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Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 NOT RELEASABLE TO FOREIGN NATIONALS INTELLIGENCE MEMORANDUM PRODUCTION, RESERVES, AND EXPORTS OF SOVIET GOLD CIA/RR IM-457 10 October 1957 WARNING THIS MATERIAL CONTAINS INFORMATION AFFECTING TEE NATIONAL DEFENSE OF THE UNITED STATES WITHIN THE MEANING OF THE ESPIONAGE LAWS, TITLE 18, USC, SECS. 793 AND 791E, THE TRANSMISSION OR REVELATION OF WHICH IN ANY MANNER TO AN UNAUTHORIZED PERSON IS PROHIBITED BY LAW. CENTRAL INTELLIGENCE AGENCY Office of Research and Reports NOT RELEASABLE TO FOREIGN NATIONALS Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 Approved For Release 1999/09/21 : CIA-RDP79TOO935AO00400340003-1 S-E-C-R-E-T CONTENTS Summary and Conclusions . . . . . . . . . . . . . . . . . . . . 1 I. Introduction . . . . . . . ? ? ? ? ? ? ? ? ? ? ? ? ? 3 II. Pattern of Gold Sales . . . . . . . . . . . . . . . . . . . 4 A. Motivation for Recent Sales . . . . . . . . . . . . . . 5 B. Other Postwar Sales . . . . . . . . . . . . . . . . . . 7 C. Prewar Sales . . . . . . . . . . . . . . . . . . . . . 8 III. Gold in Intra-Soviet Bloc Settlements . . . . . . . . . . . 11 IV. Gold and Its Internal Uses . . . . . . . . . . . . . . . . 12 A. Gold and the Ruble . . . . . . . . . . . . . . . . . . 12 B. Domestic Industrial and Other Uses . . . . . . . . . . 14 V. The Gold Industry . . . . . . . . . . . . . . . . . . . 15 A. History and Development . . . . . . . . . . . . . . . . 15 B. Production . . . . . . . . . . . . . . . . . . . . . . 16 VI. Gold Reserves . . . . . . . . . . . . . . 19 Appendixes Appendix A. Statistical Tables . . . . . . . . . . . . . . . . 21 Appendix B. Source References . . . . . . . . . . . . . . 23 Tables 1. Soviet Gold. Sales and Balances of Trade, 1953-56 . . . . .8 2. Soviet Foreign Indebtedness, Selected Years, 1924-38. . . . 10 3. Reported Soviet Gold Loans, Selected Years, 1947-56 . . . . 12 Approved For Release 1999/09/21 : CIA-RDP79TOO935AO00400340003-1 Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 1+. Estimated Soviet Gold Production, 1927-55 . . . . 18 5. Estimated World Gold Production, 194.8 and 1950-56 . . . . . . . . . . . . . . . . . . 22 6. Estimated World Gold Holdings, December 1956 . . 22 Chart Following Page USSR: Gold Exports, Production, and Balance of Trade, 1920-38 . . . . . . . . . . . . . . . . . 8 Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 CIA/RR IM-1+57 S-E-C-R-E-T (ORR Project 42.1657) PRODUCTION, RESERVES, AND EXPORTS OF SOVIET GOLD* Summary and Conclusions The reappearance of the USSR as a substantial seller of gold in Free World markets has given rise to speculation regarding the moti- vation of such sales and the implications of Soviet gold policy in general. It is fairly evident that the recent Soviet gold sales, which are estimated to have totaled US $330 million** during January 1956 - April 1957, cannot be explained simply in terms of the normal replenishment by the USSR of its foreign exchange reserves. The size of the sales and the urgency with which they appear to have been concluded in November and December 1956 suggest that their primary motivation was a result of the political upheavals in Soviet-dominated Europe. The fact that similar peak sales followed hard upon the June 1953 uprising in East Berlin provides a parallel not easily dismissed. It is not unlikely that the economic assistance granted to the Euro- pean Satellites in 1953 and 1956 might well have provided an unfore- seen strain on Soviet foreign exchange reserves (traditionally kept at a minimum level consonant with "maneuverability" in foreign trade), which, when compounded by the large Soviet purchases of consumer goods during 1953-54 and the abnormally heavy purchases of raw materials and semiprocessed goods in the-sterling area during 1956, provided the impetus for the flows of Soviet gold. The apparent reluctance with which the USSR employs gold to settle its international accounts demonstrates that, at least within the limits prescribed by its export capability, the country strongly prefers to balance imports with merchandise exports. Nevertheless, Soviet gold resources are relied upon as an integral part of Soviet foreign exchange reserves and operate as a fund out of which tempo- rary disequilibriums in the Soviet balance of payments with the Free World can be met. The prewar years show a striking correlation be- tween Soviet gold exports and the deterioration of the Soviet balance * The estimates and conclusions contained in this report represent the best judgment of ORR as of 1 September 1957. ** Dollar values in this memorandum are given in terms of current US dollars. Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 of trade. The absence of any such positive correlation in the post- war period reflects, in part, a growing Soviet export capability which perhaps has obviated the necessity for any large-scale gold financing as a normal part of Soviet foreign trade. Although gold is primarily regarded in the USSR as a means of international payment, it clearly does have subsidiary domestic uses. Presumably the Soviet ruble enjoys a 25-percent gold backing, and appreciable quantities of gold are employed in industry and in the fine arts. Although considerations of doctrine do not prevent the USSR from using gold either to settle moderate import surpluses or to ex- tend economic assistance to friendly nations, it appears unlikely that the country will resort to gold financing on any large and perm- anent scale. If this assumption is correct, it is still necessary to account in some way for the inordinately large gold reserve of the USSR, estimated to be $4 billion, and for its annual gold pro- duction, valued at approximately $175 million. One possibility is that the USSR has thus far refrained from any large-scale diminution of its sizable gold reserve because of its belief in the inevitability of a major capitalist crisis during which Soviet gold stocks could be employed with telling effect. It has often been suggested that the USSR may dump gold on the world market in an attempt to disrupt further already dislocated Free World economies. If the USSR does intend to employ its gold reserves as a weapon of economic warfare, Soviet economic writers are obviously reluc- tant to discuss the matter. It appears unlikely, however, that the USSR seriously harbors any such plan. Any economic dislocations which would result from Soviet dumping would be merely temporary, at most, in view of existing national and international devices to insulate Free World economies from such contingencies. Furthermore, if such a policy were vigorously pursued, it could conceivably bol- ster Free World economies through a reinforcement of foreign exchange reserves and might serve to depress the price of gold to the great disadvantage of the USSR, itself a major gold producer. The rationale for the large gold reserves of the USSR might be found in the peculiar, almost mercantilist preeminence which it attributes to its store of precious metals, most particularly to its Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 gold reserve. This psychological attachment to gold, however, may be motivated by several more practical considerations. In the light of recent Satellite manifestations of political and economic inde- pendence, it must be assumed that the emphasis on large state re- serves as a protective buffer against the economic encroachments of world capitalism has not measurably abated. Soviet gold reserves, according to the Soviet economist Notkin, still "provide the in- surance necessary to protect the USSR from major shifts in inter- national market conditions, the possibility of partial or general economic and financial blockade, the possibility of crop failure within the country, and the possibility of direct armed assult upon the USSR." l/* To a lesser extent, the gold reserves of the USSR have provided useful grist for its propaganda machine. This iden- tification of wealth with gold has enabled the USSR not only to demonstrate its extreme solvency to hesitant Free World businessmen but also to prove both to neutralist Asians and to faltering Satel- lites the efficacy of the Communist system. I. Introduction. When we conquer on a world scale, I think we shall use gold for the purpose of building public lavatories in several of the large cities of the world ... . But, however "just," useful, or hu- mane it would be to utilize gold for this purpose, we nevertheless say: Let us work for another de- cade or so with the same intensity and with the same success as we have been working in 1917-21, only on a wider field, in order to reach the stage when we can put gold to this use. Meanwhile, we must save the gold in the RSFSR, sell it at the highest price, buy goods with it at the lowest price. "When. living among wolves, howl like the wolves." / * For. serially numbered source references, see Appendix B. Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 Thus did Lenin serve notice that, until the triumph of socialism had been achieved on a worldwide scale and as long as the interna- tional economic relations of the USSR were conducted in a capitalist environment, the USSR would utilize its gold resources in a manner similar to that of its non-Communist neighbors. The truly "capitalist" preeminence which the USSR has consist- ently attributed to its gold resources shows that this Leninist formula for Soviet gold policy has not been measurably altered in the ensuing years -- the country exhibits an attachment to gold which is almost mercantilist in concept and is virtually unequaled among Free World nations. Some of the major determinants and impli- cations of Soviet gold policy are explored in this memorandum. II. Pattern of Gold Sales. In recognition that "short-term discrepancies between income and expenditure are not impossible even in the balance of payments of the USSR," J Soviet gold resources are relied on as an integral part of Soviet foreign exchange reserves and operate as a fund out of whicn temporary disequilibriums in the Soviet balance of external payments with the Free World can be met. Soviet sales of gold, how- ever, remain an uncertain factor in Free World markets, as these sales appear to be dependent upon the level of Soviet gold and for- eign exchange reserves, Soviet willingness to employ gold as pay- ment for net commodity imports, and the.extent to which the USSR will assume the foreign exchange obligations of the European Satel- lites. The apparent reluctance with which the USSR has employed gold to settle its international accounts shows that it prefers to bal- ance imports with merchandise exports. This position was reaffirmed in a recent textbook on foreign trade which states: "The Socialist state aims at balancing imports with exports, since only such a balance can, in the long run, provide a healthy basis for interna- tional trade." However, "gold and foreign exchange have sometimes been used if the need arose for urgent imports of certain commod- ities and if export commodity resources could not be mobilized fast enough for such imports." J Soviet economic writers take great pains to state e. licitly that Soviet gold sales are not automatic responses to balance of payments deficits. Such sales, they explain, are necessarily -4- Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 conditioned by one or both of the following circumstances: (1) the use of gold for the settlement of Soviet international accounts may be undesirable in those cases where the official price of gold in Free World markets is considered below its "actual" value, as the USSR believes to have been the case since World War II, or (2) when conditions on the capitalist market are unfavorable for the USSR -- that is, an adverse turn in the Soviet terms of trade -- it may be more advantageous for the USSR to cancel its obligations through credits extended by individual capitalist countries and through cur- rency obtained from the sale of gold rather than from the sale of commodities. It is perhaps because the USSR has in the past been forced too often to rely more upon its bountiful gold resources than its much-vaunted export capability in the settlement of its inter- national accounts that Soviet writers manifest so extreme a sensi- tivity over the possible interpretation that all Soviet gold sales are indicative of an unfavorable payments balance. A. Motivation for Recent Sales. The reappearance of the USSR as a substantial seller of gold in international bullion markets has given rise to much speculation regarding the motivation of such sales. It is now quite clear that the heavy Soviet gold exports (reported to be $150 million in 1956 and estimated to be $180 million during January-April 1957 J) can- not be explained simply in terms of the normal replenishment by the USSR of its sterling reserves. Although sales in the first half of 1956 differed little from those during comparable periods in 195+ and 1955, the offerings during the last months of 1956 and the first quarter of 1957 were reminiscent of the major sales during 1953? The urgency with which the sales were concluded in November and December 1956 suggests two major factors as the primary motiva- tion of the sales: (1) the hard currency loans to the European Satellites following recent political upheavals and (2) the abnor- mally heavy Soviet purchases of raw materials and semiprocessed goods in the sterling area during 1956.* T.T. Ivanov, Chief of Soyuzpromexport, the organization responsible for foreign sales of Soviet gold, had stated in early October that there would be no more sales of gold by the USSR in 1956. 6/ Soviet purchases from the UK in 1956 registered an increase of 75 percent above the level of 1955, giving rise to a small (although unique) trade deficit with the UK in 1956. Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 Khrushchev's disclosure at the XXth Party Congress that the USSR had thus far extended to countries of the Soviet Bloc credits totaling $5.25 billion, along with, subsequent announcements of long- term credit extensions of more than $1 billion (including $158 mil- lion in gold and foreign exchange) to the European Satellites since 1 January 1956, heralded a new and well-publicized Soviet program of economic aid to the European Satellites. The reason for this new Soviet move is now fairly evident. The USSR had either to help alle- viate the acute shortage of foreign exchange and consumer goods which plagued the European Satellites or suffer a recurrence of the polit- ical unrest to which that shortage had already contributed in East Germany, Poland, and Hungary. The USSR may have felt it politically expedient to appear more sympathetic to the economic needs of the Satellites in view of its announced policy of economic assistance to non-Communist countries. On his arrival in London in early December 1956 to negotiate for the sale of Soviet gold, Ivanov stated that the large-scale gold sales were caused by events in Eastern Europe and that the USSR re- quired currency to meet debts of the Satellite countries. '7/ This statement is further evidence that the USSR is the "benefactor" which made it possible for Hungary to meet its large commercial debts in early 1957. At the time of the Hungarian uprising it was estimated that the outstanding commercial debts of Hungary to the Free World amounted to at least $140 million. Hungarian bank officials were en- countering increasing difficulties in obtaining foreign short-term commercial credits, and most Western European export credit insurance departments were plainly reluctant to offer cover on Hungarian trade. 8/ Since the October uprising, however, Hungary has found approx- imately $56 million for trade debt repayments. Less than 10 percent of these debts were reportedly paid from small Hungarian deposits in various Western European banks, but more than 90 percent were liqui- dated through payments made by the Banque Commerciale de L'Europe du Nord. Considering the state of Hungarian export trade over this period,* it may reasonably be assumed that the Banque Commerciale re- ceived the money from the proceeds of the sales of Soviet gold. 10/ * Hungary registered an import surplus of almost $9 mill-'Lon during the fourth quarter of 1956 compared with an export surplus of $87 mil- lion for the comparable period of 1955. J -6- Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 LL O L1l U 0 O I a 0 O ~ a w m a I s.iell?a sri 3ua.rfnj uuglyW Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 Soviet Gold Sales and Balances of Trade 1953-56 Million Current US $ a/ Year Sales of Gold Free World UK Other Sterling Area 1953 150 -107 +65 -56 1954 93 -147 +63 -73 1955 70 -46 +65 -28 1956 150 -57 -25 -23 a. Adjusted. for costs of transportation. case followed hard upon manifestations of Satellite discontent, is not easily to be dismissed. It is not unlikely that the eco- nomic assistance granted to the European Satellites in 1953 and 1956 might well have provided an unforeseen strain on Soviet for- eign currency reserves necessitating the urgent sale of gold. C. Prewar Sales. Gold shipments by the USSR in the prewar period appear to have served the tradhtonal purpose of covering e deficit in its international accounts. The correlation between the export of Soviet gold and the deterioration of the Soviet balance of payments on current account is shown in the accompanying chart.* The large sales of Soviet gold during 1920-23 may be attrib- uted primarily to the economic blockade imposed on the RSFSR as an answer to the October Revolution and the peace treaty of Brest- Litovsx. The blockade, coupled with the impossibility of rapidly * Following p. 8. Soviet balances of trade in this chart are from 12/. Ruble values have been recalculated on the basis of 5.3 rubles to US $. Gold exports are from L3/. For figures on Soviet gold production, see Table 4, p. 18, below. Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 Also *of significance in thiL connection has been the rather abrupt change in the pattern of Soviet gold sales in late 1956. Most of the Soviet gold sales before November 1956 were made, not in Lon- don,* where the USSR has traditionally obtained the bulk of its ster- ling or dollars at the official rate, but in commercial centers such as Zurich, where the USSR obtained transferable sterling at a discount. The sale of approximately $75 million worth of gold on the London market (largely for dollars) in the period December 1956 - February 1957 is probably a reflection of insufficient short-term demand in Zurich for gold in this quantity. London is by far the largest mar- ket, and big sales would be more easily accommodated -there. B. Other Postwar Sales. It was not until 1953 that the USSR reemerged in the postwar period as a major exporter of gold. The absence of any significant sales during 19+6-53 might be attributed, at least in part, to the depressed price of gold in the postwar years and the extensive exploi- tation of Satellite resources and foreign reparations which, in the form of unrequited imports, obviated the necessity for any large-scale Soviet gold financing. Perhaps the most plausible motivation for the large Soviet gold sales in 1953-54, as shown in Table 1,** was the anticipation of a need to purchase quantities of goods in the Free World in order to implement the increased goals in consumer goods set for the Soviet population by the Malenkov regime. Although the ambitious objectives of the Malenkov import drive were soon proscribed by the accession to power of Khrushchev, imports of consumer goods from the Free World did show a spectacular, if short-lived, rise. Such imports of con- sumer goods in 1954 were more than twice the level of 1952 and un- doubtedly contributed to the peak Soviet import surplus with the Free World in 1954. It was apparently in anticipation of this deficit that the USSR decided to bolster its sterling balances in London by selling gold. To what extent the Soviet gold sales in 1953-54 were related to the East German uprising in June 1953 is still unclear. The parallel of Soviet gold sales in both 1953 and 1956, which in each * Only 37 percent of Soviet gold sales were reportedly made in Lon- don during 1956, a small amount in comparison with the percentages of previous years. ll ** Table 1 follows on p. 8. S-E-C-R-E-T Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 expanding Soviet export capability, left the fledgling state with only one alternative -- to pay for its needed imports in gold. The largest banks in the UK, France, and the US, however, refused to accept gold of Soviet origin either in coin or in ingots. The Soviet gold which did manage to filter into Europe, first through Estonia and then through Sweden and other countries, was exported often at a discount of as much as 15 to 25 percent. The gold blockade was lifted only after the conclusion by the RSFSR of a trade agreement with the UK in March 1921, concurrent with the adop- tion of the liberal New Economic Policy. The determined Soviet quest for adequate gold and currency reserves during the formative years of the Soviet state was frus- trated by a chronic payments deficit on international account and an inability to expand domestic gold production rapidly, as shown by the repeated governmental and Party directives stating the necessity of accumulating currency reserves and of achieving a favorable bal- ance of trade. The resolution of the XVth Party Conference, which was held in 1926, noted that the Party directives of the previous Party con- gresses regarding a favorable balance of foreign trade had not been carried out and pointed out that "with all firmness the conference emphasizes the necessity of such a quantitative relationship between exports and imports and would definitely guarantee a favorable bal- ance of trade and payments to an extent that would ensure the accumu- lation of currency reserves." l1/ Instructions on accumulating currency reserves were also given in December 1927 by the XVth Party Congress, which considered this problem together with directives for the First Five Year Plan (1928-32) and the Party's economic policy. The decision of the XVth Party Congress on this problem stated: On the basis of the general course of for- eign trade (maximum trade relations in order to strengthen our production base and grow more inde- pendent of the capitalist world), it is necessary to devise a plan for foreign trade which will assure a favorable balance. An active balance together with an increase in the domestic mining of gold is the principal source for the accumu- lation of currency reserves, which is especially -9- Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 Approved For Release 1999/09/21 CIA-RDP79T00935A000400340003-1 necessary in connection with the deterioration of relations between the capitalist world and the USSR and the possibility of a poor harvest or crop failure. 15 The scarcity of exportable commodities was further aggra- vated during the First Five Year Plan and the depression, when prices of raw materials and agricultural products -- bulk of Soviet exports -- drastically declined in the world market. So urgent, however, was the need for imports to caxry out the First Five Year Plan that imports were expanded in spite of the impossi- bility of paying fully for them out of the receipts derived from current export trade. Instead of the favorable balance of trade so fervently called for by almost every Party pronouncement, the actual developments in Soviet export and import trade resulted in a persistently unfavorable trade balance between 192'7 and 1932 (1929 excluded) and contributed to the growing indebtedness of the USSR shown in Table 2. Soviet Foreign Indebtedness J Selected Years, 1924--38 Million Current US Year Amount Year Amount 1924 80.5 1930 394.3 1925 l09.4 1931 721.6 1926 157.3 1934 232.0 1927 201.5 1935 71.6 1928 250.0 1936 44.3 1929 317.0 1938 0 Debts had to be paid, and a favorable balance of trade was therefore essential. All previous efforts to augment the export capability of the USSR had met with little success in the light of Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 the adverse terms of trade on the world market and the ambitious growth rates of the domestic Five Year Plan. The solution now was to be found in a drastic curtailunt of Soviet imports. The conclusion of the First Five Year Plan, the Soviet policy of restricting imports, the improvement in its terms of trade, and the considerable increase in gold production which be- came available for a rapid repayment of foreign indebtedness were factors which contributed to a marked improvement in the Soviet balance of payments. The USSR was able to achieve an active bal- ance of trade for every year between 1933 and 1938 and accumulated fairly substantial foreign exchange balances, particularly in pounds sterling. A variety of explanations has been offered for the appar- ent anomaly of substantial Soviet gold exports in 1937 and 1938, primarily to the UK, with which the USSR had enjoyed a relatively large export surplus in both years. It has been suggested that such sales stemmed from a Soviet desire to distribute resources among foreign financial centers where they would be available, in the event of an emergency, for the purchase of needed arms and supplies. A more :plausible explanation may be found, however, in the Soviet assertion that the sum of more than $500 million in gold transferred to the USSR for safekeeping by the Spanish Re- publican government in October 1936 was extensively drawn upon by the Loyalist forces, the last such drawing having been effected on 8 August 1938. 17/ III. Gold in Intra-Soviet Bloc Settlements. Gold is not a significant factor with respect to intra-Soviet Bloc settlements. Because-the total cost of Soviet deliveries to each of the Satellites in the course of a year is planned to be equal to the sum of deliveries made by each of these countries to the USSR, the amounts credited by Gosbank to the clearing accounts of banks of specified countries should be equal, at the end of the year., to the amounts which each bank credited to the clearing account of Gosbank. In such a way the total reciprocal claims between countries, resulting from the exchange of goods between them, are canceled out by bookkeeping entries, without the transfer of gold or currency. If imbalances occur in payments balances among the Satellites, a balance is achieved by credit extension or by subsequent goods deliveries. Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 Since World War II, however, gold has been increasingly used by the USSR as a medium of economic assistance. Evidence of this use of Soviet gold has been tae economic aid extended to "friendly" countries in the form of gold or of gold and foreign currency loans, as shown in Table 3. Table 3 Reported Soviet Gold Loans a/ Selected Years, 1947-56 Million Current US a.. 1$ b. Estimated. c. An undisclosed portion of this sum was in gold and the remainder in freely convertible currency. Country Year Amount Poland 1941 28 Czechoslovakia 1948 120 b/ Finland 1954 10 1955 10 Yugoslavia 1956 30 c/ Poland 1956 13 IV. Gold and Its Internal Uses. A. Gold and the Ruble. During the period of "War Communism" (1918-21) the USSR ex- perienced a severe inflation which wiped out the major part of the value of the old Russian currency. This period was also marked by an attempt to build up a new economic order in which money would be superfluous, and a special commission of the Supreme Economic Coun- cil was appointed to substitute a labor unit of account for the capitalist monetary unit of account. 19/ By the end of this period, however, the value of currency had fallen to about one three-hundred- thousandth of the 1914 value, and the regime was threatened by a total economic collapse. 20/ Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 The introduction of the New Economic Policy placed the whole question of money and gold in a different perspective. The IXth All-Russian Congress of Soviets, held late in 1921, instructed the Peoples Commissariat of Finance to assume the task of "re- storing a sound monetary system of currency on a gold basis." 21 This raised the question of gold reserves. In 1922 the USSR introduced a new Gosbank currency called chervonets, which represented 119.4792 grains of fine gold and was primarily for use in large transactions. Furthermore, it was backed by gold, other precious metals, and stable foreign cur- rencies to the extent of 25 percent of the value of notes in cir- culation. However, the simultaneous circulation of two types of currency, the new type gold-backed, led to a rapid depreciation of the several types of paper rubles in circulation. By the end of 1923, paper rubles exchanged in the free market for chervonetls rubles in the ratio of 3,075,000,000 to 1. As a result, a mone- tary reform in early 192+ took the old paper rubles out of circu- lation and substituted a new treasury ruble valued at one-tenth of 1 chervonets, but not backed by gold. 22 Since 192+ there have been two types of currency in the USSR: the banknote (chervon.ets) and the treasury note. Gosbank prints and distributes notes in denominations of 10 or more rubles. These are the notes for which gold bacKing is required. In addition, treasury notes in denominations of 1, 3, and 5 rubles and coins are issued by the Ministry of Finance. Treasury notes have no re- serve requirements but may be issued in an amount not larger than the banknote issue. In practice, 92 percent of the currency in circulation in mid-1956 is reported to have been banknotes. 23 Thus it may be argued that Soviet currency is legally based on gold, but actually it is on an inconvertible paper standard. The ruble has not been redeemable in gold since 1926, and the export and import of Soviet currency has been forbidden. Furthermore, the gold reserve is not and probably never was expected to serve as an auto- matic device for controlling the amount of credit and keeping the domestic price level in line with that of other nations, as it does in capitalistic countries under the gold standard. Instead, the ruble is an entirely internal currency. Although Gosbank fixes an exchange value for the ruble in terms of foreign currencies, this exchange rate is merely an accounting device for calculating foreign trade transactions denominated in foreign currency and has no bearing - 13 - S -E-C R -E-T Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 on the domestic purchasing price of the ruble. Currently the ruble is valued by a decree at 0.222168 grams of fine gold, or the equivalent of $0.25. The legal requirement of gold backing for banknotes, how- ever, does represent an important use for Soviet gold reserves. New gold production is initially purchased by the Ministry of Finance from the gold mining industry, and sufficient gold is then sold to Gosbank to act as backing for new banknotes added to cir- culation. The remainder is held by the Ministry of Finance. Cur- rency in circulation thus does not depend on the amount of gold held by Gosbank; rather, the amount of gold held by Gosbank depends on the amount of currency in circulation. Since 1937, no data have been published on Soviet bank and treasury notes in circulation. The currency in circulation in 1948, however, has been estimated on the basis of related banking and wage data to be about 30 billion rubles. 24+ Roughly $1.5 bil- lion of gold and foreign exchange would have been required as backing for the banknote part of this currency. An appreciable quantity of gold is used in the USSR in in- dustry and in the fine arts, and a small amount is hoarded, but these amounts are difficult to estimate. A Soviet publication gives complete instructions for accounting for gold used for industrial purposes. These include: Gold as a raw material and in semifinished products (in ingots, strips, alloys, and solder); in laboratory and plant equipment and articles of all kinds; in electrolytes, reagents, salts; ... in scrap, factory wastes, cutting, filing, spatters, slag, etc. 25/ Attention is also called in this publication to a number of types of gold used for jewelry and dentistry. In addition, a number of forms are given which use as examples gold articles or ;pieces for art or industrial use weighing up to 5,000 grams. 26 It may be con- cluded, therefore, that gold is used for a sizable variety of artis- tic and industrial purposes, sometimes in relatively large quantities. -14+- Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 AccQrding to two US sources (one a competent economist who has spent a number of years in Moscow and the other an interna- tionally recognized expert on gold), Soviet uses of gold for jew- elry, dental, military, and government (metals) purposes probably are as substantial or nearly as substantial as in the Free World. 27/ A recent report, for example, indicates that genuine gold is being used to gild St. Basil's Cathedral. 28 Gold is also apparently used for hoarding. Gold now is sold freely in "wafersized pieces" by state stores at a price last reported of about 90 rubles per gram (about 2,800 rubles per troy ounce*). At the official exchange rate, this amounts to more than $700 per ounce. 29 It is reported that gold transactions in the Moscow black market in 1944-47 were so obvious that the government could not have been unaware of them. 30 Although gold is osten- sibly sold for dental purposes and perhaps for the making of jew- elry, the free sale at a high price would indicate that a major aim of the government is to reduce purchasing power in the hands of con- sumers. V. The Gold Industry. A. History and Development. The determined Soviet quest for adequate gold and currency reserves led to the rapid expansion of the Soviet gold industry, and by 1933 the USSR had become the second largest gold producer in the world (after the Union of South Africa).** Expansion was initiated directly by Stalin in 1927, when an All-Union trust, Giav- zoloto (Main Administration of the Gold and Platinum Industry), was formed under his personal supervision. 31 The timing of this drive to expand gold production was apparently associated with the need for gold to help pay for essential imports under the early Five Year Plans. As a result, the gold industry had a very high priority throughout the rest of the prewar period. During the First Five Year Plan a number of important under- ground gold mines in the Urals, Kazakhstan, and the Transbaykal came into production. Increased production in the early 1930's was largely due to these new mines. * Ounce figures are given in troy ounces of fine gold throughout this memorandum. * For estimated world gold production and world gold holdings, see Tables 5 and 6, Appendix A, p. 22, below. Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 The rapid increase in gold production in the middle and late 1930's, on the other hand, was primarily due to placer mining. Part of this increase was the result of the success of the Soviet govern- ment in inducing a large influx of private prospectors into the gold industry. This encouragement of private enterprise is a reflection of the priority accorded the gold industry in this period. This in- crease is also attributable to the operations of Dal'stroy, an or- ganization established in 1932 under the &D to exploit the mineral resources of Northeast Siberia with forced labor. This organization was completely separated from Glavzoloto. Little is known about the wartime activities of the gold in- dustry except that it was not proscribed as was gold mining in many other parts of the world. It is probable, however, that a large part of the Dal'stroy gold mining labor force was transferred to construction and other types of mining. 32 Similarly, some of the most important mines under Glavzoloto are reported to have been closed. 33/ The USSR had good reason not to waste its manpower and ma- chinery on gold production during the war. Its imports consisted almost entirely of lend-lease goods. The limit of those deliveries was set by the capacity of the Allied convoys and of the transport facilities through Iran. Had the USSR attempted to buy :Large amounts of other imports, the total quantity of goods reaching it could not have been increased. Gold production, accordingly, could have served little purpose in fighting the war. The gold industry in the postwar period is believed never to have regained its prewar level of output. This is probably one reason for the virtually complete blackout on postwar information about the gold industry, although a state secrecy law of June 1947 may also be a factor. There have been no announcements of great successes or even of increases in output above the level of the previous year. Gold production in recent years is estimated to be about one-half the 1940 level, or about 5 million ounces. B. Production. The USSR has released no official statistics on its gold pro- duction in terms of quantity since 1927. Production in that year - 16 - Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 amounted to 809,987 ounces, as shown in Table 4.* Estimates made by various authorities for 1927-40 were based largely on data which gave the percent of change in production from previous years, as released periodically by Soviet sources. These data indicated a Soviet gold production in the late 1930's of about 5 million to 6 million ounces a year. These estimates, however, were almost certainly too low because the percentage figures on which they were based only covered production by Glavzoloto. The very existence of another major gold producer, Dal'stray, was a closely guarded secret at the time the estimates were made. Only in the postwar years has information become available on I)al'stroy's operations. In the middle and late 1930's, however, some statements on the size of Soviet gold production by a Soviet official should have indicated that the estimates of 5 million to 6 million ounces were probably low. In 1935, Serebrovskiy, the head of Glavzoloto, stated several times that the USSR would become the largest gold producer in the world within a period of 2 to 5 years. 34 (South African pro- duction had amounted to 10.48 million ounces in 1934.) In March 1937, Serebrovskiy stated that gold production in 1936 had exceeded 10.6 mil- lion ounces. 35 It is believed that Dal'stroy's gold production is the main reason for the difference between this figure and the esti- mate based on percentage data. Dal'stroy's gold production is esti- mated to have reached a'level of about 5 million ounces by 1936 and to have continued at this level until 1941. Total Soviet gold production, accordingly, is estimated to have been in the vicinity of 10 million ounces a year during 1936-40. There are a number of reasons why gold production failed to recover after World War II. In the first place, prewar production costs were extremely high. Average cost was reported by first-hand observers to have been 15 rubles per gram of fine gold in 1935-36. 36 If costs in the gold industry had increased in line with the increase in prices of other Soviet. nonferrous metals between 1936 and x.949, when a price reform was supposed to have brought costs and prices in line, 37 the average costs of Soviet gold production in 1949 would have been about 60 rubles per gram. On the world market a fine gram of gold was worth only about $1.12, or less than 6 rubles at the official exchange rate. In the second place, the purchasing power of Table follows on p. 18. Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 I n ^ ^ 1 n ^ n w n r-I r1 H H rH r4 r1- r4 r-1 H r-I r-I r-1 r1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 00000000000000 00000000000000 I ^ 1 . h - n n ^ ^ ^ A ^ w N N N N N N rr (0-) cr)._i- - .:1- P-1 rd U Q) 0 r-I 0 C- C\j H N H ?r1 Cn b a) W rni~ O\ OO\\OO\\OO\\0\\OQ\OON r-I r-I r-I r'1 r--I r-I r-1 r-I r-I r-A r-I r-H r-I cd a 0 El 0 r)) rI Q 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 ^ ^ w m m rn cr1 r nl ..f - _:I, Lr\ Lr\ L\ Lr\ 000000000000000 p C G\ a N- O O CC 00 00 0 00 CO 00 00 r-I H r-I N in ~- lam- 0 0 0 ON r1 CO r-I r-I r-I r-I 0 0 0 0 0 0 0 0 0 0 0 r'>NU\000000 1 ^ 1 1 n n r-I N Lr\ Lr\ U\ Lf\ Lr\. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 HQ-0000000000000 CO goo C-0 D Lr1rnMCr)COO 0 I n 1 I n h 1 n n ^ n r-I r-1 r-I N N nr) LC U\ Lr\_:t Lr\.~ C) r-I N a) ON 0 r-4 M M rY1 M \,O rr CO ()\ O\ O\ ON 0\\ O\ 0\ a\ C\ 0\ O\ O\ O\ 0\ O\ O\ ,5-1 r-I r-I r-I r-I r-1 14 r-1 r1 H H r-1 H r-i r-I r-? 0 0 0 0 0 0 0 0 0 0 O 0 0 0 0 0 0 0 0 0 0 rn 0 ? 0 n 0 n 0 ^ 0 n 0 h 0 n 0 n 0 0 Lr\ ral C\I Cl H a-:' r_-) CO a r-I 0 O a) a) a) 10 PL, 9) u-\ Cn O Hv 4~0 d 0 cd rH +m) p N d -rq rl ca Co F~ 0 Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 gold in world markets has declined as a result of inflation to roughly one-half the prewar level. As a result, gold production in the rest of the world (excluding the Union of South Africa, where costs are reduced because uranium is obtained as a byprod- uct) declined by about 4+0 percent from 1938 to 1955 in spite of the introduction of gold mining subsidies by a number of countries. Finally, Soviet gold. reserves at the end of World War II were al- ready so substantial. that the incentive to produce at almost any cost had disappeared.. In the postwar years, gold production by Glavzoloto is estimated to have increased slowly from the wartime low, partly as the result of miners returning from the wax and partly as the result of increasing production of gold as a byproduct in the production of copper, lead, and zinc. Gold production by Dal'stroy, on the other hand, is estimated to have remained at a low level as the re- sult of the postwar emphasis in this area on uranium and other new strategic ores, the depletion of the richest deposits, and the various forced labor amnesties after the death of Stalin. VI. Gold Reserves. Since World War II the consolidation of Soviet military power, the rapid technological development of Soviet industry, and the creation of a Communist trading area apparently made the prewar quest for the security of large gold and currency reserves less im- perative. "Under present conditions," states a recent Soviet text- book, "when the economic and political might of the Soviet Union is undergoing a gigantic growth, when it is no longer a socialist state surrounded by antagonistic capitalist countries, when two parallel world markets exist, and when the countries of the peoples democracies, friendly to the USSR, have every year a greater share of its trade, the significance and function of currency reserves have changed." 38 In contrast with the constant urgings for a favorable trade balance during the formative years of the Soviet state, the USSR today shows a strong preference for balancing imports with merchan- dise exports. The Soviet foreign trade Journal Vneshnyaya torgovlya states that "In trade with all countries the USSR does not strive to sell more commodities than is necessary for the payment of its purchases and the covering of its other foreign trade obligations." 39/ - 19 - Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 The relatively minor contingencies which in the past have called forth Soviet gold sales for required convertible currencies have led to much Free World speculation as to the rationale behind the size of Soviet currency reserves. Apparently, in spite of its sizable gold holdings, the USSR has been wary of augmenting its foreign cur- rency reserves beyond a minimum predetermined to afford it the flex- ibility and maneuverability in foreign trade which it so highly prizes. Deep-seated suspicion of Free World intentions and lack of confidence ir the "constant currency chaos of the capitalist world" appear to be the major factors which inhibit any intention on the part of the USSR to expand its foreign currency reserves, Although it is true that the gold portion of the foreign exchange reserve is exposed to the danger of a drop in the world price of gold, any sig- nificant decline appears remote in view of the current US policy with respect to gold. It is, rather, the dangers implicit in large holdings abroad of foreign currencies -- that is, the possibilities of devalua- tion, blocked accounts, and the like -- from which the USSR would appear to be relatively unprotected. From this stems the constant admonition from Soviet economists that foreign currency reserves of the USSR must not exceed a prescribed volume consonant with maneu- verability in foreign trade. The absence of official returns on gold movements, the difficul- ties of estimating Soviet gold production, and the doubtful nature of the data on the gold reserve of Gosbank as published irregularly before World War II, all make tenuous any estimate of the current level of Soviet gold reserves. Estimates have suggested, however, that the current gold reserves of the USSR total approximately $4 bil- lion. 40 Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 S -E -C -R -E -T APPENDIX A STATISTICAL TABLES Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 Table 5 Estimated World Gold Production a 1948 and 1950-56 Million Current US $ at US $35 per Troy Ounce of Fine Gold Area 1948 1950 1951 1952 1953 1954 1955 1956 Union of South Africa 405 408 403 414 418 463 511 556 USSR 140 140 140 175 175 175 175 175 Canada 124 155 154 157 142 153 159 154 us 71 80 66 67 69 65 66 64 All other b/ 45 203 24 214 220 216 209 211 World total J 785 986 967 1,027 1,024 1,072 1,120 1,160 a. Ell b. Excluding Communist China, Bulgaria, Czechoslovakia,, Hungary, Rumania, and North Korea. Estimated World Gold Holdings December 1956 Million Current US us 22,058 USSR 4,000 UK 1,800 Switzerland 1,676 Canada 1,103 West Germany 1,494 Belgium 928 Netherlands 844 Th F, EPU, and - BIS aJ 1,995 All other 5,702 World total 41)600 a. International Monetary Fund, European Payments Union, and Bank for International Settlements. b. Excluding Communist China, Bulgaria, Czecho- slovakia, Hungary, Rumania, and North Korea. Approved For Release 1999/09/21 : CARPJP9TQp935A000400340003-1 Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 S -E -C -R -E -T APPENDIX B SOURCE REFERENCES Evaluations, following the classification entry and designated "Eval.," have the following significance: Source of Information Information Doc. - Documentary A - Completely reliable B - Usually reliable C - Fairly reliable D - Not usually reliable E - Not reliable F - Cannot be judged 1 - Confirmed by other sources 2 - Probably true 3 - Possibly true 4 - Doubtful 5 - Probably false 6 - Cannot be judged "Documentary" refers to original documents of foreign governments and organizations; copies or translations of such documents by a staff officer; or information extracted from such documents by a staff officer, all of which may carry the field evaluation "Documentary." Evaluations' not otherwise designated are those appearing on the cited document; those designated "RR" are by the author of this report. No "RR" evaluation is given when the author agrees with the evaluation on the cited document. 1. Notkin, A. Ocherki teorii sots ialisticheskdgo';vosproizvodstva (Essays in the Theory of Socialist Reproduction), Moscow, 194b, p. 62. U. Eval. RR 3 .? 2. Lenin, V.I. Selected Works, vol 9, New York, 1943, p. 299. U. Eval. RR 2. 3. Smirnov, A.M. Mezhdunarodnyye raschety i kreditnyye otno- sheniya vo yneshney torgoyle SSSR (International Accounts and Credit Relations in the Foreign Trade of the USSR), Moscow, 1953, p ? 95 ? U U. Eval. RR 2. Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 1.. Smirnov, A.M., and Lyubimov, N.N. Vneshn a a torgovlya SSSR 29ign Trade of the USSR), Moscow, 1954, p. 18, 102. U. 'DD n 6. 7. Ibid. 8. The Times, London, 5 Max 57. U. Eval. RR 3. 9. CIA. FDD Translation no 636, Supplement to 1956 Hungarian Statistical Handbook: Important Data on the Period Oct-Dec 1956, 26 Apr 57, p. 27. OFF USE. 'val. RR 2. 10. The Times, London, 11+ May 57. U. Eval. RR 2. 2 5 May 57 . U. Eval. RR 2. 11. Bank for International Settlements. Press Review, no 69, 8 Apr 57, p. 2. U. Eval. RR 2. 12. Bakulin, S., and Mishustin, D. Vneshnyaya torgovlya SSSR za 20 let, 1918-1937 (Foreign Trade of the USSR for 20 Years, 1918-37), Moscow, 1939. U. Eval. RR 2. 13. Federal Reserve Bank of New York. Research Memorandum, Soviet Gold Reserves and Production, 27 Nov 53. C. Eval. RR 3. 11+ KPSSSR v resol tsiyakh i reshen.iyakh s"yezdov, konferentsiy i plenumov (CPSU in the Resolutions and Decisions of the Con- gresses, Conferences, and Plenary Sessions of the Central Committee), pt 1, Moscow, 1951+, p. 309. U. Eva:L. RR 2. 15. Ib id . , p. 456. u. Eval. RR 2. 16. Baykov, A. Soviet Foreign Trade, Princeton, 191+6, p. 50. U. Eval. RR 2. Prokopovicz, S.N. (edr). Quarterly Bulletin of Soviet-Russian Economics, no 3, Jan 1+0, p. 75. U. Eval. RR 3. 17. Pravda, 5 Apr 57. U. Eval. RR 2. 18. CIA. CIA/RR IM-1+33, Soviet Economic Assistance to the Sino Soviet Bloc, 20 Aug 5 . S NOFORN. NIS 2 , USSR, sec 65, chap 6, Jan 57. S. 19. Arnold, A.Z. Banks, Credit, and Money in Soviet Russia, New York, 1937, p. 107-110. U. Eval. RR 2. 20. Livshits, F.D. Bankovskaya statistika (Banking Statistics), Moscow, 191+8, p. 3b4. U. Eval. RR 2. 21. Yurovskiy, L.N. Currency Problems and Policy of the Soviet Union, London, 1925, p. 2. U. Eval. RR 1. 22. Arnold, op. cit. (19, above), p. 11+6-171+. U. Eva1. RR 1. - 21+ - Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 25X1A5a1 25X9A1 24. Holzman, F.D. Soviet Taxation, Cambridge, 1955. U. Eval. xx J. 25. CIA. FDD. U-6432, 1 Sep 54, Accounting or t'recious Mecais in Industrial Enterprises. U. Eval. RR 2. 26. p. 7. U. Eval. RR 2. 27. 28. New York Times, 7 Mar 54. U. Eval. ER 2. 29. 30. 31. Serebrovskiy, A.P. Na zolotom fronte (On the Gold Front), Mos- cow, 1936, p. 227. U. Eval. RR 2. 32. International Monetary Fund Staff Memorandum, no 385, 3 Aug 49, Estimates of Soviet Gold Production, p. 10. C. Eval. RR 2. 33. Army, FEC. No 3 1 5, 7 Apr 149. S. Eval. RR 2. Army, 7707 ECIC. RT-587-51, 28 Jun 51. S. Eval. RR 2. 34. Za industrializatsi , 1 May 35, p. 1. U. Eval. RR 3. Ibid., 2 Nov 35, p. I. U. Eval. RR 3. Ibid., 12 Dec 35, p. 3. U. Eval. RR 3. 35. Business Week, 13 Mar 37. U. Eval. RR 3. 36. CIA. OCI, Intelligence Digest, no 251824, nd. S. Eval. RR 2. 37. 38. Smirnov and Lyubimov, oa. Lit. (4, above), p. 101. U. Eval. RR 2. 39. Z&XSA. a a for ovlya, no 4, 1952, p. 4. U. Eval. RR 2. 40. 41. International Monetary Fund. International Financial Statistics, Jun 57, p. 21. U. Eval. RR 2. Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1 S-E-C-R-E-T NOT RELEASABLE TO FOREIGN NATIONALS NOT RELEASABLE TO FOREIGN NATIONALS S-E-C-R-E-T Approved For Release 1999/09/21 : CIA-RDP79T00935A000400340003-1