SOVIET ECONOMIC PROBLEMS AND OUTLOOK

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP66B00403R000100260158-7
• Release Decision: RIFPUB
• Original Classification: S
• Document Page Count: 19
• Document Creation Date: December 19, 2016
• Document Release Date: December 6, 2006
• Sequence Number: 158
• Publication Date: January 8, 1964
• Content Type: SNIE

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SECRET
CONTROLLED DISSEM
SPECIAL
NATIONAL INTELLIGENCE ESTIMATE
NUMBER 11-5-64
SNIE 11-5-64
8 January 1964
Soviet Economic Problems and Outlook
Submitted by the
DIRECTOR OF CENTRAL INTELLIGENCE
Concurred in by the
UNITED STATES INTELLIGENCE BOARD
As indicated overleaf
8 JANUARY 1964
SECRET
CONTROLLED DISSEM
N? 375
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#,)H ,nct inreiiigencP organizations participated in the preparation of
3t`atta=~'
:l igeinc ardency and the inteilicience oro anizations of the Depart-
P- L ?^rse the Army. the Navy, the Air Force, and NSA.
n Aiiigence and Research. Department of State
ar bute Inteli fence Agency
_?a at Sta'ri for inteiliaence, Department of the Army
or Naval Operations (Intelligence), Department of the Navy
rqv Co rfission Representative to the U`.JIB
rint+rira?=d -lecurity Agency
raY i u mission Representative to the USiB, and the Assistant Di-
. 3eiui Q ~euu of Investiacition, the subject being outside of their
is cant= -ns inTormation atfectina the National Defense of the United States
,7, revt.uiit? i of whiui in any manner to an unauthorized person is prohibited.
`-aciarded from automatic i
and i
,=e F.aza:f ~~,rion 1
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SPECIAL
NATIONAL INTELLIGENCE ESTIMATE
NUMBER 11-5-64
Soviet Economic Problems and Outlook
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SOVIET ECONOMIC
PROBLEMS AND
OUTLOOK
THE PROBLEM
To review, briefly and in general terms, current Soviet economic
policies and problems, and to assess the course, implications, and
overall outlook of the Soviet economic scene over the next few
years.
SUMMARY AND CONCLUSIONS
A. A number of serious long-run problems in the Soviet
economy have recently reached an acute stage. Overall growth
is lagging, various sectors of the economy are intensifying com-
petition for scarce resources, agricultural production is falling
far short of needs, large wheat purchases in 1963 have greatly
aggravated the hard-currency deficit, and gold stocks are nearing
a critically low level. This situation is due in part to chronic
Soviet mismanagement, but mainly to the burdens imposed on
the economy by a series of programs too ambitious for available
resources. The demands of defense and space have greatly en-
cumbered economic growth since 1958. Recently, industry has
been adversely affected, as well as agriculture and the production
of consumer goods. (Paras. 1-4)
B. Soviet leaders have now launched a new effort to cope with
their most intractable economic problem-the stagnation of agri-
culture-through a large expansion of the chemical industry,
especially for the production of fertilizer. They apparently ex-
pect to finance this program from the expansion they anticipate
in the economy, from cutbacks in some nondefense programs,
and from large and long-term Western credits. But we also
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think that the Soviets will make every effort to hold down defense
and space expenditures so as to release scarce resources for in-
vestment in the civilian economy. (Paras. 6-8, 10, 18, 20)
C. While defense expenditures may decline, we think it more
likely that they will continue to grow, though at a slower pace than
in the recent past. In the short term, the Soviet leaders have
the option of reducing force levels, but in the long term they
must consider the advisability of curtailing or stretching out
one or more programs for advanced weapons. (Para. 20)
D. The Soviets will make sustained efforts to expand trade
with the West, and particularly to obtain large and long-term
Western credits. This will help foster continued restraint in the
tone of Soviet foreign policy, though not major concessions of
substance. (Paras. 21, 22)
E. Over the next few years, investment in agriculture and
the chemical industry will greatly increase, partly as a result
of the policies above outlined, partly from the natural growth
of the total Soviet economy. However, chances of restoring pre-
vious high levels of industrial growth are slim, and the innate
rigidities of Soviet planning and administration will continue
to hamper the economy. Many of the chemical program's cur-
rent targets will almost certainly not be met, agricultural pro-
duction will fall far short of projected goals, and significant
benefits to the consumer will be several years in the making.
(Para. 25)
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DISCUSSION
1. RECENT DEVELOPMENTS
A. Background
1. The USSR is now in a period of increasingly severe competition
for resources among various sectors of its economy. The decline in
recent years of both the overall and the industrial rates of growth, the
disastrous agricultural year in 1963, the consequent purchases of wheat
from Western nations, and the further drain this has imposed on the
USSR's limited gold stock are the dramatic highlights of a troublesome
situation which has been developing since 1958. These economic diffi-
culties are beginning to have a major impact on the domestic, foreign,
and military policies of the USSR.
2. The annual growth of the Soviet Gross National Product (GNP),
which had averaged an estimated 6.5 percent in the decade of the 1950's,
has averaged only about an estimated 4 percent over the last four years
and has been below the US rate for the past two. The annual growth
of new fixed investment, which had been about 15 percent, dropped
to an estimated 8 percent in 1960, and has since hovered between 4 and
5 percent. Estimated defense and space expenditures, which had de-
clined in both 1956 and 1957, began to grow again in 1958, and by 1963
were about 40 percent higher than in 1958. Agricultural production
actually declined some 4 percent in 1962 and 4.5 percent in 1963; it
now stands slightly below 1958 levels and as much as 10 percent below
on a per capita basis.
3. It appeared to us last year that the problems of the Soviet economy
had reached an acute stage.' Increased defense expenditures, which
were largely responsible for the squeeze on resources, also restricted the
kinds of expenditures which might have increased growth rates. The
Soviets made a number of moves to increase growth, particularly in
agriculture, but they were short range expedients and largely unsuccess-
ful; they relied on inaccessible or nonexistent "hidden reserves" or on
solutions which were self defeating. It seemed to us that the time
had clearly come for the Soviet policy makers to make some difficult
new decisions concerning priorities in the allocation of resources.
4. But, because emphasis on heavy industry and neglect of consumer
interests has long been the pattern, powerful vested interests have had
the ability to resist efforts to alter the status quo. There has been a
continuing struggle between those who believe that the national interest
requires greater attention to an invigorated agriculture and those who
'See NIE 11-5-63, "Soviet Economic Problems," dated 20 March 1963. SECRET.
SECRET 3
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SECRET Figure 1
USSR: Estimated Annual Rates of Growth in GNP,
Industry, and Agriculture, 1956-1963
GNP
1961 1962 1963
Prelim Prelim
about)
7.01
Industry
1962 1963
Prelim
1960 1961 1962
Agriculture
1963
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CX W
t1~>
t!) Z
0
Lr)
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oppose any weakening of the priority accorded the development of heavy
industry and a pre-eminent defense establishment. Attitudes toward
military doctrine have evolved which are appropriate to those positions.
Khrushchev, though a stout advocate of great military power, has placed
stress on advanced weapons and deterrence, whereas others have sought
to maintain a more traditional (and more expensive) balance of forces
and to provide the armed forces with broader war fighting capabilities.
Thus, recent Soviet economic policy has been characterized by pulling
and hauling, contention and compromise, and an unrealistic attempt
to advance on all fronts simultaneously.
5. Khrushchev has long sought to identify himself with the aspira-
tions of the Soviet people for a better life and, over the years, has empha-
sized the importance of agricultural production and material incentives.
His speech of February 1963, in which he called attention to the tre-
mendous burdens of military spending and gave scant hope for any
marked improvement in living standards in the immediate future, thus
seemed to many observers to have been out of character. Since last
spring, however, Khrushchev's statements concerning the economy no
longer echo the extreme pessimism of his February address. On the
other hand, his sober assessment of the import of this year's poor
harvest reflects an increasing awareness of the need for effective remedial
measures.
B. The Competition for Resources
6. The Soviet leaders are now calling for a major modernization of
the economy through the expansion of the chemical and related indus-
tries, and with increased emphasis on agriculture and consumer goods.
They appear determined to commit the very substantial resources re-
quired. As formally presented by Khrushchev on 9 December at the
Central Committee plenum, the new program calls for a total outlay
of some 42 billion rubles through 1970.2 If actually carried out, this
means that annual investment in the chemical industry will rise from
the present 10 percent of total industrial investment to 18 percent.
Among the specific goals of the program are production increases in
fertilizers (from 20 million tons to 70-80 million), plastics and synthetic
resins (from. 580,000 tons to 3.5-4.0 million tons), and chemical fibers
(from 310,000 tons to 1.35 million tons). Some 200 chemical plants are
to be built, 500 existing plants expanded or rebuilt, and the output
of the chemical machine building industry is to increase fourfold.
2 The appropriate ruble-dollar conversion ratio for this program is unknown.
However, the quantity of domestic resources that the USSR would have to invest
to accomplish these goals would amount to the equivalent of much more than
$46 billion given by the official exchange rate.
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Khrushchev has cast this program largely within the context of its
anticipated benefits to the consumer, though its military significance
has also been stressed.
7. Khrushchev apparently recognizes that the needs of this new pro-
gram will clash with those of other claimants. He has implied that
the resources earmarked for the expansion of the chemical industry
will come in part from the overall growth of the economy, from imports,
and from the diversion of funds from communal services and housing
construction. He has referred to the necessity of temporary slowdowns
in certain other sectors of the economy. And, along with the announce-
ment of his chemical program, he also noted the need to study possible
reductions in the strength of the armed forces and introduced a defense
budget calling for modest reductions in expenditures during 1964.
8. This announcement of a 4 percent reduction in the military budget
is not conclusive, since in recent years only an estimated two-thirds of
defense expenditures have been included publicly within the appropriate
category. But its implications of a reduced rate of military expenditures
seem to be borne out by announced plans for the machine building in-
dustry. In Soviet statistical data, the total output of that industry in-
cludes not only equipment for the civilian economy, but also finished
military hardware. One way of analysing how fast military procurement
is growing is to compare the rate of increase in total output of the ma-
chine building industry with the rate of increase of its non-military
output. For the past several years, non-military production of the
industry has increased at a slower rate than total output, reflecting the
growing share of military procurement. Current plans, however, in-
dicate an opposite trend, i.e., that non-military procurement will be a
growing share and military procurement a declining share of the indus-
try's output. This year, while total machine-building output is sched-
uled to rise by 10 percent, the non-military portion is to grow by 13-15
percent. If this in fact transpires, then while production of weapons
will continue to increase, the rate of increase will be less than in the
past. That the effects of the new program on defense are well recog-
nized by Khrushchev has been suggested by his moves in other areas of
policy, particularly those affecting the international climate.
C. Foreign Economic Policies
9. The problems of the domestic Soviet economy have of necessity
spilled over into the area of the USSR's foreign economic activities.
Trade with Western states has been stepped up in order to compensate
for the inferior technological level of certain Soviet industries, to secure
advanced equipment not available at home, and most recently, to obtain
great quantities of grain to make up for the bad harvest in 1963. The
newly expanded chemical industries program will require substantial
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imports from both Eastern Europe and the West. Khrushchev has
stated that the USSR is in the market for Western equipment and whole
plants "if credit is available . . . and no political conditions are at-
tached." Our preliminary estimate is that the USSR might need in
the neighborhood of $2 billion of Western chemical equipment between
now and 1970; if they decided to rely extensively on the West for ad-
vanced equipment and engineering, and were able to finance it, imports
could be substantially higher. The Soviet leaders almost certainly see
little chance of a substantial increase in their own export earnings and
consequently hope that a major part of their expanded needs can be
supplied on the basis of long-term credits from the West.3
10. Trade Deficits with the West. Imbalance of trade with hard-cur-
rency nations of the West has become acute in recent years. The USSR
imported roughly $200 million in machinery from the West in 1958 and
some $600 million in 1962. The hard-currency deficit jumped from
about $100 million in 1959 to $350 million in 1962. Scheduled imports
of grain from the West (excluding any grain purchases from the US)
could bring the total trade deficit to more than $700 million in 1964. Un-
til 1960, deficits were financed largely through sales of gold. Since 1960,
a greater share of the deficit has been financed through medium-term
credits, which reached a total of $575 million outstanding at the end
of 1963. This, in turn, has necessitated a rising level of credit repay-
ment. In 1963, for example, the USSR may have obtained some $300
million in new credits, but repayments plus interest amounted to some
$240 million.
11. Gold Sales. We estimate with some confidence, as a result of a
recent comprehensive review, that the USSR had a total gold stock of
some $3 billion in 1955 and that this had been reduced to a figure of
$1.8 billion at the close of 1963.4 The Soviets are now drawing heavily
on gold stocks to finance grain imports; gold sales totalled some $210
million in 1962 and may have run as high as $500 million during 1963.
Domestic production may have reached $175 million in 1963 but this
would represent a new high. Gold reserves may sink to about $1.3
billion in 1964 even with no grain purchases from the US. If this is
so, the Soviets could significantly expand their imports from the West
only by obtaining long-term credits.
12. Non-Bloc Economic Aid. New extensions of Soviet economic as-
sistance to 25 non-Communist countries increased sharply from 1954 to
' The Soviets have been receiving substantial medium-term credits (5-6 years)
from the West, but now need long-term credits (10 or more years) because of the
current high level of interest charges and repayments.
' This figure does not include Soviet holdings of foreign currency which fluctuate
between $200 and $300 million.
' This could be deferred somewhat by short-term borrowings.
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USSR: Method of Financing the Trade Deficit, 1955-63
MILLION CURRENT U.S.$
Trade
Surplus or
Deficit with the
Industrial West
1955 75 to 85
1956 ................. -20 to -40
1957 ............ -45 to -65
1958 ................. -20 to 5
1959 ................. 25 to 50
1960 ................. - 175 to -210
1961 ................. -110 to -160
1962 ................. -250 to -285
1963 ................. N.A.
Hard-Cur-
rency Surplus Sales
or Deficit'' of Gold
10 70
-90 154
-185 275
-135 182
-95 303
-300 125
-250 310
-350 210
N.A. 500
Addi-
tional Medium-
Term Credits
from the Indus-
trial West (Net)
N.A.
N.A.
N.A.
N.A.
40
168
135
117
61
Adusted for estimated net freight costs.
As a result of trade with the total non-Communist world.
Minimum estimates.
The USSR almost certainly obtained no medium-term credits from the West
before 1959. Figures in this column include an allowance for interest at an annual
rate of 5 percent.
Year
Pro-
duction Sales
O er
Withdrawals
(Net)
Change
in Reserves
Reserve
Balance at the
End of the Year
1955
.................
121
70
32
19
3,044
1956
.................
117
154
42
-79
2,965
1957
.................
119
275
22
-178
2,787
1958
.................
124
182
29
-87
2,700
1959
.................
132
303
25
-196
2,504
1960
.................
137
125
43
-31
2,473
1961
.................
147
310
43
-206
2,267
1962
.................
156
210
43
-97
2,170
1963"
................
175
500
43
-370
1,800
One troy ounce of gold is valued at US$35.
L Minimum estimates.
Excess of consumption and other disposition above other acquisitions.
Preliminary.
USSR: Production, Disposition, and Reserves of Gold a 1955-63
MILLION CURRENT U.S.$
--- DISPOSITION ---
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1959, over $800 million being committed in the latter year. Following
some retrenchment in 1960 and 1961, new extensions fell to a low of
$77 million in 1962 and did not exceed $200 million in 1963 as the USSR
applied stricter criteria for the extension of new credits.6 This marked
decline cannot, of course, be attributed solely to a resource squeeze
within the USSR; the rapid growth of aid to Cuba, continued assistance
for Communist countries other than China, growing emphasis on mili-
tary aid, and questions of opportunity and political benefits are cer-
tainly contributory factors. Nevertheless, the reluctance of the Soviet
leaders to extend aid to countries which offer but small hope of quick
political gains, has almost certainly been reinforced by the domestic com-
petition for increasingly scarce resources and by the overall slowdown in
Soviet economic growth.
II. OUTLOOK
13. Khrushchev's new programs will almost certainly yield some posi-
tive results, but it is questionable that the leadership will move fast
enough, efficiently enough, and drastically enough to put the USSR
onto a path of resumed rapid economic growth in all the vital sectors
of the economy. Commitments to certain programs and to the main-
tenance of existing establishments, particularly in the area of defense,
will continue to retard progress in other areas. And there remain the
twin hindrances of Marxist ideology and party mismanagement.
Finally, favorable weather is of crucial importance, one more year of
drought would have very serious consequences.
14. The Soviet economy is too large, too cumbersomely managed,
and too complex to change gears overnight. There will be bureau-
cratic footdragging and resistance to innovation on a vast scale. Khru-
shchev has called attention to the tendency of planners to depend almost
entirely on the patterns of previous years and to ignore new instruc-
tions. Various other factors, such as the relative lack of material in-
centives for the workers, may also inhibit change and improvement.
But, just as important as any of these, the determination of the party
apparatus and its leaders to interfere in and to exercise control over
all aspects of economic planning and production will greatly hamper
the efforts of the professional managers and economists to rationalize
structure and improve output.
15. The most serious problem for the Soviet leaders as they seek to
implement their new economic program will be the requirements of
their large and expensive military establishment. The newer, more
complex weapons systems account, for most of the increase in military
? A total of $3.4 billion has been extended, of which more than $2 billion has
as yet to be withdrawn. In 1963, about $400 million was used by recipient
countries.
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expenditures since 1958; indeed, we estimate that the procurement ex-
penditures for missiles, nuclear warheads, and ground electronics during
1963 were as large as the total of all military procurement in 1958. These
weapons systems consume increasing amounts of many of the critical re-
sources needed for the fulfillment of the civilian investment programs.
In particular, the burgeoning needs of the chemical industry will re-
quire high quality and -scarce material and human resources, and will
compete directly with the military for both equipment and engineers.
16. The Soviet leaders will find it extremely difficult in the short term
to get the necessary resources by transfers from military programs. A
modest reduction in the conventional ground forces would be insuf-
ficient to finance a significant proportion of the contemplated invest-
ment in the chemical industry over the next several years. Even if
large reductions were made in the ground forces, savings in the re-
sources and skilled manpower needed in the chemical industries would be
relatively minor.
17. To meet such needs through cutbacks in modern weapons systems
would be extremely difficult. The leaders could cancel various expen-
sive military and space projects now only in the planning and develop-
ment stages, but this would provide little relief in the short term.
They could not expect to make additional critical resources available
in large quantities at any early date without substantially reducing
investments in expensive current projects, such as production and
deployment of nuclear warheads and advanced missiles. Quite apart
from overall concern about the effect on the Soviet defense posture, such
cuts would be highly uneconomical, and would encounter strong resist-
ance from the military.
18. Some reductions in civilian investment programs are almost cer-
tain. The steel industry, a favorite target of Khrushchev's, has already
had its rate of growth reduced to about six percent per year for 1964
and 1965 and it may be cut even further. In housing and civil con-
struction, there have already been reductions in plans, and signs are
that the pace is to remain moderate.
19. Restrictions on Soviet space activities might, over the long term,
provide important investment sources and skilled manpower. Our
knowledge of the planned scope of the Soviet space program is limited.
But some restrictions have been suggested by the USSR's declaration
of intention not to orbit space weapons, together with Khrushchev's
recent remarks which, though vague, suggested that the USSR would
not compete with the US in a race to achieve a manned lunar landing
during this decade. Any major and obvious curtailment of space activ-
ities, however, would cost the USSR some measure of international
prestige, and might, in addition, have a detrimental effect on certain
military or military-related projects.
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20. We think that the Soviets will make every effort to hold down de-
fense and space expenditures so as to release scarce resources for invest-
ment in the civilian economy. While defense expenditures may decline,
we think it more likely they will grow at a slower pace than in the
recent past. In the short term, the Soviet leaders have the option
of reducing force levels, but in the long term they must consider the
advisability of curtailing or stretching out one or more programs for
advanced weapons.
21. The campaign to gain greater and longer term Western credits
will certainly be stepped up over the next few years. Failure to gain
the desired credits would force cutbacks in civilian goals, particularly
those in the chemical industry, or further restrictions on defense
spending.
22. The new program cannot approach its announced goals without
eventual diversion of domestic resources from other claimants, particu-
larly military. Nor can it succeed without substantial improvement in
the Soviet position with respect to foreign trade and credit. Both these
necessities argue for a foreign policy of relative restraint, designed at
least to keep international tension from rising and perhaps even to
diminish it. We do not, however, believe that the Soviets would make
major concessions in exchange for expanded Western credits or reduced
Western defense expenditures.
23. Economic aid to non-Bloc countries is unlikely to recover the
momentum of earlier years. We attribute this more to psychological
and political factors than to any real shortages of available resources;
it is difficult for the leaders to justify, even in their own minds, ship-
ments of Soviet goods abroad when they are not plentiful at home
and when the effect of such shipments remains uncertain or remote.
But, while the Soviets may become even more selective when extending
new credits, they still view the program as potentially rewarding, and
commitments already made will keep them active in this field for the
next several years.
24. Despite indications in the recent Central Committee plenum and
the 1964 budget that the Soviet leaders have at last faced up to the
hard choices, it would be wholly in character if they continue partly
to rely on "hidden reserves" and various administrative reorganizations.
To achieve all their currently projected aims, as in agriculture, would
require precisely the sort of radical changes they are least likely to make
in the foreseeable future, as, for example, allowing considerable private
initiative on the farms and decentralizing the economy.
25. Over the next few years, investment in agriculture and the chem-
ical industry will greatly increase, partly as a result of the policies above
outlined, partly from the natural growth of the total Soviet economy.
However, chances of restoring previous high levels of industrial growth
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are slim, and the innate rigidities of Soviet planning and administra-
tion will continue to hamper the economy. Many of the chemical pro-
gram's current targets will almost certainly not be met, agricultural
production will fall far short of projected goals, and significant benefits
to the consumer will be several years in the making.
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IAC-D--69/2, 22 June 1953.
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Approved For Release 2006/12/06: CIA-RDP66B00403R000100260158-7