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• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83T00233R000200150002-5
• Release Decision: RIPPUB
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• Document Page Count: 59
• Document Creation Date: January 12, 2017
• Document Release Date: March 22, 2011
• Sequence Number: 2
• Publication Date: April 1, 1982
• Content Type: REPORT

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Directorate of Secret
Intelligence
USSR Monthly Review
Secret
SOV UR 82-004
April 1982
cop- 13 5
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Directorate of
Intelligence
USSR Monthly Review
The USSR Monthly Review is published by the
Office of Soviet Analysis. Comments and queries
regarding the articles are welcome. They may be
directed to the authors
Secret
SOV UR 82-004
April 1982
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Contents
Defense and the Perspective: Defense and the Economy-
Soviet Economy Coping With Less
The conflict between the requirements of defense and the needs of the
economy is posing an ever sharpening dilemma for Soviet leaders.
Unless the current leaders make significant changes in their resource al-
location policy, particularly regarding defense, they will leave a legacy
of problems carrying high political, social, and economic risks.
Guns and/or Butter in the 1980s
As Soviet economic performance continues to deteriorate in the 1980s,
the leadership will be faced with difficult guns-versus-butter choices.
This article describes the economic predicament and introduces a
measure of the cumulative effect of defense spending on economic
performance-called the dynamic burden of defense.
Moscow's Perception of US Defense Policy
Soviet leaders regard US defense plans with concern and may have
adjusted their 198 1-85 Five-Year Plan to permit increases in defense
spending if necessary. They seem uncertain of the outcome of the US
Congressional debate and of Washington's will to sustain increased
defense spending over the long term and, therefore, apparently have not
yet made any major changes to particular Soviet military programs. We
expect Moscow to wait and see, while keeping up public pressure on
Washington to reduce projected US programs.
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By using Western technology, the Soviets have cut the time and
resources needed for designing and producing new weapons, and they
have eased the defense burden by importing Western goods to help the
strained civilian economy. Their growing need for goods and technology
in the 1980s will give the West a limited ability to hamper Soviet
military programs by restricting trade and credits
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A Case Study in Resource Competition
Soviet armored vehicle programs take a large share of the resources that
could be used in the production of transportation equipment critical to
the civilian economy. Over the past decade, increases in tank production
have coincided with declines in the output of railcars and locomotives,
and production of wheeled armored vehicles has apparently limited
growth in the output of general purpose trucks
Outlook for Soviet Military Manpower in a Decade of Shortage
In the 1980s Moscow will have fewer youths available for military
service, and a rising proportion of them will be non-Slavic. Rather than
cut the size of the military, we believe the Soviets will shift the costs of
these demographic changes to the civilian economy. Those costs will be
relatively small.
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Attack Forces
A cost analysis of the strategic force options forecast in National
Intelligence Estimate 11-3/8-81 indicates that cumulative spending for
Soviet intercontinental and peripheral attack forces during the 1981-90
period may be 30 to 65 percent greater than outlays for these forces in
the previous 10 years. However, because outlays for these forces
represent only 10 to 15 percent of projected total defense expenditures,
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increases in spending for the strategic attack mission alone probably will
not significantly affect either the growth of overall expenditures or the
resources available to the civilian economy.
A ruble-based comparison shows that the costs of Soviet defense
activities exceed comparable US costs by 30 percent. This is less than
the 50-percent difference we derive from a dollar-based comparison.
Whichever currency is used, however, it is clear that the Soviet resource
commitment to defense exceeds that of the United States.
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Other Topics Succession Maneuvering in the Kremlin) 41 25X1
President Brezhnev has signaled his preference for Politburo member
Konstantin Chernenko as his successor. Some behind-the-scenes opposi-
tion to this move has developed, and succession maneuvering is likely to
intensify in the coming months.
The USSR's cash payments problem is forcing Moscow to turn to costly
short-term financing to pay for Western grain. Since last fall, the
Soviets have raised more than $1 billion in short-term credits to finance
grain purchases
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Debate Over Economic Reform
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Grain Crop for 1981 I 54
Soviets Disclaim Intent To Deploy Nuclear Weapons in Cuba F--] 55
Crime Fighting in Georgian SSRI 56
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Secret
Defense and the
Soviet Economy
Perspective: Defense and the Economy-
Coping With Less
The conflict between the requirements of defense and the needs of the
economy is posing an ever sharpening dilemma for Soviet leaders. They
find themselves confronted by a more hostile international environment at
a time when steadily worsening economic conditions both at home and in
Eastern Europe are aggravating the burden of their defense effort.
Economic choices are becoming increasingly difficult, particularly in the
context of an impending succession struggle that will politicize these
choices and work against changes in basic priorities in the near term. If the
current leaders continue to resist making significant changes in their
economic and military policies, however, they will leave their successors
with a legacy of problems carrying high political, social, and economic
risks.
The articles in this issue describe the rising pressure on the Soviet economy
created by an expanding defense effort and-in the Viewpoint section-the
difficulties associated with any assessment of the defense burden.
The economic problem is inadequate growth. Although the economy is still
expanding, its rate of growth is falling sharply, and we expect this
slowdown to continue through the 1980s. This predicament has resulted
from rising resource costs, falling increments to labor and capital, short-
falls in agriculture and industry, a sharp erosion in hard currency liquidity,
and planning mistakes that have led to bottlenecks in raw materials supply
and distribution. Defense production exacerbates these problems because it
competes directly with civilian production that will be critically needed by
the economy. For example, as one article in this theme package demon-
strates, armored vehicle production programs have cut deeply into the
civilian base for transportation equipment. Such trade-offs will become
increasingly burdensome during the 1980s.
Secret
SOV UR 82-004
April 1982
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These conditions are occurring at a time when Soviet leaders see a more
aggressive US challenge to their interests globally during the 1980s,,
supported by what they view as a US defense strategy to achieve military
superiority and "increase the acceptability of nuclear war." This percep-
tion of the threat argues for more military spending, while deteriorating
economic growth demands more resources for investment. The problem is
that current trends in economic growth will no longer permit the Soviets to
have it both ways.
How will they cope? In the near term, the Soviets seem determined to
maintain the current priority accorded defense in spite of mounting
economic problems:
? On the basis of observed military activity (that is, the number of weapon
systems in production, weapon development programs, and trends in
capital expansion in the defense industries) we expect that Soviet defense
spending will continue to grow at about its historical rate of 4 percent a
year through at least 1985.
? Evidence surrounding the preparation of the 11th Five-Year Plan (1981-
85) suggested last-minute adjustments to permit increases in defense
activities in response to an invigorated US defense effort. There are also
indications that resources may have been shifted from civilian investment
to the military.
? In terms of specific changes in weapons programs in response to any US
buildup, however, the USSR will probably seek to avoid making any hard
choices until the Congressional debate over this year's defense budget has
been resolved and the shape of the US defense program becomes clearer.
? Moscow will continue to view arms control as an instrument to limit
deployment of new US weapon systems requiring costly new programs to
counter. This does not imply, however, a readiness to make major
concessions at the negotiating table, although the Soviets will appear to
be more conciliatory.
? To husband resources and limit assistance provided through subsidized
export prices, the Soviets are already selectively cutting back support to
Eastern Europe. Other Soviet clients may also feel the pinch.
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Sustaining these policies over the long term, however, could ultimately
entail unacceptable political and economic costs-costs that will be
increasingly apparent to a post-Brezhnev leadership as it struggles to
prepare its 12th Five-Year Plan (1986-90). By that time, it may be evident
that continued priority for defense spending at the expense of civilian
investment would weaken the ability of the economy to sustain higher
defense spending in the next decade and would increase Soviet dependence
on Western technology and equipment for the most advanced industrial
processes. Moreover, as the first article notes, if average annual growth in
military outlays continues at 4 percent or higher, per capita consumption
by mid-decade could well decline. Finally, any additional setbacks to East
European economies because of reduced Soviet support could lead to
increased political problems for Moscow as well as heightened East
European resistance to accelerated military force modernization.
Faced with these conditions, a new leadership will feel greater pressure to
reduce the growth in military spending in order to free up the labor and
capital resources urgently needed in key civilian sectors. In this connection,
the cost avoidance benefits of arms control agreements could assume
greater importance in Soviet policy. The critical variables are likely to be
Moscow's perception of the severity and duration of the economic slow-
down and its assessment of the cost and risk of selective alterations in the
military effort.
Whatever choices the new leaders make, Soviet power will continue to
grow. No leader likely to succeed Brezhnev will have the power initially to
push through a comprehensive package of domestic and foreign policy
programs. In the past, it usually has taken a new General Secretary about
five years to consolidate his power. Therefore, a policy shift that reduced
the military's priority claim on resources would occur slowly and probably
would not emerge before the mid-to-late 1980s. Moreover, Soviet military
investment is so large that even with reduced growth the quality and
military capability of the armed forces would continue to improve through
this decade and into the nextl
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Guns and/or Butter
in the 1980s
Since the early 1960s, the Soviets have not had to
choose between more guns or more butter. The rapid-
ly expanding economy, fueled by large annual in-
creases in labor, capital, and industrial raw materials,
ensured enough resources for both (see figure 1).
Although the economy has expanded more and more
slowly over the last two decades, its growth has
permitted Moscow to (1) amass an ever increasing
arsenal of new weaponry, (2) provide the population
with steady increases in living standards, and (3) stoke
the economic furnace with rapidly growing quantities
of investment goods.
Figure 1
USSR: Average Annual Rates
of Growth
This is no longer the case. Soviet economic growth has
fallen from nearly 4 percent per year during most of
the 1970s to about 1 to 2 percent per year since 1978.
Stagnation in the production of key industrial materi-
als has crippled growth in machinery output-the
source of military hardware, investment goods, and
consumer durables. Oil production is virtually flat and
the output of coal and steel is falling. Soft world oil
prices and no growing demand for Soviet arms are
limiting Moscow's hard currency earnings. Three
consecutive poor grain harvests have disrupted the
USSR's livestock program and worsened its hard
currency payments position. And persistent food
shortages and increased prices for luxury goods have
left many Soviet consumers with less on their tables
and less in their pockets.
The Economy in the 1980s
More important, we expect this trend to continue
through much of the 1980s as the costs and difficul-
ties of obtaining industrial raw materials and fuels
rise and the increments to labor and capital fall. First
of all, whether or not oil production falls, energy
output is clearly going to increase more slowly and
become more expensive. The entire increment in
energy production must come from Siberia, where
costs are high and infrastructure minimal. Thus, large
new investment must be made in roads, rail lines, and
pipelines-items with heavy up-front costs and long
leadtimes. Shifting the fuel balance toward natural
Per Capita
Consumption
gas will require a large buildup of distribution and
storage facilities (that is, more investment). Because
only small annual increments in total investment are
planned for 1981-85, energy exploitation and associat-
ed infrastructure will absorb an increasing share of
investment resources.
On top of the investment crunch, increments to the
labor force-declining since 1977-will continue to
decline until 1986 and will not regain present levels
until after 1990. With growth in labor productivity
nearly at a standstill, demand for labor-especially
skilled workers-is likely to increase (figure 2). But
most of the new entrants into the labor force will be
from the Muslim areas of the USSR, where labor is
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Figure 2
USSR: Growth in Labor Force and
Industrial Labor Productivity
Growth in Labor Force
Million Persons
Growth in Industrial Labor Productivity
Average Annual Percent
generally less skilled and less mobile. Thus, we expect
industry will do well to achieve an average annual
growth of about 2 to 3 percent. The outlook for
agriculture is no better. A marked-but temporary-
improvement in output is likely over the next year or
two if the USSR gets a break in the weather. But we
see no reason to believe that sustained increases in
crop yields or livestock production will be forthcom-
ing. On balance, we expect economic growth to be
only I to 2 percent per year by the mid-1980s and to
hover near the 1-percent level through the 12th FYP
(1986-90)r--]
The Defense Bite in the 1980s
Under these conditions the competition for resources
will be fierce-especially if defense spending is to
continue increasing at its historic rate of about 4
percent per year. We estimate that defense will
continue to grow at this rate through 1985 and that
the defense share of GNP will be at least 15 percent
by mid-decade. If these trends are not changed in the
12th FYP, the defense burden might approach 20
percent of GNP by the end of the decade. More
important, the defense share of the annual increment
to GNP could increase from the current level of one-
fifth to as much as three-fourths by 1990. This would
drastically reduce the ability of the Soviet leadership
to allocate additional resources to investment and
consumption, further eroding the annual growth divi-
dend that is so important in balancing the competition
for resources and stimulating productivity.
Even though the Soviet leadership has acknowledged
that defense impinges on the economy, programs now
in train as well as investment in defense facilities
through the late 1970s suggest that the Soviet Union
had planned to at least maintain the historical 4-
percent annual growth rate of defense spending. It is
equally evident, however, that the USSR's 1981-85
plan fails to account properly for the economic diffi-
culties the Soviets are facing and for the declining
ability of the economy to offset slow labor growth
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Figure 3
USSR: Energy's Share of the
Investment Increment
Figure 4
USSR: Defense-Consumption
Growth Trade-Offs
(Average Annual Growth Rate 1981-1990)
GNP Growth
at 2%
I i
-2 0 1 2 3 4 5 6 7 8
Defense Growth (%)
GNP Growth
at 1.5%
with more capital investment. The opportunities for
growth from substituting capital for labor will be
limited by the continuing decline in capital productiv-
ity as well as by the need to sink most of the
investment increment into capital-intensive projects
(for example, energy and associated infrastructure)
whose return is long deferred (see figure 3). All of this
suggests that by mid-decade the Soviets will face a
larger defense burden than they currently anticipate.
Dynamic Defense Burden
The share of GNP devoted to defense spending in a
given year can be called the static burden of defense
as it represents a snapshot picture of the burden. In
addition, defense spending also influences economic
performance over time through its cumulative effect
on economic variables. This cumulative effect is called
the dynamic burden of defense spending. The most
revealing measure of this burden for a country's
population is the change in the average annual growth
rate of per capita consumption associated with
change in the growth rate of defense spending.)
Figure 4 illustrates the trade-off between these two
economic variables assuming that the economic trends
described above result in an average GNP growth of
1.5 to 2 percent per year for the decade (with growth
in the first half of the 1980s higher than in the last
half). Under these conditions, continued growth in
defense spending at its historic rate could well lead to
declines in living standards. Per capita consumption
probably would continue to grow marginally for the
next few years, but by mid-decade would almost
certainly be in decline.'
Even at the high end of the GNP range (2 percent per
year) the trade-off between per capita consumption
and defense spending would not present a comforting
picture to a leadership bent on maintaining the steady
increases in defense that over the past two decades
have moved the USSR into a position of strategic
' This judgment is reinforced by the possibility (discussed in the
annex to this article) that the projections of GNP rest on productiv-
ity assumptions that may be too high in light of recent experience.
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parity with the United States. Growth in per capita
consumption would average less than 1 percent annu-
ally-an imperceptible gain to the man in the street.
In any case, the proclivity of the present set of Soviet
leaders to continue the historic pace of defense spend-
ing may leave the new leadership, soon to arrive, with
a legacy of problems carrying high political, social,
and economic risks.) 1
Implications
The combination of current economic difficulties, the
cumulative effect of defense spending on economic
performance, and the desire to shift from an extensive
to an intensive growth mode will increase the pressure
for change in Soviet resource allocation decisions by
mid-decade. A decision to slow the growth of defense
in the 12th FYP (1986-90)-while risky politically for
a new leadership, especially if international tensions
are high-may be given greater currency in Moscow's
deliberations, the more so if Soviet leaders perceive
that a slowdown in defense spending would have little
impact on the USSR's total military power
Because military programs require long leadtimes,
many running 12 years or longer, a reduction in the
rate of growth of defense spending is likely to have
little impact on Soviet military capabilities during this
decade. Soviet weapons that will be in the field
through the I 980s will consist primarily of systems
already in the forces as well as those now entering
production and in the late stages of development.
Decisions to scale back defense procurement-that is,
to reduce the acquisition of military systems at the
margin-are unlikely to have a major impact on the
overall character of deployed forces until the 1990s.
Finally, although a reduction in the rate of growth of
defense spending in the mid-to-late 1980s could delay
force improvements in some areas and pose difficult
choices for Soviet defense planners, moderating the
growth of spending for selected weapon systems could
facilitate the allocation of additional resources to
critical bottlenecks in the civilian economy.
Annex: Estimating the Dynamic Burden of Defense
To estimate the dynamic burden of defense, an econo-
metric-optimal control model of the Soviet economy
called SOVCON has been developed. This annex sets
forth some of the broad considerations behind its
specification.
Gross Output-Final Demand Linkage
Conventional macromodels of the Soviet economy
frequently incorporate only a general consistency
between production of goods and their final uses-
consumption, investment, and defense. SOVCON em-
phasizes this linkage by incorporating the following
input-output sectors:
? Energy
? Industrial Materials and Infrastructure
? Civilian Machinery
? Weapons Production and Repair
? Construction
? Consumer Goods and Services and Other.
These six sectors support the production of consumer
goods, producer durables, and defense hardware and
permit the model to account for generalized bottle-
necks that may occur in the economy (for example,
shortages of raw materials). The model also assumes
that existing capital cannot be transferred between
any of these sectors in the short run (that is, within
one year). This assumption is particularly relevant to
the civilian machinery and weapons production sec-
tors because it is normally assumed in econometric
models of the Soviet economy that capital is transfer-
able from defense to civilian machinery production on
demand.
Allocation of Labor and Investment
Most macromodels assume that labor and investment
are allocated to sectors of the economy based on
historical trends or Soviet plan data. When a change
in the end-use composition of GNP is specified, say
between consumption and defense, the composition of
the supporting gross outputs-energy, industrial ma-
terials, and so forth-and the allocation of labor and
investment to the sectors will vary. However, to
allocate labor and investment to the various sectors of
the economy, some criterion is needed. SOVCON
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assumes that the objective of the planners is to
increase consumption as much as possible given a
specific rate of defense growth between 1980 and
1990 and a specified average annual growth rate for
GNP.
Soviet Production Relationships
The production functions in the model summarize the
relationship between the growth of output and the
growth of resource inputs in each sector. The results
for 2-percent growth shown in figure 4 were based on
a Cobb-Douglas production function that assumes
that the growth of output per worker bears a fixed
relation to the growth of capital per worker. This
fixed proportion is a measure of the responsiveness of
output with respect to capital.
In the Soviet Union the responsiveness of output to
infusions of new capital has been declining rapidly-a
fact that complicates the estimation of Soviet produc-
tion relationships and markedly biases the trade-off
relationship obtained using Cobb-Douglas production
functions.
There also are production functions in which the
capital-responsiveness of output is not a constant. For
example, a nonlinear relationship between the growth
of output per worker and the growth of capital per
worker, called the Variable Elasticity of Substitution
(VES) production function, "explains" the historical
data since 1960 more satisfactorily than the Cobb-
Douglas function. The resulting trade-off curve gives
much more pessimistic results for per capita consump-
tion than the Cobb-Douglas function. However, the
use of the VES production function may fail to
sufficiently credit the Soviets with an ability to arrest
the decline in capital responsiveness in the late 1980s
and may therefore result in a somewhat pessimistic
forecast. Nonetheless, the limited availability of re-
sources through the mid-1980s, together with the
declining trend in capital and labor productivity,
suggests that the outlook for per capita consumption
may be somewhat worse than depicted in figure 4.
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Moscow's Perception of
US Defense Policy
The USSR's leaders have become increasingly pessi-
mistic in assessing the prospects for Soviet-American
relations and the meaning of the newly assertive US
foreign and security policies. While some of the
leadership, most notably Defense Minister Dmitriy
Ustinov and Chief of Staff Nikolay Ogarkov, argued
throughout most of 1981 for a "worst case" assess-
ment of American intentions, other people with access
to policy circles were maintaining that US policies
might prove to be more "pragmatic" and accommo-
dating than the tough "rhetoric" in Washington
implied. But these relatively "optimistic" views have
not reappeared since the imposition of sanctions fol-
lowing the declaration of martial law in Poland, and a
broader consensus appears to have emerged within
Moscow about the Reagan administration's inten-
tions.
The essential elements of this consensus have now
been blended into a sophisticated public campaign
emphasizing that the United States:
? Has decided to adopt policies that seek out opportu-
nities to challenge Soviet interests abroad and to
exploit Soviet weaknesses at home.
? Is determined to achieve military superiority to
support this more aggressive policy.
? Is seeking to "increase the acceptability of nuclear
war" and to develop forces that will permit a "first-
strike" strategy.
One purpose of this campaign is to blame Soviet
economic problems on US and NATO policies and to
prepare the Soviet people for additional sacrifices.
President Brezhnev, in his speech to the Trade Union
Congress on 16 March, underlined this theme when
he charged that the "militarist line and aggressive
policy" of the United States had forced the USSR to
divert "considerable resources, to the detriment of our
plans for peaceful construction." It is not certain what
the kremlin thinks will be the outcome of administra-
tion efforts to improve the US defense posture, but it
is clearly worried about some features of American
programs.
The planned US military buildup comes at a time of
increasing economic and political vulnerability in the
Soviet Union. Moreover, the leaders are facing these
challenges in the context of a succession process that,
in many respects, is already under way. Under these
circumstances, it will not be surprising if the Soviets
have serious difficulty in proceeding from the general
consensus described above to a set of specific decisions
about how to adjust their own military programs. F_
Evidence of Soviet Apprehension
There is substantial evidence that Moscow is aware of
the threat to its economy posed by the US defense
buildup. Two members of Central Committee depart-
ments have made statements to East European audi-
ences that suggest the leadership is deeply worried
about the prospect of increasing allocations to defense
and the difficulties that this would impose on econom-
ic relationships among the Warsaw Pact allies. One
stressed that the arms race is a "very heavy burden
for us," which impedes "implementation of many of
our economic concepts."
The notion that Washington's decision to improve the
US military posture was designed to strain an already
troubled Soviet economy was evident as early as the
At a public lecture in Leningrad in February, a
questioner asked whether the United States could
"force the Soviet economy to its knees through trying
to keep up with military expenditures." Such evidence
of concern is not unexpected in view of the extensive
and rather sophisticated public treatment of US
defense spending plans over the last six months.
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Articles carrying detailed analysis of the US military
budget have appeared in the central press, and the
November 1981 issue of the journal of the Institute of
the USA and Canada (IUSAC) carried a detailed
analysis of the five-year defense budgets of the Carter
and Reagan administrations.
Doubts About US Capacity
For some Soviets, apprehension over a major US
defense buildup is moderated by their belief that the
United States has neither the will nor the capacity to
alter the balance significantly
reported in the fall of 1981 to be arguing privately to
Soviet government officials that the US economy and
domestic political realities would frustrate the admin-
istration's plans for force modernization and expan-
addition, Moscow has revealed many of its negotiat-
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Some Soviets have conceded to US officials that the
USSR "made mistakes" in Afghanistan and Poland
and that Washington would find Moscow more ac-
commodating if only the Reagan administration
would moderate its policies. Other Soviets have ar-
gued that a "harder line" is emerging in Moscow and
that the United States would do well to soften its
position now, before this policy takes hold.
sion
More recently, this theme has emerged in a published
analysis by IUSAC Deputy Director Zhurkin, who
argued that the Reagan administration's projections
for allocating 7 percent of GNP to defense "orobabl
The Public Campaign
In order to influence opinion in the West, the Soviets
have orchestrated an unusual public campaign to
counter US assessments of Soviet military power. In
response to the US Defense Department's Soviet
Military Power, they have published three substantial
booklets. Although these do not present independent
Soviet data, they are an unprecedented public presen-
tation of Soviet views on theater and global military
Prospect of Increasing Soviet Defense Spending
Despite public expressions of doubt that US plans
could be realized, during early 1981 the Soviets
apparently did make some adjustments to the draft
1981-85 Five-Year Plan that suggested preparations
for increasing defense expenditures
Soviets were making eleventh-hour changes to their
draft 1981-85 economic plan to incorporate large
increases in defense activities. In September a mid-
level official stated that 2.4 billion rubles had been cut
from the budget of the Ministry of Nonferrous Metal-
lurgy-about 15 to 20 percent of its planned capital
investment in the 11th FYP. The resources were to be
diverted to the military.
balances.'
Several Soviets have commented privately that the
Kremlin's authorization of such public discussion
represents a sharp break with previous behavior. In
'The publications (especially Whence the Threat to Peace, pub-
lished in January) represent a sophisticated attack on US doctrine,
which they describe as seeking superiority, a first-strike capability,
In his speech to the Central Committee in November,
Brezhnev confirmed these constraints on the economy
when he announced a 30-billion-ruble reduction in
planned investment. He cited shortages of construc-
tion resources as the reason for the cutback, and his
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explanation finds support in the sagging performance
of the steel, construction materials, and civilian ma-
chinery sectors. Despite these difficulties, we still
think the revisions made early in the year may have
allocated some additional funds to defense. Since the
Five-Year Plan was approved in November 1981,
there has been no evidence of any further modifica-
tions to it.
Moscow's Likely Course
Given conflicting pressures within the leadership and
the difficulty of reaching decisions about economic
and defense priorities, the Soviets probably will avoid
making significant changes in the recently approved
Five-Year Plan until Washington's debate over the
FY 1983 defense budget has been resolved. In the
meantime, the Kremlin is likely to pursue policies to
soften the impact of economic stringencies and to
dissuade the United States from adopting the full
measure of the Reagan administration's defense
plans.
At home, the Soviet Government can be expected to
seize upon the projected US defense buildup as a
scapegoat for its failure to solve the country's econom-
ic problems. In their relations with the Warsaw Pact
allies, the leaders may also be able to point to
increasing arms competition as an excuse for not
fulfilling their economic commitments in Eastern
Europe and for pushing the East Europeans to pro-
ceed as planned with military modernization pro-
grams. With both Soviet and East European audi-
ences, the Kremlin can be expected to hammer on the
themes of an increased danger of war and the necessi-
ty for belt tightening.
Abroad, the leadership will pursue a course of calling
attention to the "aggressive" character of US foreign
and military policies while stressing Moscow's willing-
ness to engage actively in a broad variety of arms
control negotiations. Brezhnev's recent Trade Union
speech is only one of a series made by Politburo
members in the past year along these lines. Such
efforts to appeal to public audiences in both Western
Europe and the United States seem certain to con-
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Secret
The Defense Burden and
East-West Economic Relations
Mounting economic problems in the USSR have
made Western goods and technology increasingly
important to Soviet defense programs. Legal and
illegal acquisitions of military-related technology have
saved the Soviets time and resources in designing and
producing new weapons and military support systems,
and Western goods have eased the burden of defense
spending by improving the performance of a strained
civilian economy. The rising importance of Western
goods and technology in the 1980s will give the West
a limited ability to hamper Soviet military programs
by restricting trade and credits.
The Soviets are relying on East-West trade and
technology transfer to provide partial relief from the
military's tightening squeeze on economic resources.
By acquiring weapons-related technology, they are
seeking direct relief by raising defense industry effi-
ciency and thus moderating the growth of military
spending. Through trade, a less direct approach, they
are obtaining goods and technology to enhance expan-
sion of civilian economic output and thus give the
economy more breathing room.
Acquisition of Military Technology:
The Direct Approach
Moscow has given top priority to its program to
acquire and exploit Western military technologies. By
using Western know-how and hardware, the Soviets
have reduced engineering risks, cut R&D and produc-
tion costs, and incorporated countermeasures against
Western wea ons earl in their own weapon develop-
ment process
The Soviets have several means of exploiting Western
technology and hardware:
? Western materials research, manufacturing proc-
esses, and specifications help them develop im-
proved materials for military applications.
? Comparison of preliminary Western component de-
signs with the final designs of the components after
successful testing can help their engineers avoid
mistakes in developing similar components.
? Use of Western test procedures, instruments, and
data improves their ability to test weapon compo-
nents and systems.
? Introduction of Western production processes and
equipment directly into their assembly lines has
accelerated manufacture of key components. The
Soviets have even incorporated Western components
directly into weapons in order to meet urgent mis-
sion requirements.
Evidence has been accumulating on specific military
gains from legally and illegally acquired Western
equipment and technology. For example, the Soviets
have enhanced their ASW capabilities through illegal
acquisition of antisubmarine warfare technology and
a wide variety of COCOM-controlled minicomputers.'
They also are applying Western designs and industrial 25X1
technology to the IL-76 aircraft for their airborne
warning and control aircraft program. Numerically
controlled Western machine tools are being used to
produce the SU-25 ground support fighter, and West-
ern wide-body aircraft technology has been incorpo-
rated into a new transport/cruise missile carrier, the
AN-400.
Military Requirements for the 1980s
The increased need for qualitative improvement in 25X1
military equipment will heighten Soviet interest in
obtaining Western technology. Advances in micro-
electronics and materials probably will pace the devel-
opment of new weapon systems in both the East and
the West. Accordingly, the Soviets and their Warsaw
Pact allies will probably view many new Western
component and subsystem technologies as important
to their military programs. For example, advanced
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Exports, f.o.b.
Imports, f.o.b.
Million Percent Million Percent Million
US $ of Total US $ of Total US $
Percent
of Total
Million Percent Million Percent Million Percent
US $ of Total US $ of Total US $ of Total
Total
2,201
100
7,835
100
23,498
100
2,708
100
14,257
100
26,017
100
Of which:
Crude oil and petroleum
products
387
18
3,276
42
12,028
13
1
220
3
2,706
12
0
0
0
0
0
0
93
4
391
5
362
2
0
0
0
0
0
0
6
927
34
4,593
32
6,039
23
129
6
167
2
246
1
279
10
2,567
18
3,469
13
67
3
256
3
765
3
208
8
742
5
1,565
6
Wood and wood products
365
17
712
9
1,476
6
84
3
214
2
203
1
Agricultural products
205
9
572
7
478
2
615
23
3,856
27
8,800
34
Grain
22
1
3
NEGL
0
0
101
4
2,323
16
4,400
17
Other
183
8
569
7
478
2
514
19
1,533
11
4,400
17
76
3
215
3
152
1
260
10
436
3
745
3
microelectronics is necessary for the production of
guidance components for missiles and precision-
guided munitions, signal-processing devices for ASW
and airborne radar, and minicomputers for electronic
warfare systems and other battlefield electronics.
Advances in producing powdered-metallurgical mate-
rials are prerequisites to the manufacture of advanced
airframes, aircraft engines, and penetrators for kinetic
energy munitions.
East-West Trade: The Indirect Approach
Trade plays an indirect role in cushioning the defense
burden insofar as Moscow is relying on East-West
trade to enhance civilian economic productivity and
sustain growth and living standards during this period
of deteriorating economic conditions. In particular,
the Soviets are counting on Western goods and tech-
nology to help raise the technological level of its plant
and equipment, relieve industrial supply bottlenecks,
and maintain living standards. Imports of machinery,
ferrous metal products, and foodstuffs have dominat-
ed Soviet hard currency purchases from the West,
which rose from 23 percent of total Soviet imports in
1970 to 38 percent in 1980 (tables 1 and 2).
Agricultural Products. Grain imports-and more re-
cently, meat, sugar, vegetable oil, and soybean im-
ports-have been vital to maintaining Soviet living
standards. Net annual grain purchases (which aver-
aged 11 million tons during 1971-78) have tripled (to
an average of 33 million tons during 1979-81) because
of the three poor harvests. The Soviets will have to
import roughly 30 million tons of grain annually-
even if their own grain output returns to trend
levels-in order to regain momentum in their effort to
expand meat supplies.
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Share of Hard Currency Trade
in Total Soviet Trade
1970
1975
1980
1970
1975
1980
Total
17
23
31
23
38
38
Fuels
25
37
42
4
34
NA,
Crude oil and
petroleum
products
26
40
43
10
72
NA
Natural gas
2
34
48
0
0
NA
Machinery and
equipment
5
9
3
22
37
26
Wood and wood
products
44
37
48
34
27
15
Agricultural products
14
24
25
27
42
66
Grain
6
1
0
73
87
90
Consumer goods
23
26
13
12
9
9
Oil and Gas Equipment. Western equipment was
important in increasing the Soviets' energy production
in the 1970s and will be essential to the oil and gas in-
dustries in the 1980s. The Soviets particularly need
Western equipment for exploration, drilling, oil pro-
duction, offshore operations, and gas pipeline con-
struction. Without those imports, the oil and gas
production lost could amount to some 2 million
barrels per day (calculating gas in oil-equivalent
terms) in the middle and late 1980s, roughly 10
percent of the combined oil and gas output that we
expect by then.
Chemical Equipment. Western equipment and tech-
nology are contributing substantially to growth in the
chemical industry. Such imports in the 1970s enabled
the USSR to double production of nitrogen fertilizer
and plastics, triple synthetic fiber output, and become
the world's leading ammonia exporter. Without a
continued flow of Western equipment, the Soviets will
have to import many more chemicals than they
currently do-or cope with more serious shortages
than they already have
Vehicles and Machinery. Imported equipment and
technology can aid machine-building sectors consider-
ably. With Western help the Soviets have modernized
and expanded their truck industry, which produces
military as well as civilian vehicles. During the first
half of the decade, Moscow plans to buy Western
plants and know-how for producing construction vehi-
Iles, including earthmovers and tractors, and will
probably continue to import high-capacity mining
equipment
Machine Tools and Robots. The USSR is turning to
the West for the advanced machine tools and industri-
al robots increasingly needed to improve both military
and nonmilitary industrial productivity. After import-
ing tools worth more than $4 billion in the 1970s, the
Soviets will almost certainly focus on purchasing
advanced numerically controlled tools and machining
centers. They have bought robots from Japan, France,
and Italy-as well as Hungary-and have acquired
foreign designs and manufacturing technology to pro-
duce better robots domestically
Computers and Microelectronics. Weaknesses in
computer production and microelectronics technology
have induced the Soviets to buy Western equipment.
Since 1972, Moscow has imported more than 1,300
computer systems-94 percent of them minicom-
puters, generally for R&D-valued at $400 million.
The Soviets have also illegally acquired computers
embargoed by COCOM. They have obtained-legally
and illegally-a full range of microelectronics-related
technology, materials, and equipment, altogether
worth several hundred million dollars. Continued
commercial and clandestine access to Western com-
puters and microelectronics will be important to many
sectors of the Soviet economy.
The Role of Western Credits. The availability of
Western credits and Soviet willingness to accept an
increasing debt burden will heavily influence the scale
and timing of Soviet hard currency imports in the
1980s. Because Soviet hard currency earnings are
likely to decline in the next few years, the share of
hard currency imports that must be covered by credits
will probably rise from the 1981 level of roughly 18
percent
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Potential Impact of Western Trade Restrictions
on Selected Soviet Economic Sectors
Grain
Small
Substantial
Other agricultural products
Small
Moderate
Oil and gas equipment
Small
Substantial
Large-diameter pipe and rolled steel
Small
Substantial
Chemical products
Moderate
Moderate
Chemical equipment
Small
Moderate
Machine tools and robots
Small
Substantial
Construction and mining
Small
Moderate
Allied action, including Australia, could reduce Soviet
imports by 70 percent; Soviets can import grain from
non-US suppliers to fulfill needs.
Allied embargo would aggravate already serious food
shortages; US is not a major supplier.
Allied denial would reduce expected Soviet oil and gas
output by 2-3 million barrels/day by late 1980s.
Allied countries within roughly two years could
overcome US monopoly in high-capacity oil pumps.
Western Europe and Japan supply all of the pipe
critical to growth in gas production and most of the
rolled steel imports for machine building and
metalworking.
Allied embargo would be felt throughout economy;
US denial of superphosphoric acid would hurt Soviet
fertilizer production. Pesticides are needed to boost
crop yields.
Western denial would affect all economic sectors; US
provides only a small share of equipment imports.
COCOM countries provide most of Soviet needs; non-
US suppliers are numerous.
Western denial of production technology for construc-
tion equipment would disrupt Soviet plans to increase
domestic equipment manufacture; denial of mining
equipment would create only short-run difficulties;
non-US equipment is widely available.
Automotive Small Small Soviet are unlikely to need substantial imports of
Western equipment and technology in next few years.
Computers Moderate Moderate Allied restrictions would have considerable impact on
large computers but not on minicomputers, which are
available from non-COCOM members; Soviets perfer
US products and services, although non-US firms
could almost duplicate some US offerings.
Substantial Soviets will need substantial acquisition of Western
equipment and technology-by legal and illegal
means; US retains leading edge, but Japan and
Western Europe can supply most Soviet needs.
Soviets can cover most needs from Eastern Europe
and non-COCOM Western countries.
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Neither Soviet planners nor Western bankers will
permit a massive financial burden to develop, howev-
er. Given the current credit picture, Moscow will
probably have to settle for little or no growth in
imports over the next few years. If the West were to
sharply reduce the availability of credit, Moscow
would have to cut imports substantially.
Impact of Trade Restrictions
Western restrictions on trade and technology transfer,
by increasing the strain on the Soviet economy, would
almost certainly hinder Moscow's defense effort.' Any
reduction of trade in civilian goods and technology
would increase the pressure on military programs
because most Soviet defense industries also produce
for the civilian sector and would probably have to fill
part of the gap. For example, an embargo on large-
diameter gas pipe and other high-quality steel prod-
ucts could cut into Soviet production of such defense
items as submarine hulls. An embargo on equipment
for plants that manufacture construction and mining
vehicles (as well as an embargo on such vehicles
themselves) would increase the pressure on Moscow to
shift some of the floorspace in military plants to
producing vehicles for the civilian economy.
A Western embargo of industrial plant and equipment
would also hurt military programs directly. For exam-
ple, denial of microelectronics components and pro-
duction technology would hinder the development of
weapon guidance systems and of precision machine
tools for specialized defense production. Denial of
numerically controlled machine tools would hamper
such defense-related production as the manufacture
of gears and disks for high-performance turbojet
engines. Tighter restrictions on technology transfer
would also slow the qualitative improvements in Sovi-
et weapon systems needed to keep pace with Western
military capabilities.
z This discussion assumes effective and sustained cooperation by all
COCOM countries and ignores the economic and political difficul-
Limits of Restrictions. Western restrictions on trade
and technology transfer would affect Soviet defense
programs, but the impact would be limited. In most
cases, a unilateral US embargo would be ineffective,
because other COCOM countries could take up the
slack (see table 3). In some cases, important goods are
available from non-COCOM countries.
If the Soviets were to alter some of their defense
programs in response to Western restrictions, they
probably would not significantly redirect their efforts
in strategic nuclear forces. They value greatly the
political as well as the military usefulness of these
forces and perceive a continuing need to modernize
them-partly as a result of potential US advances.
Moreover, most of the industrial resources devoted to
strategic forces-such as highly advanced materials,
microelectronics, and propulsion technologies for mis-
siles and aircraft-are too specialized to be readily
useful in the civilian industry. A reduction in size and
quality of general purpose forces, on the other hand,
would free up larger amounts of labor and material
resources, and these would be more readily transfer-
able to important civilian needs, such as energy,
agriculture, and transportation-as suggested in the
following article.
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Armored Vehicles Versus
Transportation Equipment:
A Case Study
in Resource Competition F
In the USSR, most of the plants, manufacturing
technologies, and skilled workers used to produce
armored vehicles are equally suitable for production
of transportation equipment critical to the civilian
economy. Over the past decade, increases in tank
Figure 1
Relationship Between Tank
Production at Plant 75, Kharkov,
and Soviet Locomotive Production
production have coincided with declines in the output Percent Change Since 1971
of railcars and locomotives, and production of wheeled
armored vehicles has apparently limited growth in the
output of general purpose trucks. Cuts in armored
vehicle production, or even a reduction in growth,
could release material and skilled manpower re-
sources to increase production of transportation equip-
ment and thereby benefit a faltering Soviet economy.
Inroads Into the Industrial Base
Armored vehicle production programs have cut deeply
into the civilian industrial base for transportation
equipment. They require relatively few advanced or
highly specialized manufacturing technologies and
often use facilities that also produce transportation
equipment. During the past decade, increases in ar-
mored vehicle production have diverted critical found-
ry capacity, skilled fabrication labor, and machining
capabilities from civilian production programs. More-
over, a substantial amount of new plant space at these
dual-use facilities has gone to military production.
Tank production consumed a growing share of pro-
duction resources at Plant 75 in Kharkov during the
early 1970s, and this resource drain apparently re-
stricted production of engines and components for
diesel-electric locomotives. The T-64 program en-
tailed production of opposed-piston tank engines at
Plant 75, which made heavy demands on the plant's
foundry capacity, the primary limiting factor in en-
gine production at the plant. Prior to the start of the
T-64 program, Plant 75 had been a major supplier of
opposed-piston locomotive engines and components.
Throughout the 1960s, it had also been a major final
assembler of the T-55 tank, with engines supplied by
another plant. Figure 1 shows the apparent effect the
loss of locomotive production at Plant 75 had on
diesel-electric locomotive production during the Ninth
Five-Year Plan (1971-75).
An even larger share of Plant 75's resources will go
for tank production during the 1980s. Preparations for
still another new tank production program began in
the early 1970s and are now probably complete. This
work entailed construction of nearly 80,000 square
meters of new fabrication, assembly, and manufactur-
ing floorspace. These new facilities will make even
greater demands on Plant 75's foundry capacity and
skilled manpower.
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Figure 2
Relationship Between Tank
Production at Plant 183, Nizhniy
Tagil, and Soviet Railcar
Production
Percent Change Since 1976
100
Figure 3
Relationship Between Civilian and
Military Production at Gor'kiy
Automobile Plant
-40 1976 77 78 79 80 81
During the late 1970s, production of the T-72 tank
consumed a growing share of production resources at
Nizhniy Tagil Railcar Plant 183 and apparently
hampered extensive efforts to increase railcar produc-
tion. Although Plant 183 was already the largest
railcar plant in the USSR, during the 1970s an
expansion of some 90,000 square meters of new plant
space was configured primarily for railcar production.
The start of full series production of the T-72 tank at
the plant in the middle 1970s, however, drew heavily
on foundry capacity and skilled fabrication manpower
that could otherwise have been used for railcar pro-
duction. As a result, T-72 tank production increased
and Soviet railcar production continued to fall (see
figure 2).
During the late 1970s, armored vehicle production at
Gor'kiy Automobile Plant (GAZ), a major producer of
trucks for the civilian economy, apparently preempted
substantial new capacity built between 1970 and
1980. More than 300,000 square meters of floorspace
were added, increasing foundry, final assembly, and
quality-control resources. Apparently, most of these
new facilities were used to increase production of the
BRDM-2-series wheeled armored vehicles and the
BTR-60-series armored personnel carrier (APC), and
to start the BTR-70 APC production program. As a
result, during 1976-80 military vehicle production at
GAZ increased, while the output of civilian trucks
declined (see figure 3).
Impact on Availability ofAutomotive Components
Armored vehicle production programs use a large
share of the Soviet output of high-quality automotive
components that otherwise would go for production of
a broad range of civilian vehicles, from tractors and
medium trucks to heavy mining and construction
equipment. Military vehicle programs have priority
call on limited supplies of such components as electric
motors, heavy shock absorbers, bearings, gears, high-
performance diesel engines, and hydraulic cylinders,
motors, and tubing. This diversion of high-quality
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components to armored vehicle production inhibits
Soviet efforts to increase the output and improve the
reliability and durability of civilian vehicles. Wheeled
armored vehicles such as the BTR-60 and BRDM-2
are good examples. These vehicles are truck chassis
mounting light armor bodies and use many of the
same components as the GAZ-66 series trucks, which
are widely used in agriculture as well as in the armed
forces.
Impact on Industrial Modernization
Armored vehicle production has also laid priority
claim on new manufacturing technologies and there-
fore has impeded modernization of civilian produc-
tion. The largest and most capable research and
development organizations charged with introducing
innovations in civilian product design and manufac-
turing are also heavily committed to armored vehicle
programs. Consequently, priority efforts to improve
the productivity and quality of foundry and machin-
ing processes, as well as welding and heavy fabrica-
tion techniques, have frequently focused on manufac-
turing methods, materials, and processes for armored
vehicle production programs. These modern technol-
ogies are generally automated manufacturing proc-
esses that offer high-quality, high-volume production
with less manpower and lower scrap rates. The large
amounts of such tooling introduced into armored
vehicle production operations, if used instead for
civilian products, would have increased the output and
quality-and lowered the cost-of transportation
equipment in the USSR. (See table for examples.)
Advanced Manufacturing Technologies Used
in Soviet Armored Vehicle Production
Technology Current Potential
Military Use Civilian Use
Electroslag steel Gun tubes, armor Railcar wheel pairs,
casting crankshafts 25X1
Arc-in-gas automatic Armor fabrica- Heavy-duty welding
welding tion
Plasma cutting Armor fabrica- Main frame
tion fabrication
High-speed rotary Gun tubes, axles Railcar and truck
forging axles, crankshafts,
hydraulic cylinders
and tubing
Automated mold Engine blocks, Engine blocks, brake
making and casting brake drums, hy- drums, hydraulic
draulic compo- components
nents
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Outlook for Soviet
Military Manpower in a
Decade of Shortage F_
Until recently, both the economy and the military
benefited from an expanding Soviet manpower supply.
The 1980s, however, pose a demographic dilemma for
the military-a decline in the number of young men
available for either service as conscripts or training to
become officers. This dilemma is further complicated
by a rising proportion of ethnic minorities among
these young men. To gain the flexibility necessary to
deal with both the shortage and the ethnic aspects, the
Soviets may increase the term of service for conscripts
by six months or more. Their solution for the officer
corps is less clear-cut. Whatever measures are adopt-
ed, the costs to the civilian economy will be relatively
small.
Background
An expanding manpower supply during the early
Brezhnev years facilitated the growth of the military
by 1.8 million men to its current level of 5.9 million,
as shown in figure 1. Of these, 4.4 million are in the
national security forces, performing tasks analogous
to those of the US military, and 1.5 million are in
noncombat service in the Construction, Railroad, and
Internal Security Troops. The noncombat services (of
which the United States has no counterpart) carry out
tasks that are critical in the Soviet Union: maintain-
ing internal order and assisting the chronically back-
logged construction sector.'
Only 30 percent of the military are career personnel;
the rest are conscripts serving a two-year term (three
years in seagoing units). Conscripts have no choice in
their service assignment. The Strategic Rocket Forces
and the Air Forces take the best educated, while the
noncombat services are left with the least educated,
the politically suspect, or the least physically fit.=
Life as a conscript is notoriously harsh, and few
reenlist. The limited time available for training con-
scripts means that career personnel do all the jobs
that require special skills. The usual conscript jobs are
extremely narrow and specialized. Nearly all the
career military are officers, who are educated in the
Soviet Union's 135 four- and five-year military col-
leges.'
Impact of Demographic Trends on the Military
Manpower Shortage. One of the demographic effects
of World War II was a decline in the size of the draft-
age cohort in the early 1960s.' For instance, in 1963
the number of males reaching draft age was only 40
percent of what it had been five years earlier. In the
1980s a second demographic effect is beginning to
appear as the children of the small cohort born during
the war themselves reach draft age. This dip will be
shallower than that of the 1960s (the 1985 level will
be 80 percent of the 1980 level), but it will mark a
permanent turning point. The mid-1960s saw a quick
return to manpower abundance, but the 1980s will
not. Thus, even though the impending shortage will be
less severe in the short run, its long-run effects will be
more serious.
In the past the Soviet military appears to have
subordinated its demand for conscripts to the chang-
ing manpower supply (see figure 2). Troop reductions
in the late 1950s preceded the dramatic decline in the
number of available males, and the increased con-
scription of the late I 960s closely followed the rapid
recovery in the relevant age cohort. If the Soviets
make no changes in conscription policy to accommo-
date the flagging supply of the 1980s, by mid-decade
happen. F~ 25X1 25X1
military manpower will have to be cut by 1.1 million
men. We do not believe Moscow will permit this to
' A cohort is the number of Soviet males who reach draft a e each
year. In 1968 the draft age was lowered from 19 to 18.
the armed forces.
2 Approximately 19 percent of armed forces personnel are officers,
while 7 percent are warrant officers or career NCOs. In the US
military, career NCOs (E6-9) and warrant officers are 19 percent of
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Figure 1
Soviet Military Manpower
Thousands
Noncombat
Servicesa
National
Security
Forces
aThe Construction, Railroad, Civil Defense, and Internal Security Troops
are not considered to have national security roles.
Evidence of an official reaction to the pending man-
power shortage is beginning to appear: early in 1982
the Soviets substantially reduced the number of edu-
cational deferments at many universities and insti-
tutes. As a result, many university-bound students
probably will be conscripted before they complete (or
even before they start) their higher education. This
action will improve the quality of conscripts only
marginally and will have a number of other effects:
? It will interrupt the education and delay entry into
the labor force of the civilian economy's best edu-
cated workers.
? If every conscripted college student now serves the
entire two years, the civilian economy will lose an
additional six months' work. In the past, those who
had completed higher education later served only a
short tour of duty-18 months at most.'
Ethnic Composition.- Conscripts. Figure 3 shows the
CIA estimate of the changing ethnic composition of
the draft-age (18-year-old) population. Until 1970 the
ethnic shares had been stable for many years, with
Slavs at about three-quarters and non-Slavs at one-
quarter. By 1980, however, non-Slavs had risen to
one-third of the draft-age population, and for the first
time Russians were no longer in the majority. By the
end of this decade, nearly 40 percent of 18-year-olds
will be non-Slavic; the Slavic advantage will have
slipped from 2.8 to 1 to 1.6 to 1.
The issue of ethnic "quality" is not new to the Soviet
military. The Soviets already have a mechanism for
absorbing ethnic minorities. Estimates of the size and
ethnic makeup of the noncombat services demonstrate
that they serve the purpose of an ethnic "sponge,"
exposing minorities to political indoctrination and
military discipline while preserving Slavic dominance
of the national security forces.
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Figure 2
Conscript Demand and Draft-Age Males
Index: 1981=100
In 1982 the noncombatant services will absorb the
majority of all non-Slavic conscripts. The share of
non-Slavs in the national security forces is currently
about one-seventh, even though they are one-third of
the draft-age population. If the Soviets keep the
proportion of non-Slavs in the noncombat services the
same as it is now and if overall manning levels remain
constant, the proportion of non-Slavic conscripts in
the national security forces will rise from one-seventh
to one-fourth. This will still be less than their percent-
age in the draft-age population, but it will be a
significant change in the composition of the forces
Ethnic Composition: Officers. Although the ethnic
makeup of conscripts has been changing, the officer
corps has remained a largely Russian preserve. Prob-
ably 80 percent of officers are Russian, 5 to 10
percent are non-Slavic, and the rest are of non-
Russian Slavic origin. There are no official ethnic
barriers to admission to the national system of mili-
tary colleges, but a candidate must pass difficult
exams, including one in Russian literature. Minorities
are typically at a disadvantage. In addition, the
strenuous efforts that raised the proportion of college-
educated officers from 41 percent in 1973 to 68
percent in 1980 probably increased the ethnic homo-
geneity of the officer corps
As the number of college entrants and the share of
Russians among them decline in the 1980s, it will be
difficult to maintain both the high educational stand-
ards and the ethnic exclusivity of the officer corps.
We estimate that in 1960 less than one-tenth of all
male Russian college graduates became active (as
opposed to reserve) officers. In 1980 this was about
one-fifth, and by 1990 it probably will be one-third.
Competition between the military and civilian sectors
for the highly educated Russians is bound to intensify.
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Figure 3
Ethnic Composition of 18-Year-Olds in the Soviet Union
Percent
Slavic ^ Russian
^ Other Slavs
Non- ^ Moslem
Slavic Other
Soviet Options: Conscripts
Force Reduction. Only a permanent reduction of
roughly 1 million in the size of the armed forces would
be sufficient to overcome the shortage in the mid-to-
late 1980s. Such a decline would have a one-time
economic value, representing a 20-percent increment
to the net growth of the civilian labor force expected
during the decade.' Of course, draft-age youths are
largely unskilled and inexperienced, and their value in
terms of income in civilian pursuits is relatively low.
Most would make only minimum wage, recently
raised to 80 rubles per month, while the average
civilian wage is 170 rubles per month.
From a political and military viewpoint, the disadvan-
tages of force reduction are enormous. It would:
? Require a dramatic shift in defense philosophy and
foreign policy.
? Disrupt costly operating and procurement processes.
? Rapidly increase the proportion of minorities in the
national security force, unless conscription concen-
trated on Russians.
We believe force reductions are not an option current-
ly under serious consideration by Soviet leaders, even
though they did adopt this solution in the late 1950s.
Limited Deferments. In a country already practicing
universal conscription, there is little slack to be found
in deferments, and not nearly enough to offset the
manpower shortage. We estimate that under previous
Soviet standards, between 10 and 15 percent of the
members of a draft cohort avoided service altogether
by reason of education, family hardship, or health. As
noted, educational deferments have been recently
tightened, and further major gains from tightening
are not practical.
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Service Ter i Extension. We estimate that a six-
month extension of the current two-year term of
service would maintain military manpower at its
present level. Conscription rates would still be near
the maximum feasible, but within historical levels. A
six-month extension would incur economic costs: it
would delay entry into the labor force and cause all
the costs of the declining 18-year-old cohorts to be
borne by the civilian economy. The main advantage of
an extension would be that military manpower levels
would remain constant. In addition, by allowing the
noncombat "sponge" to remain its present size, an
extension of service time provides flexibility for deal-
ing with ethnic shifts in the draft-age population.n
Soviet Options: Officers
Unlike conscript service, the choice of a military
career is voluntary. This sharply limits the Soviet
leaders' options for maintaining the ethnic and educa-
tional standards of the officer corps. The tight labor
market of the 1980s will offer college graduates a
wider choice among civilian occupations, and the
military may be forced to accept officer candidates
with less schooling.
Half measures to relieve the problem might include
encouraging officers to stay on active duty longer,
creating slots for more retired or reserve officers, and
further encouraging military "spirit" in high school
youth. These half measures are unlikely to be effec-
tive. There are, however, three longstanding policies
which might be pursued more vigorously, though they
also have weaknesses.
Intensified Ethnic Assimilation. The Soviets might
step up their efforts to promote ethnic assimilation via
Russian language instruction in school. This long-
standing policy has achieved some gains, but there is
widespread agreement that it has failed to erase
ethnicity as a fundamental cleavage in Soviet society.
Increased Prestige. The Soviets could also continue
trying to raise the prestige of a military career. As the
demand for better educated officers has grown, so too
have efforts to appeal to a more sophisticated youth.
Nevertheless, surveys of occupational prestige in the
Soviet Union suggest that while officers enjoy consid-
erable prestige generally, young people do not see a
military career as especially attractive. Minorities are
likely to be particularly resistant to increased recruit-
ment efforts. They are reluctant to relocate from their
home republics; they have been less likely to choose
college majors in technical fields of interest to the
military; and in many cases they are all too familiar
with ethnic prejudice in the services, from the military
experience of friends and relatives
Increased Pay and Privileges. Finally, the Soviets
may consider increasing officer pay or perquisites. 25X1
Two factors weaken a potential monetary incentive
effect, however: military pay scales are classified
information and are not widely known in the Soviet
Union; and in any case, consumer purchasing power
already far exceeds the availability of consumer
goods. More appealing to a Soviet civilian would be
the perquisites, particularly the guaranteed access to
scarce housing. However, such benefits are not the
exclusive preserve of officers. For example, a youth
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Expenditure Implications of
Projected Soviet Strategic
Attack Forces
A cost analysis of the strategic force options forecast
in National Intelligence Estimate 11-3/8-81 indicates
that cumulative spending for Soviet intercontinental
and peripheral attack forces during the 1981-90 peri-
od may be 30 to 65 percent greater than outlays for
these forces in the previous 10 years.' Investment in
new, more capable weapon systems is expected to be
the major factor driving costs upward. However, since
outlays for these forces represent only 10 to 15
percent of projected total defense expenditures, in-
creases in spending for the strategic attack mission
alone probably will not significantly affect either the
growth of overall defense expenditures or the re-
sources available to the civilian economy. F__1
Spending Trends, 1971-80
During the period 1971-80, the Soviets allocated
approximately 65 billion rubles in investment and
operating costs to their strategic attack forces. About
two-thirds of the cumulative expenditures for this
mission went to those forces assigned targets in the
continental United States and about one-third to
forces whose primary targets would be along the
periphery of the Soviet Union.
Investment in new weapon systems and facilities
dominated Soviet spending for strategic attack forces
in the seventies, accounting for about 80 percent of
cumulative outlays. This intense effort bought the
Soviets an intercontinental attack force at least equal
to that of the United States and a more survivable
peripheral attack force with better coverage of poten-
tial targets at the theater level. Spending for intercon-
tinental attack fluctuated in response to the procure-
ment cycles of ICBMs and SSBNs. It was highest in
the mid-to-late seventies because of the procurement
of the SS-17, -18, and -19 ICBMs and the D-class
' Strategic forces are defined according to the guidelines in the
Defense Planning and Programming Categories (DPPC) issued by
the US Department of Defense and exclude research, development,
testing, and evaluation and nuclear weapons production. These cost
calculations were derived using the SMART model-a computer-
based methodology that permits rapid cost calculations of alterna-
SSBNs. Spending for peripheral attack forces rose
steadily during the period. The increase was caused
by production of the Backfire bomber and by costs
associated with the SS-20 IRBM program.
Expenditure Implications of Alternate Forces
Projections
Figures 1 and 2 show estimated cumulative outlays
for intercontinental and peripheral attack for the 10-
year periods 1971-80 and 1981-90. The bars for 1981-
90 show alternative cost estimates based on the
Intelligence Community's projections of the number
and characteristics of Soviet strategic attack forces.
Total investment and operating costs for all combina-
tions of projected intercontinental and peripheral at-
tack forces are expected to increase significantly in
the eighties. Under the least costly combination of
force projections, we would expect the Soviets to
spend approximately 85 billion rubles, about 30 per-
cent more than they spent on this mission in the
seventies. For the most costly combination of forces,
Soviet spending between 1981 and 1990 would be over
105 billion rubles, about 65 percent more than spend-
ing during the previous 10 years. As was the case in
the seventies, investment in new equipment and facili-
ties will be the major factor driving spending upward.
Intercontinental Attack. We estimate that to deploy
and operate the NIE's baseline intercontinental at-
tack force (force I in table 1) would cost the Soviets
over 50 billion rubles, about 25 percent more than
cumulative spending for this mission in the seventies.
The increase in spending reflects the expectation of a
vigorous Soviet effort to expand and augment its
intercontinental attack forces, particularly in the ear-
ly eighties. This projection is consistent with current
evidence on Soviet programs and recent trends in
deployment rates and force composition. Investment
in ICBMs and SSBNs is expected to continue to
dominate spending trends for intercontinental attack.
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Figure 1
Estimated Investment and Operating Expenditures for Soviet
Intercontinental Attack Forces
Force I Force 2
1971-80 1981-90
Note: Forces 1 and 2 are the alternative forces projected in National
Intelligence Estimate 11-3/8-81. These forces are presented in table 1.
O Investment
Operating
Force 1 Force 2
1981-90
The Soviets, however, are expected to increase their
emphasis on the long-neglected long-range bomber
force, increasing its share of cumulative outlays from
about 3 percent in the seventies to over 10 percent in
the 1981-90 period. Key features of this projection
include:
? Continued deployment of improved versions of the
SS-17, -18, and -19 and the introduction of follow-
on systems with greater accuracy and payload.
? Introduction of a medium-size solid-propellant
ICBM as replacement for the remaining SS-1 is and
a small solid-propellant missile for deployment on
mobile launchers.
? Deployment of an additional four D-class and 11
Typhoon-class SSBNs along with improved versions
of the SS-N-18 and SS-NX-20 SLBMs.
? Deployment of a new strategic aircraft similar to
the B-1 and capable of carrying either bombs,
ASMs, or cruise missiles.
To deploy and operate an augmented intercontinental
attack force (force 2 in table 1) would cost the Soviets
about 10 billion rubles more than estimated for
force 1. Cumulative outlays for force 2 in the 1981-90
period would be about 50 percent greater than
expenditures for intercontinental attack forces during
the 1971-80 period. Force 2, however, represents
neither a maximum Soviet effort nor an upper bound
for technological potential. It is a plausible and
achievable future Soviet intercontinental attack force
given the uncertainties regarding improvements the
Soviets might make and the potential deployment
levels for new systems. The increase in outlays over
force I reflects the added investment the Soviets
would make if they chose to enhance the survivability
and destructive potential of force 1 in the late eighties.
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Figure 2
Estimated Investment and Operating
Expenditures for Soviet Peripheral Attack Forces
Moderate High
1971-80 1981-90
Note: The moderate and high forces are the alternative forces projected in
National Intelligence Estimate 11-3/8-81. These forces are presented in
table 2.
Key departures from force I include:
? Deployment of ICBMs having greater numbers of
warheads: an SS-18-size missile with 24 warheads,
an SS-19-size missile with 10 warheads, and a
medium-size solid-propellant missile with 10
warheads.
? Deployment of an additional four Typhoon-class
SSBNs.
? A doubling of the number of mobile ICBMs de-
ployed, including a medium-size solid-propellant
missile in a multiple-aim-point system.
? A doubling of the number of new strategic bombers
deployed.
Peripheral Attack. We estimate that the cost of
deploying and operating the moderate peripheral at-
tack force would be about 30 billion
rubles, about one-t it more than the Soviets spent on
this mission in the seventies. The increase in spending
reflects a continuation of the vigorous effort to aug-
ment the survivability and destructive potential of
their peripheral attack forces in the eighties. It is
Moderate High
1981-90
consistent with current evidence on Soviet programs
and recent trends in deployment rates. In part, the
growth in expenditures results from an expected
increase in operating costs caused by the retention of
a large number of older strategic bombers in the force
through 1990. As in the past, however, investment
will be the major factor driving expenditures upward.
Costs associated with the Backfire bomber and SS-20
missile programs will continue to dominate spending
trends. Major features of this projection include:
? A peak deployment of 450 SS-20 launchers and the
introduction of a more reliable and accurate version
of the SS-20 missile.
? Continued production of the Backfire bomber with a
peak deployment of 200 aircraft in the late eighties.
? Introduction of a new peripheral-strike aircraft as
both a bomber and a cruise missile carrier.
? Deployment of about 100 long-range sea-launched
cruise missiles.
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To deploy and operate the high peripheral force would
cost the Soviets about 42 billion rubles during the
1981-90 period, about 80 percent more than they
spent on the peripheral force in the seventies. The cost
increase reflects increases in deployment levels that
the Soviets might make in response to NATO or
Chinese force augmentations in the eighties. The
major factors in the cost increase are the investment
costs of doubling the procurement of Backfire bomb-
ers and cruise missiles and adding about 100 new SS-
20 launchers. The retention of a substantial number
of older land-based missiles until the late eighties
would also add to the cost of this force.
Economic Implications
The expenditure implications of the projected forces
are much less dramatic when viewed in the context of
total defense spending. We estimate that, regardless
of the combination of projected forces the Soviets
might procure, defense spending will continue to rise
at an annual rate of about 4 percent. The most
expensive force would cause defense expenditures to
rise at an annual growth rate only a few tenths of a
percent higher than that which would result if the
Soviets opted for the least expensive force. This is
because strategic attack expenditures represent only
10 to 15 percent of total defense expenditures and,
therefore, the effect of even sizable increases is
muted. F-1
From 1965 through 1978, the defense share of Soviet
GNP was a relatively constant 12 to 13 percent. By
1979 the share increased by a percentage point to 13
to 14 percent, and it has increased slightly since then
because of declining growth in GNP. If defense
spending continues to grow as past trends and present
forecasts indicate-that is, at an annual rate of about
4 percent-the defense share of GNP will increase as
the economy slows. In 1985 it will be at least 15
percent, and by 1990 it could approach 20 percent.
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Secret
Nevertheless, the potential resource commitments for
various combinations of the projected strategic attack
forces would have little overall impact on the econo-
my. By the middle eighties, the defense share of
Soviet GNP for the most expensive combination of
forces would only be a few tenths of a percent higher
than that for the least expensive combination. Such
shifts in the share of GNP going to defense would
have negligible impact on the overall growth of the
Soviet economy. This is because the production re-
sources that are consumed by strategic forces are
small in relation to overall Soviet investment require-
ments and are highly specialized-not easily trans-
ferred to civilian uses. In addition, Soviet strategic
attack forces use only between 8 and 10 percent of
total military manpower, and any projected change
would have little impact on the civilian labor force.F_
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A Ruble Cost Comparison
of US and Soviet
Defense Activities
Comparison of US and Soviet defense activities when
both are measured in rubles shows that the Soviet
total exceeded US outlays by 30 percent in 1979,
whereas the difference is 50 percent when the meas-
urement is made in dollar terms. Thus, whatever the
currency used to measure defense activities, the Soviet
resource commitment to defense is substantially larg-
er than that of the United States.
The Index-Number Problem
Because dollars are the natural basis for discussion by
US policymakers, CIA comparisons of the overall size
of the Soviet and US defense activities have tradition-
ally been made in dollar terms. The Agency derives its
estimates of the dollar costs of Soviet defense activi-
ties by applying US prices to detailed estimates of
Soviet military activities. To state one country's ac-
tivities in terms of another country's currency will
exaggerate somewhat the size of the first country's
effort. This phenomenon-called the "index-number
problem"-has been the basis of some criticism of
CIA attempts to compare Soviet and US defense
costs.
The direction of bias is associated with differences in
relative resource costs. In producing any collection of
goods and services, such as defense, a country tends to
use more of resources that are relatively cheap and
less of those that are relatively expensive. The choice
will differ in another country with a different resource
endowment.' If the defense activities of a country with
abundant supplies of cheap labor are priced in the
currency of another country where labor is more
scarce and expensive, that pricing will overstate the
manpower resources devoted to the first country's
defense establishment. If the defense activities of a
country with relatively limited and expensive supplies
of capital goods are priced in the currency of another
country where capital is relatively abundant and less
expensive, the pricing will understate the hardware
resources devoted to the first country's defense estab-
lishment. Leaders of the first country, with cheap
labor and expensive capital, will naturally choose a
mix of defense resources that emphasizes manpower,
and the result of using the second country's currency
in a comparison is to exaggerate the size of the first
one's defense costs.
The index-number problem refers to the inevitable
difficulty in comparing economic activity in any two
countries. To make such a comparison, the activities
must be measured in common terms-specifically,
they must be stated in a single currency. Since either
currency can legitimately be used, the comparison can
be done in two ways-which lead to different results.
The essence of the index-number problem is that no
unique result is possible in such an economic compari-
son among countries
The prospects for making meaningful economic com-
parisons are not quite as bleak as this might suggest,
however. The direction of the index-number bias in
any single comparison is easy to identify, and the two
complementary comparisons provide a logical range
within which a meaningful difference lies.
As a result of differences in resource endowments,
dollar comparisons of US and Soviet defense activities
tend to inflate the size of Soviet costs relative to those
of the United States. Manpower is relatively expen-
sive in the United States, and the relatively high
dollar wages somewhat exaggerate the size of Soviet
defense activities, which are more manpower-inten-
sive than those of the United States. Of course,
comparisons can also be made in ruble terms, using
Soviet price and wage data to cost US defense
activities. Such ruble comparisons inherently exagger-
ate the level of US activities relative to the Soviet
level-the reverse of the distortion that occurs in
dollar comparisons.
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Neither way of comparing US and Soviet defense
activities-dollar costs or ruble costs-can avoid dis-
tortions totally, but the picture they provide together
gives a reliable indication of relative sizes of defense
activities in the two countries. The true size of the
Soviet resource commitment to defense relative to
that of the United States is likely to be no less than
the ratio shown by ruble cost comparisons and no
larger than the ratio shown by dollar costs.-1
Analytical Approach
A ruble estimate of US defense activities measures
what it would cost, in constant 1970 rubles, for the
Soviets to produce and man a military force of the
same size and with the same inventory as that of the
United States and to operate that force as this country
does. To maintain consistency with the dollar esti-
mates, we have used the same definition of national
security activities that we used in dollar estimates. F-
For practical reasons, in calculating the cost of US
defense activities in rubles we did not use the direct
costing methods we use in calculating Soviet activities
in dollars.' Instead, we developed the substitute meth-
odology described below.F__-]
Resource Categories. Ruble costs for US defense
activities were calculated by major resource categor-
ies-research and development (R&D), procurement,
construction, operation and maintenance (O&M), and
personnel. Personnel costs were derived by a direct-
costing methodology because Soviet pay and
allowance data were available. The other four cate-
gories were derived by multiplying the US dollar
resource accounts (called resource identification codes
or RICs by the Department of Defense) by appropri-
ate ruble-dollar ratios.)
The Defense Department organizes US defense costs
into more than 80 separate RICs. These RICs cover
each kind of activity (for example, personnel, O&M,
or procurement of tracked vehicles) and each service
(including the guards, reserves, and defense agencies).
' For the dollar estimate, we ask appropriate US manufacturers
what it would cost them to produce a given Soviet weapon. For the
ruble estimate, the practical limitations are obvious: direct costing
would require us, for example, to ask a Soviet aircraft manufactur-
er the ruble cost of producing an F-15.._~
An "account" such as aircraft procurement for the
Air Force can include a diverse group of weapons and
weapon components-all types of aircraft, air-to-air
missiles, and major spare parts.
Ratios. Ruble-dollar ratios (developed originally to
convert Soviet defense activities from dollars to rubles
in those cases where we were not able to derive ruble
values directly) were used to convert US dollar outlays
to rubles. The original ratios applied to specific Soviet
product groups-aircraft, electronics, missiles-that
did not necessarily correspond to the US resource
"accounts." To solve this problem we constructed new
composite ruble-dollar ratios. These are weighted
averages of the basic product group ratios, the weights
representing the share of total costs of each product
group in the particular resource account. F__1
Procurement. Procurement presented a special prob-
lem. There are some items in the US weapons inven-
tory-the F-15, for example-that the Soviet defense
industry could produce only at extremely high cost
because the quality or technology of the system is
beyond present Soviet capabilities. To bring the ruble
price for these items up to an appropriate level, we
either adopted the ruble-dollar ratio appropriate to a
Soviet weapon system of a later generation (which is
higher) or increased the basic product group ratio by
20 percent. (The 20-percent differential is derived
from a study of merchant ships.') This adjustment was
applied to an entire procurement account if there was
in that account at least one weapon system in which
the United States has such an advantage. Thus, this
increase in ruble price tended to overstate the costs to
produce, man, and operate the US force in rubles..
Personnel. Ruble personnel costs were calculated by a
direct cost methodology. We distributed US service-
men into the four active services and into 21 ranks
' A sample of US and Soviet merchant ships costed in both dollars
and rubles found that the ruble-dollar ratio for US ships was
approximately 20 percent higher than the ratio found for Soviet
ships. The 20 percent is believed to reflect the more sophisticated
technology embodied in US ships-which if produced under Soviet
conditions would be relatively more expensive. The technology in
merchant ships is fairly simple, however, and the 20-percent
differential may be low when applied to advanced technologies.
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Operation and
Maintenance
ranging from general to private. The manpower in
each rank was multiplied by appropriate ruble rates of
pay and ruble allowances for clothing, food, and
medical care. Guards and reserves were turned into
full-time equivalents based on the hours of paid drill
and then multiplied by the average rates of pay for
Soviet officers or enlisted men (we have no detailed
rank structure for US reserve forces).
Ruble Cost Comparisons
Whether measured in dollars or in rubles, Soviet
defense costs exceeded US spending by a considerable
margin in the late 1970s (see graph). Total Soviet
defense costs in rubles were 30 percent greater than
those of the United States in 1979; measured in
dollars they were 50 percent greater. That is, the
Soviet "lead" in total defense costs measured in
dollars is 1.15 times the lead measured in rubles.' This
spread between the ruble and the dollar comparisons
for defense is much narrower than similar calculations
for other sectors of the economies of the two countries.
For instance, in the case of production of consumer
durables, the US advantage measured in rubles is
almost twice the US advantage measured in dollars.'
The spread between costs measured in rubles and
dollars is narrower for defense than for consumer
durables because of the relatively greater degree of
similarity between the mix of defense outlays for the
two countries. In particular, the two armed forces
operate with similar equipment-manpower ratios. The
USSR has much more manpower, but it also acquires
much more equipment each year than the United
States does. The basic similarity in structure of the
two forces is dictated more by military consider-
ations-they are preparing to confront each other-
than by economic considerations. With such a basic
similarity, relative defense costs measured in dollars
will differ little from those measured in rubles.
' Franklyn Holzman, International Security Review, Spring 1980,
p. 89F___1
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The difference between the dollar and the ruble
estimates was greatest for procurement-Soviet costs
exceeded US costs by 60 percent in dollars and 25
percent in rubles. It was least for personnel-Soviet
costs exceeded US costs by 85 percent, whether
calculated in dollars or in rubles. The larger range in
procurement reflects the USSR's relative disadvan-
tage in producing the high-quality, technologically
advanced US equipment. The lack of difference in
personnel costs means that differences in the distribu-
tion of the ranks between the two forces are offset by
differences in the relative rates of pay among the
ranks. Soviet resource costs measured in either dollars
or rubles exceed comparable US costs for every
resource category except operations and maintenance.
Here, the United States pulls ahead, reflecting the
high cost of US petroleum, oil, and lubricants, the
large US civilian payroll in defense, and high mainte-
nance costs.
A Test of the Method
The assumptions made about the degree of the US
lead in technology and quality were necessarily sub-
jective. Therefore, a sensitivity test was made to
analyze the effect of these assumptions on the total
comparison. For this test the ruble-dollar ratios ap-
plied to the RDT&E accounts and selected procure-
ment accounts were raised by another 25 percent.'
Even with this large change, the ruble cost of Soviet
defense activities was still 15 percent above that of the
United States in 1979.
' Not all procurement accounts were affected, since in 1979 the
United States had a clear quality and technology advantage for
only certain weapon systems. In those accounts that were affected,
however, the procedure required that the additional US advantage
be applied to all systems in that account even though this country is
not necessarily superior in all of them. For instance, the whole
procurement account for Air Force aircraft was raised-not just
the ruble costs of F-15s but also those of simpler aircraft such as F-
5s, A- I Os, and C- l 30s.
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Other Topics
Succession Maneuverin
in the Kremlin F
President Brezhnev, in the aftermath of senior party
secretary Mikhail Suslov's death, moved decisively to
signal his preference in the succession sweepstakes for
his friend and protege, Politburo member Konstantin
Chernenko. Some behind-the-scenes opposition to
Brezhnev's actions has developed, but this sniping
poses little threat to his position. The attacks, howev-
er, indicate that succession maneuvering is likely to
intensify in coming months and increasingly preoccu-
py the Soviet leaders.F__-]
Following Suslov's death, Brezhnev moved quickly to
place Chernenko in Suslov's position as the party's
unofficial second secretary. Brezhnev vaulted Cher-
nenko over his chief succession rival, Andrey Kiri-
lenko, in the leadership protocol rankings and gave
him some of Suslov's duties. For example, he included
Chernenko in the delegation that met with Polish
officials and chose him to head the group attending
the French Communist Party congress
Brezhnev, moreover, assigned Chernenko some re-
sponsibility for personnel matters, heretofore one of
Kirilenko's duties. The President also supported Cher-
nenko's interpretation of ideological acceptability by
attending a play reportedly promoted by Chernenko
and earlier opposed by Suslov. At the same time,
Kirilenko has failed to appear at any leadership
functions since 1 March and, according to various
rumors, is ill. Whatever the reason for his inactivity,
his absence has appeared to weaken his political
position during a period of intense leadership maneu-
vering.
Without these decisive moves, Kirilenko's strength in
the party probably would have resulted in his becom-
ing "second secretary." Given Brezhnev's failing
health-he reportedly suffered another setback after
his trip to Tashkent in March-the poor performance
of the Soviet economy, and the mixed results of his
policy abroad, he probably felt such an accumulation
of power in Kirilenko's hands would be dangerous.
Pushing Chernenko into this position did not carry
such a risk because Chernenko is Brezhnev's protege
and lacks the power to act independently of the Soviet
leader
Rumors Versus Brezhnev's Power
Brezhnev's intrigues and his declining health have
apparently inspired some opposition. An anticorrup-
tion campaign sponsored by Chernenko is being used
by Chernenko's opponents to embarrass both him and
Brezhnev. Rumors have been planted with Western
correspondents linking Brezhnev's son and daughter
to corruption scandals, and hints have surfaced that
Brezhnev is at odds with some officials in the KGB
over protecting his family. In addition, some articles
that have appeared in the Soviet press can be read as
thinly veiled attacks on Brezhnev.
This sniping is probably troublesome and embarrass-
ing to Brezhnev, but it is not particularly threatening.
Such attacks, in fact, are risky and may reflect the
desperation of those like Kirilenko who oppose Brezh-
nev's recent moves.
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Brezhnev has clearly demonstrated that he still con-
trols events. He has strengthened Chernenko's posi-
tion, attacked Kirilenko's, and made some key person-
nel changes. For example, he promoted a crony to the
key post of first deputy chairman of the KGB, a move
that belies the insinuation that he is having difficulty
with that organization. He also removed the trade
union chief, who may have been supported by Suslov
and Kirilenko, and replaced him with an official
indirectly criticized by Kirilenko earlier.
Infighting Will Intensify
Whether Brezhnev intended it or not, his recent
actions have put the succession at the top of the
leadership's agenda. The coming plenum of the Cen-
tral Committee-probably to be held within the next
several months-could produce significant personnel
changes.
Chernenko, despite his recent success, does not have a
lock on the succession. Having been a staff man for
most of his career, he does not have the kind of
executive experience that past party leaders have had.
Although Chernenko will attempt to improve his
position further, it is unlikely that Brezhnev will name
him as heir apparent. Brezhnev may believe that
Chernenko would protect his legacy, but he is well
aware that conferring such power-even on a
friend-could endanger his own position
With Brezhnev gone, Chernenko's rivals, Kirilenko
particularly, could probably defeat him unless he
obtains additional help. Despite Kirilenko's current
difficulties, he remains a formidable opponent. He has
considerable experience as a party manager and in the
past has acted for Brezhnev during his vacations and
illnesses. As an original member of the group that
replaced Khrushchev, he has had considerable oppor-
tunity to build a client network that would serve him
well in a succession struggle. Even if he falters for
political or health reasons, other more junior leaders
such as Moscow party boss Viktor Grishin are likely
to contest Chernenko's claim.
Outlook
While Brezhnev remains on the scene, this infighting
is not likely to lead to significant policy changes. The
debate over policy, nonetheless, will probably heat up,
and some signs of dissension have already appeared. A
change in investment strategy probably favored by
Kirilenko was openly advocated in a recent Pravda
article.
Those who oppose Brezhnev's political maneuvering
may try to raise other issues in an attempt to put him
on the defensive and complicate his political strategy.
Brezhnev will work to keep policy on its current track,
thereby avoiding the political risks that advocacy of
major changes would entail.
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Soviet Financing of
Grain Purchases
The USSR's cash payments problem is forcing Mos-
cow to turn to costly short-term financing to pay for
Western grain. The financial pinch, at least temporar-
ily, is especially tight because of the slump in gold
prices, the recent oil price erosion in Western Europe,
and the continuing need to import grain at a record
pace. Since last fall, the Soviets have raised more than
$1 billion in short-term credits to finance grain
purchases. If, as seems likely, Moscow is able to line
up credits for even one-half of the additional $1.6
billion in grain we expect the USSR to purchase by
the end of September, financial credits could ap-
proach $2 billion. The annual cost of carrying this
financing would add at least $150 million to Mos-
cow's debt service
The USSR's Need./or Grain
To help offset last year's harvest disaster, the Soviets
have bought 43.9 million tons of the 45 million tons of
grain we expect them to import before this June-July
marketing year. Almost 29 million tons of grain were
shipped by the end of February. Soviet trade officials
have announced plans to accelerate the pace of deliv-
eries this spring. Moscow is expected to buy an
additional 11 million tons of grain during July-
September (see table).
Financing Grain Imports
Unlike in the past, the Soviets have been forced to
seek credit from the international banking community
for part of their grain purchases, which may exceed
$6 billion in the current marketing year ending 30
June. Moreover, the Soviets are expected to purchase
another 1 1 million tons-worth almost $1.5 billion at
current market prices-by the end of September.
Three major sources of credit are open to Moscow:
? International grain trading companies have ex-
tremely deep pockets thanks to longstanding credit
relations with major banks. By extending short-term
credit to purchasers, using the firm's line of credit,
the trader can profit from both the sale and the
credit arrangement. The companies can also help
arrange direct credit between bank and grain buyer.
? Commercial banks independently will provide
short-term, unsecured loans to grain-buying coun-
tries that are deemed creditworthy. Interest on loans
is pegged to the US prime rate and the London
Interbank Offered Rate (LIBOR) on most US-
financed grain. Both prime and LIBOR rates have
exceeded 15 percent for most of the past year.
The USSR is benefiting from a buyer's market. A
record world grain crop has forced wheat and corn
prices in March to their lowest level in almost two
years. With non-Soviet import demand weak, Moscow
has considerable negotiating leverage with Northern
Hemisphere exporters desperate to move existing sur-
pluses before this year's summer crops are harvested.
This leverage is somewhat offset, however, by the
Soviet inability to pay cash and the tightness of the
credit market. More recently, Moscow has had to
contend with the possibility of grain supply disrup-
tions that could result from the Falkland Islands
dispute.
? Government financial assistance is available from
some exporters to promote grain sales. Support can
take a variety of forms, from providing direct credit
to guaranteeing private loans. Canada and Austra-
lia both have offered credit facilities similar to the
US Commodity Credit Corporation. In countries
that have some nationalized banks (France, for
example), the distinction between government and
private commercial banking is obscure.
Activity to Date
Grain purchased on credit to date represents more
than one-fifth of the $6 billion in grain ordered from
Western exporters since July. In the past, the USSR
paid cash for virtually all grain purchases. About
$800 million of these credits have been used to pay for
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USSR: Grain Imports, July 1981-September 1982 Million Tons/Million US $
Expected Purchases Actual Purchases and Expected Purchases
(July-June) Commitments to Date (July-September)
(July-June)
Economic Community
3.0
500
3.0
500
0.5
70
Australia
2.6
350
2.6
350
1.3
175
Eastern Europe b
1.2
160
1.0
135
a Estimated.
b The Soviets do not pay hard currency for all of these purchases.
these and other credits carry commercial terms of 15
to 18 percent-the going market rate-for 150 to 180
days.
Although the Soviets have approached a number of
banks directly, most of the loans have been arranged
through grain trading companies. US, West Europe-
loans negotiated in late 1981 were usually for 60 to 90
days. The Soviets are now beginning to request even
longer terms. Recently they requested but were re-
The Soviets have in a few instances attempted to
barter Soviet exports for grain. Late last year several
international grain companies were asked to take
Soviet potash and urea in partial payment for grain
purchases. Although most of the companies turned
down this offer, the USSR did arrange a barter deal
with Thailand-500,000 tons of fertilizer for 100,000
tons of Thai corn. Because barter deals are so hard to
put together, they are likely to continue to account for
only an insignificant share of Soviet grain imports.
Immediate Financing Needs
The USSR will probably order an additional 11
million tons by the end of September-virtually all
from the United States, Canada, and Argentina.
Within the past month, French bankers reportedly Because of its acute hard currency shortage, the
granted a 150-day, 15-percent commercial credit for USSR is likely to continue to rely heavily on short-
the purchase of nearly $75 million worth of US corn, term Western bank credits to finance its grain bill
and a $25 million Soviet purchase of US wheat was over the next few months.
financed with credits from Italian banks. In the main,
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Secret
US grain traders have been told by Soviet officials
that all new grain contracts must include one-year
terms. Moscow's ability to obtain credits for US grain
will depend on whether the trading companies can
raise the required funds. The 2.2 million tons of US
grain we expect the Soviets to buy for delivery by 30
September would require additional financing of
about $300 million. At the same time, US banks,
after initial willingness to make short-term loans for
grain, have become increasingly reluctant to lend
directly to the Soviets. One major US bank's policy is
to be receptive only to grain companies that have
traditionally been customers. The current financial
crises in several East European countries have
prompted bankers to limit their exposure in the
USSR. Bankers may also be responding to US policy
and public sentiment, which they interpret as discour-
aging trade with the Soviets.
Most of the non-US grain that the USSR is expected
to purchase by 1 October will come from Argentina.
In late March, Soviet officials began negotiations
with the Argentine Central Bank for a $300 million
credit with 150-to-240-day terms for the purchase of
3 million tons of grain. Although the Argentines have
indicated they are willing to assist the Soviets in
obtaining this loan on commercial terms, Buenos
Aires is not likely to be able to advance the credits
that the USSR wants. Moscow will probably have to
rely mainly on commercial credits to finance pur-
chases of Argentine grain. The Soviets reportedly are
themselves arranging financing for the purchase of
another 1.5 million tons of Argentine grain with West
European bankers
Other additional purchases are likely to be made from
Canada, the European Community, and Australia.
Canada and Australia both have official credit facili-
ties similar to the US Commodity Credit Corporation.
the French Government has
indicated that it would view favorably a request for
government-guaranteed credits for future sales of
French grain.
Outlook
The financial picture is not likely to change quickly.
Oil and gold prices are likely to remain at their
present low level for some time, keeping the pressure
on Moscow's hard currency position. Grain imports
are likely to remain at high levels through most of
1982 and into 1983. Even with a good harvest this
year, Moscow will need to rebuild stocks depleted by
three consecutive poor harvests. Falling grain prices
will only slightly ease the strain grain purchases have
put on Moscow's hard currency reserves.
Given its present financial position the USSR will
probably continue to rely on short-term credits to
finance most of its grain purchases over the next few
months, possibly adding another $1 billion in grain
credits by the end of September. As interest rates and
credit availability are expected to ease only gradually
at best, the costs of such financing will remain high.
Moreover, with previously arranged short-term cred-
its maturing, Moscow will have the added pressure of
paying off these loans in late summer.
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Secret
Briefs
Weak Western Demand
The slackening of West European demand for Soviet oil has reduced the USSR's
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for Soviet Oil 0
hard currency earnings and will substantially damage Moscow's hard currency
position if it continues much longer. In March
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Lisbon had decided not to renew an agreement signed
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last year to purchase oil from the USSR on a contract basis because of the high
prices asked. Moreover, the Soviets reportedly had to concede price reductions=
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he Soviets would accept almost any requested terms in order to 25X1
Since the first of the year, Moscow reportedly has agreed to price reductions
matching the decline of $5 to 6 per barrel in spot market prices. If prices continue
at the current level throughout this year, Soviet oil earnings will be reduced by
about $2 billion. Hard currency losses will, of course, be greater if the volume of
Soviet oil exports also falls. The weak demand for oil-the USSR's major
export-comes in the wake of three successive harvest shortfalls leading to large
outlays of hard currency for grain, meat, and other agricultural imports.
Contention Over In a major article in Pravda recently, A. G. Aganbegyan, a prominent Soviet
Investment Allocations= economist and director of the Siberian department of the Academy of Sciences,
urged investment increases beyond those now planned for the machinery and
equipment sector. More and better machinery, he contended, is crucial to
achieving increased productivity, on which growth in national income depends.
Publication of Aganbegyan's views in Pravda suggests that debate over how best to
allocate investment may be continuing. Aganbegyan did not argue for an overall
increase in the current five-year investment plan. Rather, he advocated postponing
short-term gains to achieve a higher rate of return in the longer run by shifting in-
vestment into expanding capacity for new machinery and away from such areas as
chemicals, metallurgy, timber, coal, and land reclamation. These and other sectors
would ultimately benefit from improved machinery==
Aganbegyan's argument is not without merit. For example, the quality and
productivity of Soviet machinery are low, primarily because the machine tool park
is technologically outdated. Low retirement rates have given rise to an increasing
share of machine tools with rising maintenance costs and declining productivity.
As a substitute for retirement, service lives are prolonged unduly by large annual
increases in capital repair==
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Grain Crop Economic lecturers in Murmansk and Leningrad have indicated for the first time
for 1981 that the USSR's grain crop for 1981 may have fallen below 160 million tons. Two
lecturers put the crop at 158 million tons, and another said it was between 150 and
165 million tons. "Znaniye" lecturers were among the first spokesmen to provide
accurate figures for the disastrous grain harvests in 1975 and 1979. An official of
an economic institute in Moscow repeated the figure of 158 million tons during a
conversation with a US Embassy official on 29 March.
A crop of 158 million tons would be over 60 million tons short of the quantity re-
quired to permit small increases in the output of livestock products in 1982. The
gap can be only partly filled by imports. The USSR probably will import about 45
million tons during the year ending 30 June; it has already bought 43.9 million
tons for delivery by that date. As livestock feed supplies dwindle, the output of live-
stock products will continue to decline. Meat output for the first three months of
1982 was below 1981's depressed level, although a larger-than-usual number of
hogs were slaughtered. Cattle slaughter weights in March were the lowest on
record and milk output per cow was down 4 percent. Unless weather conditions-
warmth and drying-allow early pasture use, farm managers may be forced to
resort to herd reductions. This would temporarily increase meat supplies but would
make it more difficult to meet longer term meat production goals as herds are re-
built.
Debate Over Debate over economic reform in the USSR appears to be gaining momentum. A
Economic Reform (u) spate of articles has recently appeared in the open press, for instance, praising the
virtues of the Hungarian "model" and advocating the introduction of similar
reforms into the Soviet economy:
? The March issue of the prestigious journal Voprosy Ekonomiki carried an
article praising the decentralization of Hungarian agriculture, its flexibility and
reliance on price incentives, and the encouragement and support given to private
plots.
? A recent issue of Pravda effusively lauded the innovativeness of Hungarian
banking and monetary policies.
? One of the most glowing tributes to Hungarian economic successes appeared in a
March Literaturnaya Gazeta article discussing the Hungarian retail trade
apparatus. Competition, decentralization, and flexibility in pricing were cited as
the reasons for the Hungarian "economy of plenty."
Three consecutive years of poor economic growth, the political maneuvering for
the succession currently under way, and recent events in Poland have all converged
to make the climate for discussion of reform in the USSR more propitious than at
any time since Brezhnev's accession to power in 1964. Thus far, however, this kind
of discussion has not been reflected in pronouncements by upper party echelons.
Opposition to reform by party hardliners concerned about the political implica-
tions of decentralization and with protecting their own self-interests remains
strong.
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Soviets Disclaim Since the speech in which Brezhnev said the USSR would put the United States
Intent To Deploy "in an analogous position" if intermediate-range missiles are deployed in Europe,
Nuclear Weapons Soviet officials have denied that they mean to use Cuba for this purpose. Five days
in Cuba after the speech, the head of the USSR's Institute of the USA and Canada told a
British interviewer that there was no basis for Western speculation that the Soviets
intended to violate the Kennedy-Khrushchev understanding on Cuba. On 27
March, a senior Soviet general said in a Moscow television interview that the
USSR could retaliate against the INF deployments without bringing "other
territories" into play. Subsequently, a leading Soviet foreign policy specialist told
the US Embassy that the general's statement was authoritative.
By raising the specter of a new Cuban missile crisis, Moscow may have hoped that
many in the West would come to view the planned deployment of US missiles in
Europe to be as destabilizing as Khrushchev's gamble of 20 years ago. The Soviets
probably saw, however, that the threat distracted attention from their moratorium
offer and was counterproductive in terms of winning over public opinion. Soviet
spokesmen, nonetheless, continue to speak in broader terms of the USSR's right
and intention to retaliate if the United States proceeds with its missile deployment
plans.
New Tanks The Soviets appear to be in the early stages of replacing the T-62 medium tanks in
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have been armed with T-62s since the mid-1960s. The changeover probably will
not be complete until 1987 if it proceeds at the rate at which T-64s have entered
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M-1 Abrams tanks that are entering NATO forces opposite these two southern
armies. These T-64s may be an improved version that is known to have been
entering at least one of the other three armies in the GSFG since last July.
Progress on
New Large
Military Transport
The large military transport being developed by the Antonov Design Bureau in
Kiev could be ready for flight-testing late this year.
the prototype is now in final assembly and
sign Bureau is being strengthened.
could make its first test flight within seven to 10 months. A fuselage test fixture
used to test the AN-22 (currently the Soviets' largest operational transport) is
being enlarged, and the runway at the flight test airfield used by the Antonov De-
years in the mid- 1970s, probably because of problems in engine development.
According to emigres, the program to build this transport was begun in 1973. The
mockup of the aircraft reportedly resembled the C-5A, on which the design bureau
had assembled extensive data. The program was apparently delayed about two
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Crime Fighting in Top party officials in Soviet Georgia have intensified the pressure on lower level
Georgian SSRD administrators to combat rising crime (much of which is associated with black
marketing) and widespread corruption in the republic. Anticrime commissions
have been established with republic ministries and party organizations, and the
second party secretary is to report on the status of their work on a weekly basis.
The organizational changes appear to be related to the ongoing nationwide
anticorruption campaign and could be implemented in the other Soviet republics.
In discussing the commissions, Georgian party chief E. A. Shevardnadze implied
that the prevention of criminal activity is tied to the improvement of people's living
standards-a rare open acknowledgment of such a connection. Georgia has long
been known for its black marketing, in part because purchasing power is much
greater than the regime's ability to deliver goods and services.
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Viewpoint
The views expressed in the following
article are the authors and do not
necessarily represent a consensus of
CIA anal vsts.
The Many Burdens
of Defense
in the Soviet Union
Rubles, dollars,
Computers, collars,
Engineers, chemists,
Male orfemist,
Capital and labor
For plough or saber,
? The ruble cost of defense in the USSR understates
the burden on the economy because defense pro-
grams use especially high quality, scarce resources
which are badly needed by the economy.
? Military R&D is about three-fourths of total R&D.
? Military procurement of machinery and equipment
is about one-third of all final uses of machinery and
equipment.
Opportunity cost,
Steel capacity lost;
We'd choose a measure if we knew how!
Burden, burden, who's got the burden now?
Those who have followed the writings and estimates
on Soviet military expenditures over the years are
aware of considerable difference of opinion as to how
much of a burden on the Soviet economy military
programs are and as to the correct way to measure the
burden. Ways of measuring burden have, indeed,
proliferated in recent years. To illustrate this point,
consider the following statements, all of which have
been used to express the burden of defense on the
Soviet economy:
? Defense expenditures are about 12 to 14 percent of
GNP,' when both are measured in ruble prices.
? Defense expenditures are about 11 percent of GNP
when measured in dollar prices.
In the United States no one is particularly reluctant to
use dollar cost as the measure of the burden of
defense.' The objection to the use of ruble cost in the
case of the USSR stems in part from a widespread
and well-founded suspicion of the usefulness or sig-
nificance of prices in the Soviet economy. One can
conclude from the haphazard incidence of shortages
of industrial as well as consumer goods in the USSR
that the prices do not represent relative priorities
either of consumers or of planners. The artificiality of
Soviet prices is, however, only a symptom of a much
more fundamental disability of that bureaucratized
system. The Soviet productive system is in a state of
gross and pervasive "disequilibrium," in the sense of
the word as defined in conventional equilibrium the-
ory of economics. This paper attempts to explain how
this theory applies to the USSR, and why, as a
consequence, the ruble measure of Soviet defense has
a very uncertain meaning.
2 Whenever I speak of cost as a measure of burden, I mean defense
cost relative to some other aggregate such as GNP, for example, the
dollar value of defense as a percent of GNP in dollars or the ruble
value of defense as a percent of GNP in rubles.
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It is to be hoped that this discussion does not strike a
blow for ignorance. Nevertheless, it is a plea for
recognition that we are in the presence of uncertainty.
The problem is a briar patch of complexity. If the
reader finishes this paper with the feeling that he
understands the problem clearly, he is ahead of the
author. The following simplified and condensed out-
line of the argument may help the reader to muddle
through.
? The proper measure of the burden of defense is its
opportunity cost, that is, the value of alternative
goods and services done without in order to acquire
defense.
? In a perfectly competitive market economy in "equi-
librium," the opportunity cost of defense is the same
as its resource cost or cost of production, that is, the
sum of costs of all inputs used to produce the
defense goods and services.
? The bureaucratic nature of the Soviet system, the
physical allocation of resources by bureaus instead
of market allocation, keeps the economy in chronic
"disequilibrium."
? In an economy in a state of chronic "disequilibri-
um," opportunity cost has several different values,
depending on which alternative goods are valued,
and it is quite uncertain which of the many opportu-
nity costs, if any, is measured by resource cost.
? Our ruble estimate of defense expenditures in the
USSR is, more or less, a resource cost estimate and
is a very uncertain measure of burden.
? Any other measure, such as the dollar cost of Soviet
defense, is an even worse measure of burden.
? Effective transfer of research and development in-
vestment resources out of defense would require
some drastic administrative reform.
? The impact of a change in defense in the USSR, like
the burden of defense as a whole, should be consid-
ered to be multivalued. The value of a shift to
investment, as measured by the effect on growth,
may be much less than for a shift to consumption, or
at least some kinds of consumption.
The Burden of Defense in Equilibrium
The burden of defense or any other portion of final
demand in a market economy is, according to conven-
tional economic theory, measured by the market value
of the goods and services purchased (as a share of
GNP), provided we assume the economy is in equilib-
rium. Equilibrium is defined precisely in general
equilibrium theory. It states that a dollar's worth of
defense (or any end use) forgone would release re-
sources that could be transferred to produce a dollar's
worth of any other good or service. The necessary
condition for this is that the value of the product of
any resource at the margin is the same in all possible
industries. Thus, if a given kind of labor is used in
both the blue jeans industry and the integrated circuit
industry, the value of the product of one man-month
of that labor will be the same in each industry.' These
statements are the basis for the definition of opportu-
nity cost. The opportunity cost of one good is the value
of other goods forgone. Hence the burden of defense is
its opportunity cost-not its cost of production but the
value of the other goods that could have been pro-
duced alternatively. In equilibrium, these two, the
cost of production and the value of goods that could
have been produced, are the same.
The key aspect of equilibrium is that opportunity cost,
or value forgone, is single and unique; no matter what
goods are thought to be given up, their exchange value
is the same. A gun that costs $10 would be produced
by resources that could produce various other goods.
Suppose those resources could have produced 11
pounds of butter, or four pipe wrenches. In equilibri-
um, 1 1 pounds of butter and four pipe wrenches would
both have a market value of $10. In the absence of
equilibrium, opportunity cost (or burden) is ambigu-
ous. The four wrenches might be worth $8 and the 1 1
pounds of butter $6, or $12. In that case there are two
possible measures of opportunity cost, or as many
measures as there are possible alternative goods.
Perfect equilibrium in a market economy requires
perfect competition! This happy condition does not
exist in practice-certainly not in the United States.
' The product of labor referred to here is its net product (or
marginal product), product net of the costs of capital, materials,
and other resources used in production.
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However, the usefulness of the concept, in spite of the
stringency of the assumption, can be clarified by some
examples. In the United States, engineers must be
hired in the market, and Revlon Corporation can, by
paying a similar price, acquire just as good a chemist
as Dow Chemical Corporation. Or a small computer
service can hire just as good a programer as IBM uses
on its fattest defense project. Auto producers can buy
stainless or high-strength steel alloys at no price
premium and as easily as military aircraft producers.
Finally, government businesses and individuals pay
the same prices for the same products by and large
(allowing for such things as volume discounts). On the
other hand, equilibrium is far from universal. Urani-
um is preemptively controlled by the government.
Excise taxes, price supports, tariffs, and monopolies
exert their influence. Nevertheless, in the United
States, as in most market economies, there are strong
private incentives for moving resources in the direc-
tion of equilibrium. The characteristic of equilibrium
or a reasonable approach to it which is crucial both
for the health of an economy and for measuring
values in it is that resources can and do, given some
time, transfer at small cost from one use to almost any
other. This does not necessarily occur by direct trans-
fer but by multiple, successive, and indirect shifts.'
The Burden in Disequilibrium
In an economy in disequilibrium the opportunity cost
of a program may have many possible values or it may
not even be measurable. For example, consider one
part of the US economy, which is surely not in
equilibrium-social services for the poor. Would $5
billion taken from defense expenditures produce the
same value of production in health services via some
national health insurance, or would a large part of the
' The easiest way of transferring resources to new or different uses
is by preferential direction of new investment and new workers to
the new uses, combined with depreciation and attrition of resources
in the old uses. Most transfers of resources probably take place at
this evolutionary rate. Frequently, however, changes in demand
require a much more rapid and radical change. Then existing
resources as well as new resources must be redirected. It should be
noted that most physical assets cannot be easily moved to different
locations. Transfer in that case means using the assets to produce a
different product. The argument of this section and the succeeding
one implies that for any degree or rate of reallocation of resources,
including even full mobilization for war, the response of a market
economy is likely to be more efficient than that of a centrally
directed socialist economy.
funds be dissipated in higher incomes for doctors,
hospitals, and associated enterprises? Or would $5
billion transferred into an antipoverty program pro-
duce an equivalent value of output? In the latter case,
there is no known way of measuring output.
The Soviet economy is in a state of pervasive disequi-
librium. Resources in some activities are used very
much more efficiently than in others. A few conspicu-
ous examples are: the wide disparity in efficiency
(output per worker) between agriculture and manufac-
turing; the great disparity in profits (negative and
positive) between firms; the widespread production of
tools and spare parts by enterprises for their own use
at high cost compared to the cost of producing them in
specialized tool and spare part enterprises; the surplus
of some consumer goods coincidental with the chronic
shortages of many other kinds; the enormous re-
sources tied up in unfinished construction and unin-
stalled equipment. Not by the greatest reach of
abstraction can one assume that resources are used in
all industries at about the same level of productivity.
In the centrally planned and administered economy of
the USSR, resources do not transfer easily from low-
value uses to high-value uses. They do not transfer at
all except by official plan or bureaucratic needs. Even
under officially planned fiat, the shift of resources
from their accustomed uses to new cues is often
painful. Witness Khrushchev's difficulty in accelerat-
ing the chemical industry at the expense of steel.
When anyone below the top political leader seeks to
change things, the results are likely to be nil. Gosplan
and various ministers have been inveighing for dec-
ades against low product quality, excessive construc-
tion time, and inefficient small-scale production of
spare parts and castings, and in favor of specialization
of production and the introduction of new and im-
proved designs. Yet none of these deficiencies has
been noticeably remedied.
The burden of defense or its major parts varies
according to what use one assumes the resources
might otherwise be put. When in 1955 Khrushchev
reduced the number of personnel in the armed forces
and sent their equivalent to the Virgin Lands, he
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achieved a gain in output very much larger than the
reduction in defense cost. That opportunity was,
however, unique. Other allocations of the resources
released would have come out differing from the
Virgin Lands result and differing from each other.
Any economy is in disequilibrium to one degree or
another in the sense that transitional adjustments are
always in progress and new developments are contin-
ually initiating additional adjustments. So long as
resources can move in response to economic demands,
the assumption of equilibrium can be usefully made.
In such cases, monetary values are a reasonable
measure of opportunity cost. But the Soviet economy
does not respond like a market economy and ruble
costs are an uncertain measure of the burden of
defense.
I shall argue that the Soviet economic system should
be analyzed like an administrative bureaucracy. In
such a system the value of an alternative use of
resources depends on what that use is, and further-
more, on what resources are to be transferred. A
single ruble total for defense cannot convey these
multiple values. However, none of the alternative
measures are better, and indeed, are perhaps worse.
Alternative Measures of Burden
Let us consider first the significance of the dollar
value of Soviet defense as a share of GNP, measured
in dollars. If rubles are not to be trusted, then dollar
valuation has an a priori attractiveness. The estimat-
ed dollar cost of Soviet defense programs serves the
legitimate function of facilitating a comparison of the
aggregative size of Soviet and US expenditures or
components thereof. It does not, however, reflect the
resource cost, much less the opportunity cost within
the USSR.
The difficulty with applying US prices to the USSR is
illustrated by the case of military personnel costs,
including subsistence and quarters, and other outlays.
In this case, the ruble cost is reasonably well known or
easily estimated. That is not to say that the Soviet
armed forces necessarily pay full resource cost on
everything they purchase, but these full costs (for
example, of food and uniforms) can be approximately
estimated. The pay and subsistence of Soviet enlisted
men are very much lower than those of American
enlisted men. While not conceding that the pay and
subsistence of military manpower reflect their oppor-
tunity cost within the USSR, one can conclude that
there is no justification for using the very high US pay
and subsistence rates as a measure of the burden on
the Soviet economy.
The rationale for using dollar prices applies, if at all,
to the valuation of Soviet military equipment. The
CIA has explained that the low ruble price of military
equipment relative to its dollar price is mainly a
reflection of the high cost of food and textiles in the
USSR rather than of the efficiency of the Soviet arms
industries. However, the feeling persists that the
burden on the Soviet economy of producing such a
substantial quantity of sophisticated equipment must
be more than the estimated ruble costs imply. The
dollar costs are surely not the right measure, but the
Agency has implicitly concurred in the criticism of
ruble prices by advancing a hypothesis about scarce,
high-quality resources. Thus, we have said that the
military establishment preempts especially high-
quality resources, both men and materials, which are
badly needed for the modernization of Soviet indus-
try, and that on this account the ruble costs of defense
understate its effect on the rest of the economy. The
discussion which follows suggests that this hypothesis
may be misleading and should be reexamined in the
light of the opportunity costs of these scarce
resources.
In the first instance the high-quality-resource hypoth-
esis implies that our estimates of cost per unit of
weapons including research and development costs are
too low. That may be true, but even if full resource
costs were correctly estimated, there still might be a
kind of understatement which would be significant. If
the resources are badly needed in the civilian econo-
my, then their productivity in civilian uses would be
higher than resource cost. In this sense, the opportuni-
ty cost would be greater than the estimated ruble cost.
If the Soviet economy is in disequilibrium, as argued
above, this might be true. However, is it true in fact?
For this question, the nature of the disequilibrium is
crucial.
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It is plausible to suggest that the rapid expansion of
expenditures on advanced weapons in the early 1960s
disrupted civilian programs of investment and re-
search and development, and that it created shortages
and bottlenecks of specialized types of materials and
equipment. This argument is at least consistent with
the very abrupt reduction in the rate of economic
growth after 1960. But has this remained the case in
recent years? Given time, specific bottlenecks can be
broken simply by an adjustment of allocations within
the overall civilian/military division of funds. But the
continuing decline of the output-capital ratio and of
the rate of growth of factor productivity despite rising
civilian research and development, and strenuous
administrative efforts to stimulate new technology,
argues that the economic problems are probably
chronic and more deepseated than the bottleneck
hypothesis comprehends.
The problems of transferring resources from military
to civilian uses, from investment to research and
development, from any of those to consumption or
vice versa are institutional in nature. The disequilibri-
um in the USSR is institutional rather than alloca-
tional. By this I mean that significant improvements
in the Soviet economy cannot be achieved simply by
reallocating funds, or even by changing physical plans
and allocations. The existing state of affairs is en-
trenched in a bureaucratic administrative structure
whose rigidities are an imposing barrier to change.
The widespread belief that the Soviet leadership can
reallocate resources at will in large quantities in any
desired direction is not borne out by experience. They
can reallocate some resources in some directions. The
New Lands campaign was an impressive movement of
labor and agricultural equipment. However, Khru-
shchev's campaign to expand the chemical industry
had faltering and mediocre results, and is still not
swinging in spite of continued support by Brezhnev
and Kosygin. Moving labor around is much easier in
the USSR than redirecting the use of plant and
equipment.
The relation of administrative arrangements to the
burden of defense can perhaps be clarified by an
extreme example from history.
The Burden of Defense in Sparta
Suppose we were to ask what was the burden of
defense in ancient Sparta. The question could not be
answered in economic terms. The Spartan society and
government existed primarily for war. Whether peace
or war prevailed at any given time, the Spartans were
perpetually mobilized. Resources did not shift be-
tween defense uses and civilian uses. On the contrary,
labor was permanently divided into two classes, the
Spartans who devoted themselves to a military life,
making war, or training for the next war, and the
Helots who were forcibly assigned to the job of
supporting the Spartans and making their weapons.
The Helots could not fight very well and did not want
to fight anyone, except perhaps the Spartans, which
they did when they thought there was a chance to
rebel. The Spartans could not farm or shoe horses and
certainly wouldn't want to.
The case of Sparta points up two problems in extreme
form. First, it would have been very difficult to
discover what share defense absorbed of Sparta's
GNP, because the resources for defense, either the
Spartans' activities or that part of the Helots' work
devoted to supporting them, were not, in general,
purchased in the market, but were preempted by
command. (Estimating Sparta's civilian GNP would,
of course, be no trick for economic intelligence offi-
cers.) The second problem is that even if the cost of
production of defense in Sparta were estimable, its
opportunity cost was not. An alternative use of re-
sources and an estimate of its value could be achieved
only by a radical institutional overhaul of the Spartan
state and body politic, and all its tradition and
ideology.
The Redirection of Bureaus
The Soviet economic administration resembles the
Spartan one in interesting ways. Large parts of the
military production are separated from civilian pro-
duction not only by opaque security curtains, but
different organizational subordination, and by differ-
ent sets of rules and modus operandi. Under what
conditions and in what condition can resources shift
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out of military work to civilian? Some can shift quite
easily; noncommissioned soldiers can shift to civilian
employment at no loss in ruble value produced. The
aircraft industry can shift from military to civilian
aircraft fairly efficiently as it did in 1956-58. The
same is true for those parts of the civilian equipment
industries that are producing land armaments or
related equipment, so long as they shift to similar
types of civilian equipment. The difficulties center in
the advanced weapons systems, both R&D, produc-
tion and deployment.
It is evident that the Soviet military establishment has
achieved a much more impressive record in fostering
the development of new products and bringing them
into serial production than has civilian industry. At
least three conditions seem to favor these military
activities. First, the familiar and ubiquitous supply
difficulties of Soviet industry succumb much more
easily to the gentle coaxing of military priority and
expediting. Second, Communist party interference is
at a minimum in military work. Third, and most
important, military R&D and production benefit from
the close, interested, and demanding supervision of
the consumers of the product. This effective commu-
nicarion of users with producers is missing at all
stages of civilian production.
The degree of difficulty of transferring the high-
quality performance of the military productive organi-
zations to civilian objectives is impossible to estimate.
When the United States wished to launch itself into
space, it set up an entirely new agency, gave it a goal,
priority, slogans, and resources. Perhaps the relative
failure of the Soviet space program may be in part
due to the fact that it was left under the control of the
armed forces for whom space was a secondary goal.
Recent efforts of the Soviet Government to improve
civilian R&D-issuing more and still more instruc-
tions as to managing, training, paying bonuses, con-
tracting with consumers, and so forth-have not been
and are not likely to be very useful. A major institu-
tional overhaul as well as a reallocation of resources
would be required. The mills of gods and bureaucra-
cies grind exceedingly small, but only if the product
stays the same. If you wish to change from grinding
flour to grinding lenses, or vice versa, then you need to
get a new bureau'.
The Burden of Defense in the USSR
The conclusion to be drawn from the arguments above
is that the burden of defense, that is, the opportunity
cost of the resources used in defense, depends on
which alternative uses the resources would be trans-
ferred to and which resources are to be transferred.
Even with accurate data no single measure will be
accurate. However, the ruble measure, allowing for a
generous margin of error, is less misleading than any
other single measure. Thus, the share of defense in
total R&D, the defense share of machinery produc-
tion, or of electronics production, while interesting in
themselves, do not justify conclusions about burden.
Each would suggest a much heavier burden than the
actual total cost of defense in rubles as a share of
GNP. None of these specifics has any more implica-
tion for the burden of defense than the share of
titanium used in defense. In each case, as with ruble
costs, the question to be asked is whether the opportu-
nity cost of the resources or the value of the marginal
product in alternate uses is more, equal to, or less than
their cost in military use.
Because of the institutional disequilibrium of the
Soviet economy, multiple and quite different answers
can be expected as the opportunity cost of different
kinds of resources. In research and development there
is reason to believe that civilian industries could not
effectively use large amounts of these resources with-
out a substantial and unspecifiable institutional re-
form. Resources that could be shifted to civilian
investment probably could do so at no loss in ruble
value of product. However, the utility of investment
depends on its rate of return, that is, its effect on
growth. An accumulation of evidence indicates that
the return on investment in its present pattern and
distribution has gotten very low. This means that,
barring some drastic institutional reform, a large
transfer of resources from defense to investment is
likely to increase the rate of economic growth by a
disproportionately small percent. In both cases the
suggestion is that the opportunity cost is probably less
than the resource cost of the military resources.
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How this might work out for various different kinds of
consumer goods, for agriculture, for housing, for
consumer durables, would have to be examined case
by case. One supposes that consumer durables (includ-
ing automobiles) could be expanded fairly readily by
resources now used in defense production, but that
consumer services, highways, repair services, and
agriculture might quickly run into diminishing
returns.
An important application of these views, if they are
correct, is to the analysis of the economic impact of a
change in defense spending such as might result from
an arms limitation agreement. The argument here is
that there is no standard or routine calculation that
will give a useful answer. Each proposed change in
defense spending must be studied as a special unique
case with due regard to plans of the leadership, the
alternative economic opportunities, and the possibili-
ties for organizational change which might be in the
offing. And for each change several alternative im-
pacts could be estimated.
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