THE SINO-SOVIET BLOCK ECONOMIC OFFENSIVE: HAZARDS FOR THE UNDERDEVELOPED COUNTRIES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP62S00545A000100090114-1
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 29
• Document Creation Date: December 9, 2016
• Document Release Date: July 17, 1998
• Sequence Number: 114
• Publication Date: April 3, 1958
• Content Type: IR

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THE SINO-SOVIET BLOC ECONOMIC OFFENSIVE-.
HAZARDS FOR THE UNDERDEVELOPED COUNTRIES
3 April 1958
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THE STNO--SOVIET BLOC ECONOMIC OFFENSIVE:
HAZARDS FOR THE UNDERDEVELOPED COUNTRIES
INTRODUCTION
In 1953 -the Soviet Bloc began to use economic programs as
a means of expanding its influence in the underdeveloped coun-
tries of the Free World, particularly in Asia and Africa. In
these regions, new nations are struggling for national identifi-
cation and economic improvement. Through offers of credit, tech-.
nical assistance and trade to underdeveloped countries, the Bloc
is seeking to promote its political objectives--to reduce the
influence of the United States and its allies, to disrupt Free
World alliances and to increase its own prestige and power.
President Eisenhower, in his message to Congress on the mu-
tual, security program said.
"If the purpose of Soviet aid to any country were sim-
ply to help it overcome economic difficulties without
:infringing its freedom, such aid could be welcomed as
forwarding the Free World purpose of economic growth.
But,. there is nothing in the history of international
Communism to indicate this can be the case. Until
such evidence is forthcoming, we and other free nations
must assume that Soviet Bloc aid is a new, subtle, and
long-range instrument directed toward the same old pur-
pose of drawing its recipient away from the community
of free nations and ultimately into the Communist orbit."'
A. Soviet Bloc Capabilities
As Deputy Under Secretary for Economic Affairs C. Douglas
Dillon reported to the Senate Committee on Foreign Relations:
The USSR is now the second greatest industrial power
in the world. The entire Bloc, including Communist
China, has a gross national product of $280 'billi.on
It produces in quantity the principal kinds of manu-
factures, including machinery and capital goods, which
the less developed countries require for their econ-
omic development. The USSR also has at its disposal
the resources of a large part of Eastern Europe, includ-
ing the industrial economies of Czechoslovakia and
East Germany. It is also capable of arranging its
economy so as to absorb large amounts of raw materials
and foodstuffs from the rest of the world---cotton, wool,
'hides, rubber,, nonferrous metals, oilseeds, sugar,
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cocoa and the like. There is little doubt, there-
fore, that from the technical--economic viewpoint,
the Bloc can greatly intensify its economic relations
with the less developed countries of the Free World.
Also, it can probably do this with economic benefit
to itself. Industrial growth within the Bloc, which
has increased much more rapidly than has its output
of agriculture and raw materials, probably would now
make it economically advantageous to the Bloc to
encourage expanded trade With the Free Worlds exchang-
ing in increasing degree Bloc industrial goods for
Free World foodstuffs and raw materials. The Bloc,
in short, can throw into the scale sizeable economic
resources not only without damage to itself but
probably with positive economic benefit.
B. Motivation Behind the Bloc Economic Offensive
By and large, Bloc activities are motivated by one of the
ultimate aims of international Communism--the control, direct
or indirect, of the emerging countries. In pursuing this aim
the Bloc encourages existing tendencies toward over-rapid indus-
trialization, nationalization, expropriation, and disruption
of traditional ties with the West. Such actions result in a
disturbed internal situation,, both po:l i.t;ical and economic,
which would be susceptible to Communism. They have the simul-
taneous effect of discouraging the entry of Western capital,
managerial skills, and technological 'know-how, all vital to
economic development o
The Blocs long-range motivation was again made clear as
recently as September 1.957, when Soviet Far Eastern expert
E. M. Zhukov quoted Lenin's remarks that 1?we are devoting all
of our efforts so that Mongols, Persians, Indians, and Egyptians
should draw closer to us and merge with us...." Communist ef-
forts, therefore, may be directed toward the development of
socialized economies of broad industrial bases, and of dissatis-
fied proletarian elements. The proletariat, of course, can be
exploited by Communist-dominated political parties and trade
unions o
C. Techniques
The Soviet Bloc econcmic penetration program has been imple-
mented in four major waysz credit offers, technical assistance
programs, trade agreements, an~ commercial penetration activi-
ties. These four techniques have been carefully examined in
many countries and in almost all instances there was a demon-
strable potentiality for subversion. The following pages con-
tain concrete examples of the unfortunate results experienced
by many recipient countries.
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THE SING-SOVIET BLOC ECONOMIC OFFENSIVE
HAZARDS FOR THE UNDERDEVELOPED COUNTRIES
Contents
INTRODUCTION page i
A. Soviet Bloc Capabilities i
B. Motivation Behind the Bloc Economic Offensive ii
ii
C. Techniques
Ie Sino-Soviet Bloc Credit Program I
A. General 1
B. Examples of Integrated Single Country Programs 2
1. Afghanistan, 2
2. Syria 2
Co Political Implications of Bloc Credits 3
1? Subversion 3
a? General 3
b. Strengthening Local. Communist Parties 3
2e Political "Strings" and Leverage
a, o General
bo Specific Examples
D. Economic Implications of Bloc Credits
1 Project Disappointments
a o Hidden Costs
b. Bakery Complex in Afghanistan
c p Aswan Dam
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d. Soviet Offers to Ceylon,
e. Sugar Mill in Indonesia
2. Internal. Disturbances. Arising From Bloc
Credit Projects
aQ India
b. Syria
II. Sino-Soviet lo'c Technical Assistance Program
A. General
B. Scope of Bloc Technical Assistance
1. Bloc Specialists in Aid-Recipient Countries
2.. Technical Training in the USSR
C. Political Implications of Technical Assistance
1. Technicians in Afghanistan
2. East German Survey in the Sudan
3. Trade Mission, in Ethiopia
D. Economic Implications of Technical Assistance
1. Numbers and Cost of Technicians
2. Narrow Specialization
E. Soviet Participation in UN Program.
IlIL Sino-Soviet Bloc Trade.Agreements
A. General
B. Examples of the Hazards of Bilateral and
Barter Trade
1. Reorientation of Trade Patterns as a Result
of Bilateral Agreements
a. Afghanistan
b. Egypt
c Ceylon
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iv
page 5
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Barter Trade Hazards
page 12
ao Burma
12
b. Argentina
13
C.
Political: implication:,
13
1.
Iran
13
2
Greece
14
3.
Holland
14
4,
Au.stral.ia
14
5,
Israel
15
6,
Finland
15
D.
Economic Implications
15
1.
Shoddy Goods
15
ao Egypt
15
b, Afghanistan
15
c. Syria.
16
d d, Indonesia
16
p
e, Iran.
16
2.
Price Manipulation
16
Burna
16
b. Hong Kong
16
e Iran
17
d, Egypt
17
Greece
17
Resale in Third Countries
17
a, Burma.
17
b, Egypt
18
c o Turkey
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V
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Failure to Honor Terms of Agreements
page 18
a.
Japan
18
b.
Egypt
18
c.
Burma
19
Difficult Trading Practices
19
a.
India
19
b.
Hong Kong
19
c.
Switzerland
20
d.
Sudan
20
IV.
Commercial Penetration
21
A. The Technique.
21
B. Examples
21
1? Communist-Controlled Branches: of the
Bank of China
21
2 Promasheksport
22
3. Bank of Chios
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THE SINO-SOVIET BLOC ECONOMIC OFFENSIVE:
HAZARDS FOR THE UNDERDEVELOPED COUNTRIES
K STNO-SOVIET BLOC CREDIT PROGRAM
A. General
Soviet economic assistance almost always is extended in the
form of loans. Very little grant assistance has been made
available by the Soviet Union or its Satellites so far. The
economic offensive has been, and will probably continue to be,
primarily directed toward economically vulnerable countries in
which the Bloc hopes that its political objectives can be ad-
vancedo
The acceptance of Soviet credits carries with it certain
implications not always clear to the recipient countries. As
yet there is no evidence that the Soviets are motivated by any
altruistic desire to aid economic progress. Rather, they look
upon aid as a means of securing changes favorable to their
interests. Thus they hope to influence the recipient countries
to adopt or maintain policies consistent with Soviet objectives.
Bloc loans essentially are lines of credit for the financ-
ing and purchase of capital goods, raw materials, and technical
assistance from the Bloc o As pointed out in the State Depart-
ment Bulletin of 27 January 1958, In negotiating agreements,
the 3:1oc gives no evidence of requiring economic justification
for the protects involved." Where a development plan exists,
the Bloc credit is designed to underwrite projects already de-
cided upon by the recipients; sometimes such plans are based
on recommendation of Free World institutions, In such cases
the Bloc will be able to disclaim responsibility for failures
in development planning. Instead of economic justification,
there has been an obvious effort to select projects which will
have both an important psychological impact on the recipient
country,, and propaganda value throughout the Free World o
American aid generally has been designed to build a founda-
tion on which the recipient country8 s economy can safely ex-
pand? For the most party the Soviets have ignored this aspect
of the problem, and in some instances the Bloc program will
probably result in economic imbalances in the recipient coun-
tries a The type of projects most frequently financed by
Soviet credits has been spectacular in nature and not neces-
sarily those most likely to produce any basis for. expansion
of real output. The actual effect of Bloc credit programs
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has been inflationaryJin countries where implementation has'been
most rapid, such as Afghanistan. In countries-where Bloc credits
have not yet been drawn down, an inflationary threat remains.
B. Examples of Integrated Single Country Programs
The Bloc has extended $125 million to Afghanistan. for
"economic development." Short-range projects being sponsored by
the Soviets are designed to give the Afghans the feeling that
this development is indeed taking place. It is estimated that
funds at least equal to the amount extended by the Bloc must be
raised to cover the indigenous share of project expenses contracted
under the various Bloc credit programs. Hence the eventual cost
of :Bloc aid projects in Afghanistan, if the total credit is
drawn down, could run as high as $350 million.
Repayment for projects must be made in goods. The ef-
fect of Afghanistan's drawing down all of the Bloc credits would
be to tie up a large percentage of its exports for many years.
It is doubtful that the aid given to Afghanistan will suffim
cie'ntly stimulate production of exportable commodities to permit
it to liquidate its indebtedness to the Bloc o The Afghans are
already beginning to appreciate the economic implications of the
indebtedness they are assuming. Recently, Foreign Minister Naim
indicated to the US and Soviet Ambassadors that his country could
accept no further Loan assistance o
In order to repay Bloc credits, Syria will be required to
direct a considerable portion of its exports towards the Soviet
Bloc for many years to come. In addition, the Syrian Govern-
ment is required to defray all local. currency costs of the
development program. A Syrian official estimated that these
costs represent 70 per cent of total, expenditures. Syria has
already requested postponement of repayment or its arms debt.
Deputy Under Secretary Dillon has commented that US economic
experts believe that e if Syria is to defray the local cur-
rency costs of all these projects,, estimated at $390 million,
there would have to be a dangerous degree of money creation,
resulting iii serious inflation. The Communist prescription
for meeting such a situation of course, would be the introduc-
tion ofcomplete state control of the economy in order that
resources could be directed away from consumption into develo -
ment e ?B (Department of State Bulletin, 24 March 1958, p. k72
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Before the creation of the United Arab Republic, the Beirut
newspaper Le Jour commented on the 1957 Syrian-Soviet economic
agreement by staing that-
"The Syrian economy until 1970 will be strictly control-
led by the Soviet Union, which has been entrusted with
the mission of reorganizing and developing it, Nothing
will escape the watchful eyes of the Soviet experts,
not the soil or what is under the soil, or the factories
or the bridges or the railroads or the dams or hydro-
electric plants or irrigation plans .. what Will happen
if Syria cannot pay off this enormous debt which it has
contracted with a great power which has always dreamed
of placing its hegemony over the Near East?"
Although the creation of the UAR reduces direct Soviet influence
upon Syria, the presence of Soviet personnel continues the
threat.
C. Political Implications. of Bloc Credits
a. General
Inevitably, the establishment of closer economic
ties with the USSR opens the door to political subver-
sion. Soviet credit agreements, with their provisions
for technicians, detailed studies, exploration projects,
and technical assistance, which includes advice and
supervision by Soviet experts at all economic levels,
provide the USSR an opportunity for collection of
intelligence and permit the establishment of an ever-
'widening base for subversion. .
b. Strengthening Local Communist Panties
Even when there is no.eviden e that Soviet Bloc aid
is used directly to benefit local Communist parties,
the gain in Soviet "respectability" and prestige prob-
ably serves to strengthen the position of local parties
and front groups in their bids for power.
2. Political Strings and Leverage
Although the Soviets boast about the absence of
conditions attached to their aid, the facts indicate
the reverse is true. Soviet strings indeed may be subtle
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and not readily ap'parent, but they are present. Although
the USSR sometimes trains local operating personnel for
the instailati6ns being built, many of the plants under
Construction will be manned by Soviet nationals for
several yearso Thus, the presence of a large number
of Soviet citizens,, each a potenntial channel for propa-
ganda, becomes a lasting factor in the life of the
recipient country.
b. Specific Examples
It has been demonstrated on a number of occasions that
the Soviet Bloc stands ready to use economic grants for
political purposes. In early 1957, the Pathet Lao attempted
to make the acceptance of substantial foreign aid from.
Communist China a condition for political settlement with
the Royal Lao Government.
Soviet--Yugoslav economic relations show what can hap-
pen In a country already intimately involved with the
Bloc. Yugoslavia's expulsion from the Cominform and the
subsequent disruption of economic relations demonstrate
the use of economic sanctions for political purposes.
In August 1.956, Yugoslavia signed an agreement with the
USSR and East Germany for the construction of a 700 million
ruble aluminum production complex? with an annual capa-
city of 50,04O tons. Installation was to be completed
by 1961. Shortly after Soviet-Yugoslav political differ-ences'came to the su? ace ift late 1956, the USSR and East
Germany announced that the aluminum project would be
deferred. Manufacture of plant components was not to
commence until 1961 or 1962. With the next shift in
political tide and the Tito-Buiganth meetings, resumption,
of the project was announced. The original agreement
was unilaterally broken for obviously political reasons,
despite the Soviet Union's continual claim that Bloc
economic assistance is free from political conditions.
(Der Ta ess ie el, Berlin, 6 October 1957; .Die Wirtschaft,
-1957:, Christian Science Mon o 3 Ju 7e
Ber:Lin, A a,g
u
197.
D. Economic Irn ications of Bloc Credits
1. Project Disappointments
a. Hidden Costs
The low interest rates set in loan agreements con-
cluded by underdeveloped countries with the Soviet Bloc
have proven somewhat illusory; a number of service charges
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have added to the loans,, with the 'net effect of raising
over-all project costs. Practically; all Bloc assist-
ance provides for the purchase of goods and services
from Bloc"countries exclusively. This restriction is
applied even to technical assistance which the USSR
renders through the United Nations,, In this way, re-
cipient countries are prevented from, obtaining the maxi-
mum benefit from loan funds by purchasing the most
suitable goods at the lowest world market prices. An
additional burden upon recipients of Bloc credits is
the relatively short repayment period, seldom more than
10 to 12 years, requiring large payments within a short
t ime
b. Bakery Comdex in Afghanistan
The much-publicized 'bakery and related facilities
built in Kabul by the Soviets have proved to be a sub-
stantial disappointment to the Afghans. It is designed
to produce Western--style bread, which the local popula-
tion dislikes, preferring its traditional nano As a
result, the impressive bakery has been operating at
only a portion of its capacity. It has been reported
that 4,000 Kabul school children became ill from bread
produced at the Soviet bakery, causing the schools to
close.
o. Aswan Dam
The Soviet Union failed to finance the Aswan Dam
project after withdrawal. of the US and offers.
d. Soviet Offers to. Ceylon
Only recently, the USSR promised to"clear stretches
of jungle for the Ceylon Government's development
scheme, but it developed that the Russians had no suit-
able equipment. (Asian Anal st, January 1958)
e. Sugar Mill in Indonesia
Since 1955, an East German technical team has been
directing the construction of a sugar mill In Djok jakar?ta,
Indonesia. Although scheduled to be in operation by
August 1956, present estimates indicate that the project
will not be completed before late 1958. Since apparently
no penalty clause was included in. the" contact, the
Indonesians are relatively helpless to pressure the
East Germans into speeding completion of the project,
which is costing five to six times the original estimate
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2. Internal Disturbances Arisin from Bloc Credit Pro..ects
At various times reports froth India have indicated a
fairly widespread distaste for Soviet Ruseian drinking
habits. The practice of living in compounds, insulated
.from the populations near which they live, has also irri-
tated some Indians and Middle Easterners.
b. Syria
In Syria, TECHNGEJ QRT, the Czech overseas construc-
tion enterprise, has been: the target: for demonstrations
by Syrian workers in the Homs region, where a petroleum
refinery is under construction. The Czechs had beennre-
crua:ting in the rural villages, where labor is paid less,
and had been paying their workers on a piece work rather
than an hourly basis. As.a result, workers found it diffi-
cult to earn more than 2 E Syrian per day (about 56 cents
US), a figure which is as much as i4'r Syrian less than
the wages paid by the ANOWN!Wd Iraqi. Petroleum Company.,
Syrian Government requests for a pay boost were refused.
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II.' SINO-SOVIET BLOC TECHNICAL ASSISTANCE PROGRAM
A. General
The USSR usually makes the provision of training facilities
and technical exchange an integral part of credit arrangements.
Technical assistance offers the Bloc a particularly valuable
means for promoting closer ties with underdeveloped countries.
Bloc technicians have a capability for indirect subversion de-
signed to promote Communist objectives, particularly the Soviet
propaganda theme of peaceful intentions. They also are able to.
influence the organization and character of the local development
programs along Soviet lines. Soviet specialists are often engaged
in advisory capacities to the ministries of the recipient govert~-
ments, to various key technological services or in surveys of
natural resources. Large numbers of technicians are attached to
specific industrial or technical projects undertaken by Bloc
countries in recipient countries. The influence which can be
exerted by such technicians is magnified in countries which are
in the early stages of 'technological development.
B. Scope of Bloc Technical Assistance
1. Bloc Specialists in Aid-Reci ien.t Countries
The number of Bloc specialists in underdeveloped, areas
increased about 15 per cent during 1957. Daring the first half
of the year, approximately 2,:100 specialists visited the 19 Bloc
aid-recipient countries for periods of a month or more. During
the last six months, this figure rose to approximately 2,400.
Moat of the increase consisted of 'military personnel assigned
to the five countries receiving military aid. This increase,
from 600 to 800, was largely due to the expansion of the military
mission to Egypt. Non-military specialists, such as agricultural,
industrial, and professional personnel, increased from about
1,500 during the first half of 1957 to about 1,600 during the
last half,, wtiith 'most of the increase taking place in Afghanistan,
Egypt and Indonesia.
2. Technical Training in the USSR
During 1957, well over 2,000 technicians, professionals,
and students from the underdeveloped countries traveled to Moscow
for special courses of study or for observation of Bloc techniques
of -planning and production. Five hundred enrolled in universi-
ties and other high-level educational institutes. The opportuni-
tiesfor long--range direct influence on these key groups within.
the underdeveloped countries are readily apparent.
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jThe Soviets also supply both instructors and assistance
for local educational systems. Russian specialists, for example,
have made sweeping recommendations for the reorganization of
Indian technical education. In addition, technological institutes
provided by the Bloc (such as the one established in India and
the nuclear energy laboratories in Egypt and Yugoslavia) provide
a long-term base to subvert and influence local trainees.
(Department of State Bulletin, 27 January 1958, Vol n XXXVIII,
No, 970 __
C. Political Implications of Technical
As
istance
1. Technicians in Afghanistan
Some of the Soviet specialists speak the local language
and they are thus in a position to influence Afghans with whom
they work. Soviet technicians and construction workers have dis-
tributed Communist literature among Afghan workers, and on at
least one occasion Communist slogans have had to be removed
from the masonry of a building into which they had been built.
2. East German Survey in the Sudan.
The Sudan has had similar experiences. After a year's
survey of underground water resources in Sudan's. Kordofan pro-
vince, an East German team failed to locate any supply of water.
Members of the Sudanese Government suspect that the East Germans
were more interested in gathering intelligence than in finding
water.
3. Trade Mission in Ethic .ia
In Ethiopia, government officials have been disturbed by
the activities of the Bulgarian Trade Mission