRASILIA
B862 1 USDAO OTTAWA
8876 1 USDAO LONDON
B878 1 USDAO HELSINKI
6879 I USDAO PARIS
B880 1 USDAO BONN
8888 1 USDAO JAKARTA
B892 1 USDAO TEL AVIV
B896 1 USDAO TOKYO
8898 1 USDAO SEOUL
8902 1 USDAO KUALA LUMPUR
B916 1 USDAO MANILA
8917 1 USDAO WARSAW
B921 1 USDAO RIYADH
8928 1 USDAO BERN
8931 1 USDAO BANGKOK
B934 3 USDAO MOSCOW
8937 1 USDAO CARACAS
6948 1 USDAO CAIRO
C046 1 WRAIR
C065 1 USAITIC-PAC
C081 1 USARI
C201 1 HQ I CORPS
C202 3 III CORPS
C207 1 LIMRES
C231 1 2ND ARMD DIV
C232 1 3RD ARM CAV REGT
C234 1 1ST CAV DIV
C235 1 1ST INF DIV
C242 1 FORSCOM
C246 1 6TH CAV BDE(AC)
C247 1 THIRD US ARMY
C251 1 50TH ARM DIV
C284 1 415TH MID (STRAT)
C297 1 245TH PSYOP CO
C298 1 244TH PSYOP CO
C299 1 194TH ARMD BDE
C302 1 2ND PSYOP GROUP
C304 1 5TH PSYOP GROUP
C305 2 18TH ABN CORPS
C306 1 82ND ABN DIV
C309 1 500TH MIG
C314 3 513TH MIG
C316 4 20TH SFG (ABN)
C318 1 28TH INF DIV
C320 1 197TH INF BGE(S)
'C351 1 10TH SFG(A)
C364 1 HQ FT DEVENS
C400 1 10TH MTN DIV
C415 1 5TH INF DIV (M)
C419 1 9TH INF DIV
C446 1 USAFS SAN ANTONIO
C454 1 FLD ARTY SCH
C459 3 COMD-GEN STF CUL
C460 1 ENGINEER SCH
C470 3 ARMY WAR COL
C509 1 BALLISTIC RES LAB
C512 1 ARMY MATERIEL CMD
C523 1 ERADCOM/FI-A
C535 1 AVIATION SYS CMD
C545 1 ARRCOM
C605 1 1ST SOCOM
C617 1 CONCEPT ANLYS AGCY
C620 1 SRO
C623 4 USAOG
C635 1 AIR DEF AGCY
C639 1 CMBT&TNG DEV DIR
C646 1 CACDA
C667 4 USAJFKSWC
C748 1 HQDA DAMI-FRT
C757 1 SED
C763 1 HQDA DAMI-FIT
C766 1 HQDA DAMI-FIC
C768 3 ITAC (LIBRARY)
C788 2 HQDA DAMI-FII/S
C798 1 1ST(BM) 1 SFGA
C799 1 1ST MI CO 1ST SFGA
C813 1 USAFS AUGSBURG
C819 1 5TH SFG(A)
D002 1 OP-91 (DNM)
D005 1 OP-60
D007 1 NSIC HQ (NSIC-22D)
D150 1 CMC (INTP)
D153 1 PACMISTESTCEN
D184 1 NAVSTRKWARCEN
0202 1 NAVWARCOL/LIB
0249 3 NAVPGSCOL
D263 1 NOSC
D301 1 OP-009 (DNI)
D559 1 NAVMEDRSCHDEVCOM
D660 25 NMITC
D900 1 NAVOPINTCEN
D902 1 NAVOPINTCEN DET NP
0971 1 OP-009P
E001 1 HQ USAF/IN
E003 1 HQ USAF/INYX
EUIU 1 HQ USAF/INAR
E016 1 AFIS/INC
E017 1 HQ USAF/INA (W)
E018 1 HQ USAF/INA (C)
E053 1 HQ USAF/INET
E054 1 HQ USAF/INER
E100 90 TAC 480 RTG/INPPD
E102 1 TAC AIR CMD/INYC
E104 1 4513 ATTG/INOI
E200 1 ALASKANAIRCOM/INOI
E231 1 HQ USAF/LERX (CM)
E303 1 HQ USAF/INEGD
E310 1 HQ USAF/XOXA
E317 1 HQ USAF/SAMI
E4U1 1 AF LOG CMD/IN
E408 1 AF WEAPONS LAB/IND
E413 1 ESD/IND
E450 2 AIR UNIV
E451 1 AUL/LSE
E452 1 CADRE/WGOI
E465 1 USAF ACADEMY
E503 2 3305 STUGP/TTGM
E568 1 6990 ESG
E706 - 1 HQ ESC/INYQ
E726 2 USAF TAWC/IN
E730 1 HQ USAF/XOC
F005 3 HQ MAC/INO
FO10 2 HQ 23RD AIR FORCE
F018 2 21 AF/IN
F019 2 22 AF/IN
F058 1 1 SOW/IN
F081 1 438 MAW/DOI
G005 6 HQ SPACECOM/INXU
G009 1 CDR USAFA/OP
H005 10 USCINCEUR
H100 1 HQ USAFE/INS
H101 10 USAFE 497RTG (IRC)
H300 1 ODCS IN(USAREUR)
H309 1 11TH ARM CAV REG
H310 1 USASETAF
H350 1 1STSFBN 10TH SFG
H500 10 CINCUSNAVEUR
H511 1 COMSIXTHFLT
H525 1 HQ VII CORPS
H527 1 HQ 8TH INF DIV
H530 1 HQ 1ST ARMORED DIV
H704 1 USAFE/INO
1005 1 USCINCCENT
1040 1 SOCCENT
J005 1 USCINCLANT
J500 1 CINCLANTFLT
J515 1 FICEURLANT
J582 1 II MAR AMPHIB FOR
J654 1 TACTRAGRULANT
J818 1 CG SECOND MARDIV
K005 5 USCINCPAC
K007 1 COMUSJAPAN
K100 1 PACAF 548 RTG
K101 1 PACAF/INOI
K117 1 18TH TFW
K201 1 13TH AF
K202 1 3 TFW/IN
K203 1 6TH TACINTEL GP
K300 1 IPAC (LIBRARY)
K302 1 USAWESTCOM
K305 1 25TH INF DIV
K309 1 3D FSSG
K313 2 IPAC (CODE IA)
K314 1 IPAC (CODE PT)
K318 1 IPAC/IT4
K320 1 USARJAPAN
K500 1 CINCPACFLT
K505 1 FICPAC
K510 1 COMNAVFORJAPAN
K515 1 COMSEVENTHFLT
K525 1 COMNAVAIRPAC
K605 1 FMFPAC
K612 1 THIRDMARDIV
K614 1 FOURTHMAR
K615 1 THIRDMAR
K621 1 NINTHMAR
K658 1 COMUSNAVPHIL
K710 1 FISC WESTPAC
L005 1 HQ SAC (INO)
L006 1 SAC/IN
L040 1 SAC 544 SIW/DAA
L044 1 HQ SAC/INA
L051 10 544 IAS/IAI
L101 1 1 STRAD/DOX
L102 1 2 BMW/IN
L104 1 6 SW/IN
L107 1 8 AF/IN
L108 1 9 RTS/INOE
L109 1 9TH SRW/INCC
Lill 1 19 AREFW/DOXI
L112 1 22 AREFW/DOXI
L113 1 28 BMW/IN
L114 1 42 BMW/IN
L115 1 43 BMW/IN
L117 1 55 SRW/IN
L118 1 68 AREFG/DOXI
L121 1 92 BMW/IN
L122 1 93 BMW/IN
L123 1 96 BMW/IN
L124 1 97 BMW/IN
L125 1 9TH SRW/INCCI
L130 1 141 AREFW/DOXI
L131 1 151 AREFG/DOXI
L134 1 161 AREFW/DOXI
L139 1 11 SG/DOXI
L140 1 305 AREFW/DOXI
L142 1 306 SW/IN
L143 1 34 STRAT SQ
L144 1 922 SS
L147 1 319 BMW/IN
L150 1 340 AREFG/DOXI
L152 1 351 SMW/D0221
L154 1 379 BMW/IN
L155 1 380 BMW/IN
L157 1 384 AREFW/DOXI
L159 1 410 BMW/IN
L161 1 452 AREFW/DOI
L162 1 509 BMW/IN
L164 1 940 AREFG/DOXI
L165 1 4315 CCTSQ/CMCM
L166 1 2 ACCS/DOCI
L700 1 3 AD/IN
L703 1 9 SRW/IN, BET 1
M005 1 USCINCSO
N005 1 USREDCOM
OTHERS
P002 2 NPIC/IB
P055 400 CIA/OCR/DSD/DB
P057 1 CIA/SOVA/TWA/RP
P075 1 FBI
P079 1 STATE INR/PMA
P080 1 STATE INR/RWE
P081 1 STATE INR/EC
P090 5 NSA/T515/CDB
P091 1 NSA REP DEFENSE
P100 1 NAT SEC COUNCIL
P109 1 PFIAB
P111 1 WH SIT ROOM
P112 1 WH MILITARY OFF
P125 1 DEPT OF TREASURY
P175 1 US CUSTOMS SERVICE
P700 1 VICE PRESIDENT
P702 1 CIA/NI0/GPF
P705 1 SEN SEL COM INTEL
P714 1 IC REGISTRY
0008 1 NISC
Q043 2 OFMIC
Q420 2 FTD/SIIS
Q591 1 FSTC-AIFIC
Q619 1 MSIC REDSTONE
R025 1 COMMERCE
R048 1 FEMA
R066 1 USCG OIS
R069 1 USCG ICC
R081 1 DRUG ENFORC ADMIN
R082 1 NNBIS
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
R083 1 USCG DISTRICT 8 ARMY U.S. AIRFORCE K115 1 5TH AF
R084 1 COORD SE REGION K300 1 IPAC (LIBRARY)
R086 1 SOUTHWEST NNBIS C302 1 2ND PSYOP GROUP E100 1 TAC 480 RTG/INPPD K426 1 MACG-18
R087 1 NORTH BORD NNBIS C311 1 305TH PSYOP BN E706 1 HQ ESC/INYQ K427 1 MACG-38
R135 2 USIA C314 1 513TH MIG K516 1 CG I MAF
R145 3 ACDA C351 1 10TH SFG(A) UNIFIED AND SPECIFIED COMMANDS K700 1 SEVENTH MAR
S030 1 FRD LIB OF CONG C667 1 USAJFKSWC L051 2 544 IAS/IAI
----------------------------- C768 1 ITAC (LIBRARY) L141 1 7 AD/IN
408 COST'S 1314 COPIES C772 1 HQDA DAMI-FIO 8010 1 SOTFE (J-2) L161 1 452 AREFW/DOI
H101 1 USAFE 497RTG (IRC) OTHERS
(MICROFICHE) 1005 1 USCINCCENT
DIA U.S. NAVY 1040 1 SOCCENT P002 1 NPIC/I8
J502 1 COMSECONDFLT Q420 2 FTD/SIIS
B331 1 DIA/RTS-2A2 J579 1 4TH MAB Q591 1 FSTC-AIFIC
B352 5 DIA/RTS-2F D261 1 NUSC NPT J818 1 CG SECOND MARDIV -------------------------------
B934 1 USDAO MOSCOW D466 1 NAVENPVNTMEDU 6 J977 1 FLTCOMBATDIRSSACT 34 COST'S 40 COPIES
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
 Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7
Declassified and Approved For Release 2012/03/05: CIA-RDP08SO135OR000401320001-7