THE SINO-SOVIET BLOC ECONOMIC OFFENSIVE: HAZARDS FOR THE UNDERDEVELOLPED COUNTRIES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP78-02771R000500090002-3
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 30
• Document Creation Date: November 11, 2016
• Document Release Date: July 30, 1998
• Sequence Number: 2
• Publication Date: April 3, 1958
• Content Type: REPORT

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THE SINO-SOVIET BLOC ECONOMIC OFFENSIVE:
HAZARDS FOR THE UNDERDEVELOPED COUNTRIES
3 April 1958
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THE SINO-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 billion.
It produces in quantity the principal kinds of manu-
factu.res, 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 World, 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 political 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.
The Bloc's long-range motivation was again made clear as
recently as September 1957, when Soviet Far Eastern expert
E. M. Zhukov quoted Lenin's remarks that "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.
Co Techniques
The Soviet Bloc economic penetration program has been imple-
mented in four major ways: credit offers, technical assistance
programs, trade agreements, and 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.
C. Techniques ii
I. Sino-Soviet Bloc Credit Program
A. General
B. Examples of Integrated Single Country Programs
1. Afghanistan
2, Syria
Co Political Implications of Bloc Credits
1. Subversion
a. General
be Strengthening Local. Communist Parties
2. Political "Strings" and Leverage
a o General
bQ Specific Examples
Economic Implications of Bloc Credits
1, Project Disappointments
ao Hidden Costs
b. Bakery Complex in Afghanistan
c. Aswan Dam
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d. Soviet Offers to Ceylon page 5
e. Sugar Mill in Indonesia 5
2, Internal Disturbances Arising From Bloc
Credit Projects
b. Syria
II. Sino-Soviet Bloc 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
III. Sing.--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 e Afghanistan
b, Egypt
c. Ceylon
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2.
Barter Trade Hazards
page 12
a. Burma
12
b. Argentina
13
C.
Political Implications
13
1.
Iran
13
2.
Greece
1!l
3.
Holland
14
4.
Australia
14
5.
Israel
15
6.
Finland
15
D.
Economic Implications
15
1.
Shoddy Goods
15
a. Egypt
15
be Afghanistan
15
c. Syria
16
d. Indonesia
16
e. Iran
16
2.
Price Manipulation
16
a. Burma
16
b. Hong Kong
16
c. Iran
17
d Egypt
17
e. Greece
17
3.
Resale in Third Countries
17
a. Burma
17
b. Egypt
18
c. Turkey
18
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4.
Failure to Honor Terms of Agreements
page 18
18
a.
Japan
18
b.
c.
Egypt
Burma
19
Difficult Trading Practices
19
.
India
19
b.
Hong Kong
19
c
d.
Switzerland
Sudan
IV. Commercial Penetration
A. The Technique
B. Examples
1. Communist-Controlled Branches of the
Bank of China
2. promasheksport
Bank of Chios
vi
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THE SINO-SOVIET BLOC ECONOMIC OFFENSIVE:
HAZARDS FOR THE UNDERDEVELOPED COUNTRIES
. 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-
vanced.
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. As pointed out in the State Depart-
ment-Bulletin of 27 January 1958, "In negotiating agreements,
the B= gives no evidence of requiring economic justification
for the projects 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 recommendations 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.
American aid generally has been designed to build a founda-
tion on which the recipient countryes economy can safely ex-
pand. For the most part, 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. 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 inflationary in 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
1. Afghanistan
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 suffi-
ciently stimulate production of exportable commodities to permit
it to liquidate its indebtedness to the Bloc. The Afghans are
already beginning to appreciate the economic implications of the
indebtedness they are assuming. Recently, Foreign Minister Nairn
indicated to the US and Soviet Ambassadors that his country could
accept no further loan assistance.
2. Syria
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 on its arms debt.
Deputy Under Secretary Dillon has commented that US economic
experts believe that "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 in serious inflation. The Communist prescription
for meeting such a situation, of course, would be the introduc-
tion of'complete state control of the economy in order that
resources could be directed away from consumption into develo -
ment." (Department of State Bulletin, 24 March 1958, p. 472.
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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 sating 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
1. Subversion
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 Parties
Even when there is no evidence 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
a. General
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 apparent, but they are present. Although
the USSR sometimes trains local operating personnel. for
the installations being built, many of the plants under
'construction will be manned by Soviet nationals for
several years. Thus, the presence of a large number
of Soviet citizens, each a potential 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 dhow 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 1956, 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 50,000 tons. Installation was to be completed
by 1961. Shortly after Soviet-Yugoslav political differ-
ences came to the surface in 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-Bulganin 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 e sepie el, Berlin, 6 October 1957, Die Wirtschaft,
Berlin, August 1957; Christian Science Monitor, 3 June
l57.)
D. Economic Implications 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 casts. 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
time.
b. Bakery Complex 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 nan. 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.
c. Aswan Dam
The Soviet Union, failed to finance the Aswan Dam
project after withdrawal of the US and UK offers.
d. Soviet Offers to. Ce rlon
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 Djokjakarta,
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 contract, 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 Arising from Bloc Credit Projects
a. India
At various times reports from India have indicated a
fairly widespread distaste for Soviet Russian 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, TECHNCE) 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 been re-
cruiting in the rural villages, where labor is paid less,
and had been. paying their workers on apiece work rather
than an hourly basis. As a result, workers found it diffi-
cult to earn more than 2 L Syrian per day (about 56 cents
US), a figure which is as much as l- 1; Syrian lens than
the wages paid by the US-owned Iraqi Petroleum Company.
Syrian. Government requests for a pay boost were refused.
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II.' SING-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 govern-
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-Recipient Countries
The number of Bloc specialists in underdeveloped areas
increased about 15 per cent during 1957. During 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 2,1100,
Most 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, with 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-
ties for long-range direct influence on these key groups within
the underdeveloped countries are readily apparent.
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The 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.. XXXVIII,
Na 977 -
C. Political Implications of Technical Assistance
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 Ethiopia
In Ethiopia, government officials have been disturbed by
the activities of the Bulgarian. Trade Mission. Although the
Bulgarians had offered to construct a meat plant, tannery, soap
factory and other projects, no progress has been made. Reportedly,
the Bulgarians main activity has been to tour the area exten-
sively by car, carrying cameras.
D. Economic Implications of Technical Assistance
1, Numbers and Cost of Technicians
Soon after Afghanistan concluded a credit agreement with
the USSR, hundreds of Soviet workers and technicians flooded
the country. Soviet technicians arrive in India almost daily;
an estimated 300-400 have arrived to date. The cost of trans-
portation, wages, and living quarters of Soviet technicians must
be borne by the local economy, as with free world technical
missions.
8
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2. Narrow Specialization
Reports from Afghanistan and India indicate that many
Bloc technicians are often narrow specialists whose lack of
flexibility sometimes makes it difficult to'cope with closely
related problems. The Afghans have complained that the Soviets
employ four technicians to do the work by one German due to
narrow Soviet specialization.
E. Soviet Participation in UN Program
The Soviet Bloc provides technical assistance to underdeveloped
countries through the United Nations Technical Assistance program.
Originally antagonistic to the UN program, the Soviet Union decided
to become a participant in 19534 In 1954 it was joined by Czecho-
slovakia and in 1956 by Bulgaria, Hungary and Rumania. Bloc par-
ticipation has been slight. While complicated by Soviet Bloc
contributions in non-convertible currencies, it is clear that the
impact made by the provision of technicians and equipment through
the UN program has been considerable in the underdeveloped coun-
tries.
The principal impact of Soviet and East European participation
has been psychological and political rather than economic? In
addition to the obvious motive of enhancing its prestige, the
Soviet Union also probably expected some specific gains from par-
ticipation in the UN program. The UN program has undertaken to
acquaint recipient countries with Soviet and East European equip-
ment, supplies, technical experts, and technical education
facilities. The expanded UN program is performing, in part, the
function of trade promoters and industrial advertisers for the
Soviet Union and Eastern Europe. ("Soviet Russia and the Under-
developed Countries,' The World Toda , Chatham House Review,
May 1957, pp. 207-219)
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III. SINO-SOVIET BLOC TRADE AGREEMENTS
A. General
The role of trade in Bloc economic diplomacy is clearly
indicated by Khrushchevrs statement to a US Congressional dele-
gation to Moscow in September 1955.- "We value trade least for
economic reasons and most for political purposes." Because
foreign trade is conducted as a state monopoly in the USSR,
ordinary commercial considerations are of only secondary
importance to the broad long-term political objectives of
the Sino-Soviet Bloc,
In contrast to the normal trading patterns of other
countries, much of the Bloc trade is highly selective and
aimed at politically vulnerable 'underdeveloped countries.
Most of the countries selected have economies which are
dependent on one or two agricultural crops, such as rice or
cotton, or on industrial raw materials. Frequently, 60 to
80 per cent of the volume of export trade consists of these
few primary products. As a result, the economies of these
countries are highly vulnerable to variations in yield and
fluctuations in price. The Bloc offers favorable terms for
hard-to-sell export surpluses.
Once a country develops reliance upon the Bloc as a
major supplier of its essential imports and as an important
export market, severing this relationship will create a
serious internal economic disturbance to the nation involved.
Soviet Bloc industrial equipment requires Bloc spare parts,
and Bloc technicians; thus close economic relations with
the Bloc tend to continue indefinitely.
Responsible people in many countries are becoming in-
creasingly aware that Bloc trade, based on political motiva-
tion rather than commercial considerations may be unstable and
is also politically dangerous. Communist trading practices
are flexible enough to fit particular situations and to achieve
special political ends.
B. Examples of the Hazards of Bilateral and Barter Trade
1. Reorientation of Trade Patterns as a Result of Bi-
lateral Agreements
The Bloc consistently has attempted to reorient the
trade of underdeveloped countries by demanding bilateral trade
agreements in return for its purchase of their exports. These
bilateral agreements require the exporting countries to switch
their imports to the Bloc in order to achieve bilateral balance.
Economically vulnerable countries, particularly those relying
on a limited number of commodity exports, can thus find them-
selves linked to the Bloc in ways which are costly and painful
to correct.
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a. Afghanistan
Current Soviet-Afghan trade arrangements give the
Soviet Union a. large part of Afghanistan's trade. As
a consequence, Afghan trade with the Free World has
diminished. During the Pakistaniblockade of supplies
entering Afghanistan during the summer of 1955, vital
Soviet gasoline shipments were suddenly curtailed.
While the curtailment was apparently a coincidence,
Afghanistan was made painfully aware of the country's
economic dependence on the USSR.
b,. Egypt
Since most of Egypt's cotton has been going to
the Soviet Bloc, Egypt has steadily lost ground in its
traditional markets, such as the United Kingdom and
Western Germany. Thus the Egyptians have suffered
losses of traditional markets and foreign exchange.
(London Times, 4 February 1958)
C. Ceylon
As a result of the rice-rubber agreement between
Ceylon and China, China owed Ceylon L13.5 million
sterling which it was reluctant to pay in cash. The
Ceylonese finally agreed to accept rice in partial
payment. The means of payment for the remaining
unpaid balance was still not agreed on as of February
1958. At the time the Chinese first refused to pay
cash, The Economist, London, commented:
"The Chinese move is a good example of the
opportunities trade agreements give of
exerting economic, and eventually political
pressure. If Ceylon refuses to renew the
agreement, on China's terms, it risks losing
both a market and the money which it is
already owed. If it accepts, it will have
to restrict its imports from other countries,
disregard its obligations under GATT, and
allow its economy to become still more
vulnerable to pressure from China. China,
on the other hand, is a free agent; now
that the embargo has been lifted, it can
obtain rubber at competitive prices from
other countries."
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2. Barter Trade Hazards
Barter agreements between Communist countries and
underdeveloped countries have a distinct disadvantage in
that normal trading arrangements are upset.
a. Burma
U Nu's comment to a press conference that "a
man who takes barter when he can, take cash must be
out of his mind," embodies the Burmese disillusion-
ment over trade with the Bloc. Following an internal
rice slump in 1954, Burma resorted to barter with
Communist countries to dispose of unsold stocks. In
1955 and 1956, Burma concluded barter trade agree-
ments with China, East Germany, USSR, Poland, Rumania,
Czechoslovakia, Hungary, and Bulgaria for periods
ranging from one to five years. Officially the barter
agreements were referred to as the "clearing accounts
system."
Although Burma managed to market a substantial
percentage of its rice exports through these agreements,
it accumulated large credit balances with the Bloc
which it had to draw down in overpriced Soviet goods.
Many items on the Communist "available" products list
proved to be unavailable and it was necessary to take
substitute goods. Private traders in Burma estimated
that Burma paid from 10 to 30 per cent more for Soviet
Bloc goods than for similar goods from Western Europe.
U Nu said in May 1956 that "our experts have laid be-
fore us the implications of barter trade, that prices
are manipulated as to place us at a disadvantage by
10 to 30 per cent on the goods exchanged." Burmese
warehouses are full. of Communist electrical goods
which do not fit Burmese sockets, cement which does
not set, asbestos roofing sheets which are the wrong
size, plumbing fixtures which do not fit Burmese
pipes, congealed condensed milk and rusty tins, and
Czech whiskey which no one will drink. (Far Eastern
Economic Review, 13 June 1.957)
Burma's agreement to accept cement as a barter
commodity proved almost disastrous. Soviet freighters
unloaded 42,000 tons of cc-mient in Rangoon alone,
filling all available warehouse space and blocking
the unloading of badly needed, consumer goods from
other areas; port income was simultaneously choked
off. Much of the cement was ruined by monsoon rains,
while Burmese requests to halt or even slow down the
Soviet deliveries were ineffective. Members of Cham-
bers of Commerce In Burma complained that a month
passed before Moscow answered commercial inquiries.
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On the other hand, the Bloc pattern of deliveries
is quite unpredictable. Deliveries, sometimes delayed
from 3 to 10 months, have often resulted in losses to
Burmese traders after expiration of their import licenses.
Although the USSR absorbed 40 per cent of Burma's
entire rice export to barter countries, the goods shipped
in return accounted for only 12.5 per cent of barter im-
porto. Since China supplied 50 percent of the barter goods,
Burma incurred a serious deficit to China while its trade
balance with the USSR was just the reverse.
Meanwhile, quantities of Burma's bartered rice were
re-exported by Soviet Bloc recipients in direct compe-
tition with Burma's normal trade. Communist China, in
particular, profited on Burma's rice by re-selling the
commodity to Burma's regular customers. (The Nation,
Burma 9 October 1957; Foreign Agriculture, Ma-y-71-97-7;
Far Eastern Economic Reyie une-'_ ()
b. Argentina
Argentina has recently sent a high-level trade
mission on a visit to Bloc capitals in an effort to
utilize old credit balances held by the Bloc in Argen-
tina's favor. In 1954 and 1955 the bilateral agree-
ments concluded by the Peron regime with Bloc countries
were honored by Argentina with large shipments of goods
overp,Piced for traditional markets. The Bloc, however,
shipped very little in return and thus accumulated
large unfavorable balances still active in 19:,('. The
existence of these balances is tantamount to ArLcntine
credits to the Bloc state trading monopolies.
Soviet trade representatives in Iran have insisted on
dealing directly with chosen merchants, granting a few of
these businessmen sizeable profits in return for "kickbacks"
which are then used to pay the expenses of Soviet intelli-
gence organizations. Felix Aghayan, one of the country's
biggest importers, told Christian Science Monitor corres-
pondent, Wilfred A. May, I always feel that in dealing
with the Soviets I'm dealing with someone who wears a poli-
tical suit first, and a trade suit second. We resent the
Soviet trade officials here, moseying around when we don't
know what they're up to except that they are in all proba-
bility doubling as political spies and propagandists."
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2. G eece
The Greek newspaper Vradyni reported on 10 October
1957 that the Soviet Embassy in Athens was using third
persons to blackmail Salonika businessmen doing business
with the Soviet Union. Although the details of the
commercial transactions were supposedly known only to
the Greek businessmen involved and to the Soviet trade
delegation in Athens, Greek businessmen were approached
by individuals who knew the amount of goods exported,
and the exact profits made. One tobacco merchant gave
5,000 drachmae to the Greek-Soviet League in order to
be permitted to continue exporting tobacco to the Bloc.
The "collectors" acting for the Soviet Embassy combined
their claims for money with blackmail threats about
future business transactions with Russia. Consequently,
the merchants who wanted to continue in business made
the requested contributions.
3. Holland
Netherlands traders provided an example of the poli-
tical pressures involved in trade with the Communists.
Before the conclusion of the Soviet-Netherlands trade
accord in June 1956, Dutch negotiators expressed surprise
that the Soviet draft agreement contained no provision
for USSR purchase of the Netherlands staple exports of
meat, cheese and butter, despite Soviet Russia's importa-
tion of substantial quantities of these foodstuffs since
1953. When the negotiators pointed out the omission, the
Soviets explained they were no longer importing these
items. However, while the accord was still being discussed,
.a Soviet-Denmark agreement revealed that Danish meat, cheese
and butter were among the commodities the Soviets would
import. Confronted by this fact, the Soviet negotiator
told the Dutch officials that the Premier of Denmark had
recently visited Moscow--the implication being that the
purchases were a political reward.
4. Australia
In the 1953-1954 season, Australia sold the USSR 30
million pounds of wool. Soviet buying stopped after Aus-
tralia granted asylum to Petrov, a Soviet official who
defected. (Washington Post, 23 June 1956)
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5. Israel
Soviet shipments of fuel and crude oil to Israel were
cut off by the USSR on the grounds of "force majeure" one
week after Israel invaded Egypt. Cancellation af`he Soviet
contract caused considerable hardship for Israel, whose
ships were waiting to load at Black Sea ports.
6. Finland
A good. example of Soviet exploitation of trade agree-
ments. to influence Finnish policy occurred in November 1957.
Following the fall of the Sukselainen Government, Vaino
Tanner was asked to forma new Cabinet. Because Tanner
was persona non grata to the Soviets, the USSR postponed
1958 trade negotiations with Finland. Finnish Government
trade circles clearly perceived the implications of the
Soviet move.
D. Economic Implications.
1. Shoddy Goods
a. Egypt
A 7,200 ton cargo of kerosene, purchased by Egypt
from Rumania at bargain prices, turned out to be so
inferior that it was necessary to refine the-entire
cargo at considerable expense. Standard. tests revealed
that the cargo, as delivered, burned lamp wicks to
ashes and coated lamp chimneys with a heavy black soot.
The cost required in pumping the oil into government
refineries, mixing it with crude oil at 20 cents a
barrel and reprocessing it through distillation is
reported. to have exceeded the 15 per cent saving the
Egyptian Government had expected to gain through this
"bargain" deal. Another Egyptian experience involved
Soviet wheat`gwhich recently arrived in Egypt. When
analyzed by agricultural experts., it was found to be
animal feed. Bread made from it turned green in color.
b.. Afghanistan
Many Soviet deliveries,to Afghanistan. have been
sub-standard. Some shipments of Russian cement were
rejected as "mostly sand." Trucks from Soviet fac-
tories sent to Afghanistan are defective, and not
suited to the local. terrain
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c. Syria
In February 1956, Damascus automobile dealer Salah
Bizri was forced to terminate his agency for East German
IFA passenger cars and trucks. Customers were demanding
refunds, complaining that the vehicles lacked sufficient
power for traction on moderate grades in and around
Damascus. In addition, there were widespread complaints
that serious engine trouble had developed only a few
months after purchase. After drawn-out negotiations,
Bizri was finally able to persuade the East German manu-
facturer to take back the remaining unsold vehicles.
d. Indonesia
The New York Herald Tribune reported on 17 December
1957 that-the Indonesian Army was bitter about jeeps
imported from the Soviet Union. Indonesian officers
complained that the tires did not stand up, that wind-
shields shattered and motors rattled to pieces. At the
same time, Moscow was pressing Indonesia for payment
for the shipments that had been made.
e. Iran
In February 1957, the Hungarian Commercial Dele-
gation found itself with 12,000 worthless bicycle tires
rejected by an Iranian buyer. The tires did not fit
any normal size wheel and their quality was so poor
that they had begun to deteriorate while in storage.
2. Price Manipulation
The Rangoon newspaper Nation reported on 1 February
1956 that Chinese suppliers often raised prices 10 to
15 percent after terms had been worked out and Burmese
import licenses had been issued.
b. Hong Kong
In Hong Kong, the Chinese have on several occasions
profited from their near-monopoly position by with-
holding shipments of pigs and poultry until prices rose
sharply, then selling to gain extra profits. (Far
Eastern Economic Review, June 1957)
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c. Iran
In Iran, Abbas Massoudi, Iranian newspaper pub-
lisher and member of Parliament, summed up the diffi-
culties in trade. "The main difficulty comes from the
Soviet Union's concentration on State trading, which
means manipulated prices. Prices are non-competitive;
they price their own good& too high and they pay too
low. In this they try to treat usjust as they treat
their Satellites.'
d. Egypt
Communist cotton buyers in Egypt during 1956
haggled over every point, questioned the quality of
shipments, and juggled accounts to conceal their
purchases. At the same time, prices of some Bloc
goods sold to Egypt rose about 40 per cent above
world competitive market prices.
e. Greece
Alexander Tsatsos, head of the Federation of Greek
Industries and President of the General Cement Company,
stated that his firm has become completely disillusioned
about sales to the Soviet Union. "They have shown they
are completely uninterested in a free and natural mar-
ket," he said. "They continually price their exports,
out of the market, which makes it unwise to depend on
them."
3. Resale in Third Countries
There is a constant threat of Soviet resale or dumping
of imported goods on Free World markets.
a. Burma
The bulk of Burmese rice, 112,000 of the 150,000
tons bought by China in 1954 and 1955, was sent to
Ceylon, traditionally one of Burma's best customers..
Since Burma had no rice to sell, Ceylon had to pay
$20 more a ton for Burmese rice re-exported by Peiping
than it would have paid had it bought directly from
Burma. Hungary bought 20,000 tons of Burmese rice
and then resold it to French West Africa at a lower
price. Rice bartered to Bloc countries. has. appeared
in West Germany, and as a consequence Burmese direct
sales to West Germany declined. (Far Eastern Economic
Review, June 1957)
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b. Egypt
The Soviet Bloc has resold Egyptian cotton at a
10 to 14 per cent discount on Western markets for hard
currency. Nothing that the Egyptian Government has done,
whether by offering premiums or by juggling with payment
mechanisms, has enabled Egypt to regain its former mar-
kets. (London Times, 4 February 1958; New York Times,
7 March 195
c. Turkey
Turkish tobacco merchants have found that Bloc coun-
tries are reselling tobacco originally purchased in Turkey
to the US. Having obtained Turkish tobacco in exchange
for overpriced Bloc commodities, the USSR and Satellites
have then resold the leaf to US buyers, using European
intermediaries. An indication of Turkish concern is a
3,:-.,cent directive of the Turkish Trade Ministry in di-
recting sellers to refuse sale of high-grade leaf to
Bulgaria since Bulgaria is known to have resold Turkish
tobacco to the West.
4. Failure to Honor Terms of Agreements
a. Japan
In Japan, 20 Japanese firms contracted to import
153,000 tons of soybeans from China at $39 per ton.
The Chinese firm then notified the Japanese traders
that only 60,000 tons were available at that price,
and quoted a higher price for the additional amount.
The Japanese had to accept the new terms. (China As-
sociation, London Bulletin No, 1.21, 20 June 1956)
b. EE t
In Egypt, the Soviets signed a barter agreement in
1952 which provided for the trading of Egyptian cotton
for Soviet wheat, both being valued at inflated prices.
Both parties to the agreement appeared to be satisfied
with its terms until the price of cotton began to
decline on the world market. Then, despite the agree-
ment, the USSR demanded a revision of the contract to
bring the barter price of cotton down to the prevailing
price in the world market. (The Havana Post, 18 May
1957)
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C. Burma
A prominent Burmese export-import firm entered into
an agreement in 1956 with the Soviet PROMSYRIO-IMPORT
organization for milled steel square bars. The Soviets
later notified the firm that the steel could not be
delivered before 1957 at the earliest.
5. Difficult Trading Practices
The Soviet Bloc countries conceal a large part of the
trade and production data customarily published by other
countries, and regarded as essential by Western business-
men . for planning purposes.
Indian Airlines encountered an example of such Bloc
secrecy when it began negotiations far. Soviet Ilyushin-
14 aircraft. The'Indians required detailed information
about performance, maintenance, and construction neces-
sary to calculate costs of operation and secure certifi-
cation for airline use. The Russians refused to supply
the specifications. They also proposed that all major
maintenance be done in Moscow, which would have involved
long costly flights and kept aircraft out of service
for longer periods. The Russians would not compromise
so the idea was abandoned.
Small firms in particular suffer as a result of
Soviet Bloc methods of doing business. In India,
Chinese Communist buyers insisted on bulk purchases
of 50 to 200 tons of black pepper at a time, amounts
that only the big trading firms could supply. Demands
for such large quantities led to speculation and arti-
ficially increased prices, which benefited only the
big dealers and monopolists.
b. Hong Kong
In dealing with Free World firms, the Chinese Commu-
nists reserve the right to full or partial rebate from
the shipper within 60 days in case the local Chinese
Communist Commodity Inspection and Testing Bureau finds
the goods unsatisfactory. The decisions of the Bureau
cannot be appealed and the Chinese Communists are re-
ported to have used this device to reject imported goods
arbitrarily, or to insist upon paying less than the
agreed terms. Since some time elapses between delivery
of the goods to the inland buyer, inspection of the
goods, and shipping back in the case of rejection, some
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goods are returned to Hong Kong spoiled or damaged
even though at the time of delivery they may have
been in accordance with the specifications of the
contract. Rough handling of the goods during the
process of shipping them back and forth contributes
to spoilage and breakage. Once the goods are re-
ceived in Hong Kong, the seller is obligated to
refund the borrowed funds and take the losses.
c. Switzerland
Swiss traders encountered unusual difficulty in
dealing with East German enterprises at the 1957
Leipzig Fair. In one case a Swiss. prospective buyer
found that he had to get special permission to inspect
a. machine in which he was interested. Additional phone
calls to his superiors had to be made by the East Ger-
man salesman in order to answer technical questions
and, later, to demonstrate the equipment, Unable to
obtain a copy of the specifications, the Swiss was
required to leave his name and address so that these
could be mailed. They were mailed, many weeks later,
by the Soviet Embassy in Bern.
The vast majority of contracts. between non-Commu-
nist business corporations and Soviet agencies contain
a clause stating that all disputes shall be submitted
to the Soviet Foreign Trade Arbitration Commission of
the All-Union Chamber of Commerce in Moscow; that the
Commission shall operate under its own laws of pro-
cedure; and that its decision shall be final. Thus
traders have no legal recourse or other established
means to settle disputes. (New York Times, 3 November
1957)
The Sudanese newspaper Al Umma reported on 10 Novem-
ber 1957 that the Sudanese f rm I-amid Al. Sayyis, and
Company has sued the Soviet Government for 24,000
1.Sudanese as the result of unsatisfactory performance
on a cement deal arranged through the Soviet Commercial
Attache in Khartoum. When the cement arrived it was
found. to be of poor quality and, packed in inferior
bags which had broken, causing further damage, The
Chairman of the Sudanese firm has. traveled to Moscow
in an attempt to get satisfaction.. The case has now
been pending for several months and. no resolution of
the plaintiff's case seems in sight.
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IV. COMMERCIAL PENETRATION
A. The Technique
Commercial penetration consists of using indigenous
enterprises in the interest of the Bloc. Although this
technique has been seldom used by the Bloc thus far,
the threat from this type of operation is real indeed.
B. Examples
1. Communist-Controlled Branches of the Bank of China
Many branches of the Bank of China which the
Chinese Communists have taken over have been used as
instruments for the financial support of local Commu-
nist organizations. For example, according to press
reports, the Government of Burma believes that the
gains made by the Communist-led National United Front
in the April 1956 elections were due, in large part,
to the generous financial aid supplied to the Front
by the Chinese Communists through the Bank of China.
One of the most important uses of the Bank of
China by the Communists is in influencing the Over-
seas Chinese communities which play so important a
part in the life of many Southeast Asian countries.
The Bank of China gives direct subsidies to Communist-
dominated agencies in the form of low-interest, easy-
term loans; schools receive funds for the purchase of
textbooks and buildings or for the employment of pro-
Communist teachers; and pro-Communist newspapers receive
loans from the Bank.
Another far-reaching activity in winning the Over-
seas Chinese to the Communist side is the loan program
to businessmen and to small borrowers who would normal-
ly depend on money-lenders of the bazaars. The Bank
offers loans on easier terms and at lower interest
rates than other banks, but it shows preference to
Overseas Chinese who will line up publicly on the
Communist side. The borrower must be introduced by
a reliable pro-Communist who will vouch for his poli-
tical reliability, must agree to send his children to
a Communist school, to fly the Communist flag on holi-
days, and not to subscribe to nor support any anti-
Communist or Nationalist papers or organizations.
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Chinese Communist Embassies and Consulates have
an important voice in the approval or rejection of
loan applications. One procedure for deciding upon
loans is for the Chinese Embassy officers to rely
upon local organizations such as Chinese Chambers of
Commerce, labor unions, or firms dominated by Commu-
nists to pass upon the economic and political status
of applicants, since these organizations have wide
knowledge of the local community. The applicant for
a loan files his application with the local organiza-
tion which investigates him, and then passes the
application to the Chinese Embassy with its recommenda-
tion that it be granted or rejected. The Embassy re-
views it and, if favorable, then passes it along to the
Bank, which grants the loan and does the paperwork.
2. Promasheksport
According to a report in the Soviet foreign trade
organ Vneshnaya Torgovlya, a foreign trade organization
called 1Promasheksport` was established in Moscow in
July 1957. Its authority to lease, buy, and invest in
foreign enterprises, however, would mark a departure
from past practice, at least in openly Soviet-sponsored
activities, Up to March 1958, active operations of
Promasheksport had not been observed. It is clear,
however, that its existence would pose a considerable
threat to the Free World along many lines., including
for the first time, overt commercial penetration by the
USSR.
3. Bank of Chios
A current Communist attempt to use European. banks
for penetration illustrates the technique of operating
through an ostensibly Western European bank to acquire
control of another bank in a third country. The Commu-
nist-controlled Banque Commerciale pour ltEurope du
Nord, in Paris, has recently been attempting to acquire
control of the Bank of Chios, Athens. Once control of
the Bank of Chios is acquired, the Communists intend to
start a program of credits to Greek rural cooperatives
attaching political strings to each transaction. For a
largely agricultural economy, the political implications
are great. (Athens, Ethnikos Kiryx, 19 January 1958)
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25X1A8a
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