INTERNATIONAL ECONOMIC & ENERGY WEEKLY 30 SEPTEMBER 1983

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CIA-RDP84-00898R000300120009-2
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September 30, 1983
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Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Directorate of I Secret Intelligence International Economic & Energy Weekly Secret DI IEEW 83-039 30 September 1983 Copy 8 6 5 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Secret International Economic & Energy Weekly 30 September 1983 iii Synopsis 1 Perspective-The Soft Oil Market in Near East-South Asia 3 Briefs Energy International Finance Global and Regional Developments National Developments 15 Middle East-So h Asia: Re ional Interdependence and the Soft Oil Market 23 Persian Gulf Oil Still at Risk: Some Economic Implications 35 OPEC Persian Gulf States: Reduced Foreign Aid 25X1 25X1 25X1 25X1 25X1 -25X1 25X1 Comments and queries regarding this publication are welcome. They may be directed toDirectorate of Intelligence, telephone Secret 30 September 1983 25X1 25X1 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Secret International Economic & Energy Weekly Synopsis Perspective-The Soft Oil Market in the Middle East-South Asia 25X1 25X1 Lower oil revenues are forcing a more tight-fisted attitude toward government spending throughout the Middle Eastern-South Asian region. Even the oil- rich OPEC states, ever mindful of the need to maintain sufficient economic momentum to forestall political and social unrest, have begun to adopt some restraint. 25X1 Middle East-South Asia: Regional Interdependence and the Soft Oil Market Because of the close interdependence among countries in the Middle Eastern 25X1 South Asian region, the economic effects of a prolonged soft oil market will be widespread. Although financial reserves will cover the loss of income for the major oil exporters in the short term, they face tough spending cuts if the soft oil market persists beyond the middle of the decade. 25X1 Persian Gulf Oil Still at Risk: Some Economic Implications The delivery of five French Super Etendard aircraft to Iraq-which we believe is likely-increases the possibility of an escalation of the Iran-Iraq war tha25X1 Iraq: Economy Under Siege 25X1 With major oil export facilities inoperable and Damascus refusing to allow oil deliveries through the Iraq-Syria pipeline, Iraq's oil revenues have plummeted to less than one-third prewar levels. The Iraqis already have virtually shelved their development program, and Baghdad has been forced to slash imports this year for the first time since the war began in 1980. 25X1 OPEC Pesian Gulf States: Reduced Foreign Aid Aid disbursements by four OPEC Persian Gulf states-Saudi Arabia, Kuwait, the United Arab Emirates, and Qatar-declined by over 20 percent in 1982 to $11.4 billion. First-half 1983 aid transactions indicate OPEC states have be- gun to limit new aid pledges and are slowing transfers on previous pledges. iii Secret DI IEEW 83-039 30 September 1983 25X1 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Perspective Weekly International Economic & Energy 30 September 1983 Perspective-The Soft Oil Market in the Middle East and South Asia Lower oil revenues are forcing a more tightfisted attitude toward government spending throughout the Middle East and South Asia region. Even the oil-rich OPEC states, ever mindful of the need to maintain sufficient economic momentum to forestall political and social unrest, have begun to adopt some restraint. Y~ .. ? Slowdowns in spending for military imports. ? A squeeze on foreign aid expenditures and less timely disbursements. Thus far, cutbacks are particularly noticeable in: ? Reduced spending for development projects. ? Cuts in social programs-including generous subsidies for petroleum prod 25X1 ucts e1ectricit and water We believe that the wealthier OPEC states will be able to weather some reforms-including reductions in benefits to their populations-without undue hardships. They can use their financial reserves and borrowing power to reduce the severity of the reforms. For some of the more financially troubled OPEC members in the region, however, reduced revenues present major difficulties. For example, Iraq's conduct of its war is ham ered by finan 'al problems, and Libya has been forced to slash imports. 25X1 The slowdown in economic activity in the OPEC states will reduce the growth or even cut the size of their foreign work forces. For many of the African and Asian countries, a return of migrant workers or lower remittances would exacerbate the economic and social problems already present. Most labor- exporting countries-particularly Egypt, North Yemen, and Pakistan-have limited employment opportunities for even a small fraction of migrant workers. We believe that a large-scale return of workers employed in the Gulf would in- crease frustration and heighten political tension, particularly in urban areas. 25X1 Reduced revenues are likely to limit the influence of OPEC states with other LDCs. With the prospect that Arab aid programs are likely to be cut- particularly to those countries less vital to the security of the aid donors- potential recipients will have less incentive to support Arab issues. Some African countries, for example, are already more receptive to reopening Secret DI IEEW 83-039 30 September 1983 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 While lower oil revenues are posing political challenges to the oil producers, the reduction in oil prices has not given a major boost to Middle East and South Asia oil importers. For the most part, the countries' oil bills are small, and, in any case, savings are threatened by the remittance, aid, and export flows that are now at risk. Secret 2 30 September 1983 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Secret Energy interest for some time in US and other Western equipment for this and other25X1 he Soviets have expressed Barents Sea. the project would be roughly equivalent to the $25 billion Siberian gas pipeline to Western Europe. Soviet Oil Production Jhere 25X1 Plans could be a "dramatic decrease" in domestic oil production after 1985 unless offshore resources in the USSR are exploited. As a result, the Soviets are seeking help from Western oil companies in preparing feasibility evaluations, 25X1 beginning in early 1984, of a large offshore development program in the 25X1 Soviet planners apparently are considering actions that they hope will offset a probable leveling off or decline in oil production after 1985. The USSR lacks, however, the manufacturing capability and experience in using machinery suitable for use in the severe climate of the Barents Sea. Moscow would depend heavily on the West for such equipment, and it appears to be laying the groundwork to get US or other Western firms interested in such sales. Even if Western assistance were obtained, the USSR would be unlikely to extract oil commercially from the offshore reserves before the early 1990s. Canadian Oil Sands Following major tax and royalty concessions by both Ottawa and Alberta, 25X1 Project Wins Imperial Oil Limited (Exxon's Canadian subsidiary) has announced it will Concessions proceed with a $245 million oil sands project in northern Alberta. The project is expected to produce 19,000 b/d of very heavy crude oil beginning in 1985 and, with additional investment, total output could rise to 57,000 b/d by 1990. Both the federal and provincial governments have been looking to Canada's vast oil sands deposits for additional oil production to help meet the projected shortfall in Canadian requirements in 1990. This project is part of a trend to replace large projects that have failed-such as Alsands, which was to have produced 140,000 b/d-with smaller, more easily financed facilities that can later be expanded. 3 Secret 30 September 1983 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Strong Dollar The continued strength of the US dollar has partly offset lower OPEC crude Holds Up Foreign oil prices in Western Europe and Japan. The average official price of a barrel Oil Costs of OPEC crude oil dropped nearly $6 per barrel, 17 percent, between December 1981 and June 1983. Because crude oil prices are denominated in US dollars, the cost of French crude imports increased by 10 percent during the period, reflecting the sharp appreciation of the dollar vis-a-vis the French franc. In West Germany and Japan the cost of imported crude oil has declined only 8 percent and 11 percent, respectively, since yearend 1981. During the same period, the average US imported price declined by nearly $7 per barrel or 18 percent to $29.33 per barrel. 1981 December 1983 June Percent Change France (francs) 208.89 230.3 10.2 West Germany (deutsche mark) 83.84 76.8 -8.4 Japan (yen) / 7,862.0 7,003.0 -10.9 United States (US $) 35.95 29.33 -18.4 Dutch Authorize The government's energy policy for 1984 outlined this week reverses its New Gas Exports previous policy of restricting natural gas export sales and authorizes Gasunie-the state gas distribution monopoly-to negotiate new export contracts. According to government officials, the policy change is due to a decline in Dutch gas sales and a worsening domestic fiscal situation. State gas revenues, which account for 18 percent of the national budget, are expected to fall 25 percent over the next four years. Extra gas volumes will be offered to customers in exchange for higher minimum offtake levels and higher prices to bolster the Dutch position in upcoming contract renegotiations. An immediate increase in gas export sales is unlikely because of sluggish demand growth. By giving in to the Dutch terms, however, customers may assure themselves of some additional volumes in the late 1980s and early 1990s. Secret 4 30 September 1983 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Secret South Korea Delays Nuclear Power Program South Korea has postponed plans to purchase up to four additional nuclear power plants until at least 1986, according to officials at the Ministry of Energy and Resources. Reduced growth rates for electricity demand, improved conservation, and government efforts to hold down foreign debt all contributed to the postponement. The announcement caught the Korea Electric Power Company in the process of preparing to solicit bids later this year for two 1,000 megawatt-electric (MWe) nuclear power plants. Bids for two follow-on 1,000 MWe units were planned for 1985. Electricity demand growth stagnated in 1980-81 and actually declined in 1982. Despite the current delays, we believe Korea will remain a strong market for nuclear reactor sales later in the decade. 25X1 Romanian Drive For Romanian President Ceausescu reportedly has authorized imports of Western Oil Independence oil equipment to facilitate the drive for petroleum self-sufficiency. Minister of Petroleum Vlad cited Romania's failure to persuade Moscow to sell oil for soft currency-and his own success in convincing Ceausescu that high-pressure oil tools were the key to increasing domestic output-as reasons for the decision. 25X1 quickly. The purchases would be consistent with Ceausescu's effort to free Romania from dependence on imported energy by 1985. Domestic oil production peaked in 1976 at 294,000 b/d and dwindled to an average of 232,000 b/d in 1980-82. Imports, meanwhile, rose from 170,000 b/d in 1976 to an average of 265,000 b/d in 1980-82. In response to hard currency constraints, Romania has reduced oil imports for the last two years and has cut the domestic consuption of oil and petrochemicals by more than 10 percent this year. These cuts have already led to transportation problems, factory closings, and fuel shortages for agricultural machines. Even if the oil equipment is purchased this year, however, it would take several years before oil output would increase because. Romania lacks the geological and drilling expertise to exploit the technology Secret 30 September 1983 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Mexican Debt Mexico City has rescheduled the bulk of its public debt and is releasing foreign Rescheduling exchange to reduce private-sector arrearages. International commercial bank- Developments ers, nevertheless, still project substantial defaults in privately held, nonguaran- teed debt. Mexico City signed agreements to restructure $8.6 billion in principal obligations of five large government agencies this week. This brings the total of the restructured debt of the eight largest government agencies to $20 billion; payments will be stretched over eight years. We expect the 20 remaining public agencies negotiating relief on some $2-4 billion to work out agreements by the end of the year. The Central Bank announced plans to release $280 million by the end of this month to cover one-half of the past due private interest held in escrow accounts. The balance, with accrued interest, is to be paid by the end of 1983. Earlier this month, Mexico City released $185 million to cut private-sector arrearages on overdue suppliers' credits. Restructuring privately held commercial debt, however, continues to be a slow and difficult process. Less than one-fifth of the $10 billion non guaranteed private debt maturing by yearend 1984 has been negotiated. Many international financiers believe that these problems will restrict private Mexican business access to new foreign lending for at least the next two years. Guarantees from foreign official agencies or the Mexican Government, however, could regain some private businesses access to foreign funding somewhat sooner. Brazil's Letter of Brazil's signing of a letter of intent in mid-September agreeing to IMF terms Intent Brings for a revised stabilization program has not yet led to an easing of the country's Little Relief foreign exchange crunch as earlier expected. A usually reliable source reported that international banks, following the lead of the IMF, do not now intend to release their long-delayed payments-up to $1.9 billion-under existing medium-term loan commitments until the Brazilian congress approves a crucial anti-inflationary wage decree. Bankers almost certainly were unnerved last week by the defeat of a different but analogous wage decree by an increasingly rebellious congress. Although the Brazilian administration contin- ues to press for support for the IMF-sought salary decree, which comes up for vote late next month, prospects for the decree's rejection and a breach of the letter of intent clearly have increased. Secret 6 30 September 1983 71 25X6 25X6 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Secret The continued withholding of foreign bank disbursements is severely eroding Brasilia's ability to service debt obligations and to import needed goods. Arrears in interest payments have mounted to nearly $1.5 billion, according to the press, and could result in some US bank loans being declared non- performing assets. Meanwhile, the government's inability to purchase ade- quate supplies of fertilizers and industrial materials from abroad is threatening major production declines in agriculture and such basic industrial sectors as steel and chemicals. because Brazil's 25X1 foreign exchange needs have become so acute, early this month Petrobras-the state-owned oil company-began selling its accounts receivable to foreign creditors at discounts up to 25 percent. Portugal's Financial IMF assistance and commercial loans should cover most of Portugal's 1983 Outlook financing needs, but Lisbon will have to sell gold beyond what it has already sold recently. The IMF Board is likely to approve a new standby loan at its 7 October meeting, and according to the US Embassy, Lisbon expects to receive the first tranche of about $100 million at the end of October. Portuguese officials also expect to receive $250 million under the Compensatory Financing Facility for shortfalls in 1981 export earnings. Immediately after the IMF meeting, the Portuguese will begin seeking a second $300 million Eurodollar syndicated loan. Although bankers have expressed confidence in the Soares government's economic policies, they probably will raise the spread on the loan to close to 1 percentage point over LIBOR-twice the spread on Portuguese loans last year. While these funds will cover most of Portugal's needs, Lisbon probably will have to sell gold to repay a $300 million loan from the Bank for International Settlement (BIS) that falls due early in December imports. 25X1 World Bank Project Hungary has obtained more than $500 million in loans from Western Loans for Hungary commercial banks and the World Bank to finance development projects intended to improve its hard currency trade performance. The World Bank in June authorized development loans of $130 million for grain storage facilities and agricultural mechanization and $109 million for energy. diversification and conservation. On 26 September a group of European, Middle Eastern, and Japanese banks provided Hungary with a $200 million Eurodollar loan to cofinance the projects while a group of Japanese banks are completing a yen- denominated loan worth $72 million. The World Bank is contributing $45 million to the two commercial syndications in addition to its original commit- ments. The Hungarians claim, probably optimistically, that by 1985-86 the agricultural projects will generate $100 million annually in additional exports and by 1987 the energy projects will save $300 million annually in energy Secret 30 September 1983 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Secret Although World Bank support was crucial, completion of the commercial loans demonstrates that Hungary enjoys a better standing with Western bankers than the other East European countries. Despite the reluctance of banks to extend new loans to financially troubled countries, Budapest has raised more than $725 million in syndicated credits over the past year. The new loans will not help the Hungarians cover large debt service obligations coming due next year because funds are tied to project imports and the payoff from the investments is several years away. Budapest, nonetheless, hopes that these credits will encourage bankers to extend other loans needed to meet its obligations. Global and Regional Developments Big Six Trade The Big Six countries as a group boosted their merchandise trade surplus to a Surplus Grows seasonally adjusted $4.3 billion in second-quarter 1983, continuing the steady improvement that began in mid-1982. The growing surplus is largely the result of import cuts outpaced declining export sales by these countries. Compared to 1982 Big Six imports in second-quarter 1983 were off 10.5 percent while exports were down 8.4 percent in nominal terms. Among the Six, Japan, France, Italy, and Canada improved their trade balances during the second quarter while the United Kingdom and West Germany experienced a deterio- ration. Japan's surplus was $5.9 billion, West Germany's $4.0 billion, and Canada's $2.0 billion. The United Kingdom, France, and Italy recorded deficits of $3.7 billion, $3.1 billion, and $1.2 billion, respectively I II III IV I II Exports (f.o.b.) 171,791 167,796 159,293 154,971 162,351 153,708 Imports (c.i.f.) 172,207 166,947 158,836 153,685 159,346 149,384 Trade Balance -417 849 457 1,286 3,005 4,324 Trade Balance with 3,155 2,018 3,882 5,404 3,179 5,023 the United States Secret 30 September 1983 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Secret Continued strength of the dollar and increased import demand in the recovering US economy helped to boost the Big Six surplus. Big Six exports to the United States have been on an upward trend over the past year and imports have dipped. Following a first-quarter 1983 drop, the surplus with the United States rebounded to $5.0 billion in the second quarter; only Canada and Italy failed to improve their US balances. For the near term, a sizable Big Six surplus is likely to persist because of continuing strong Japanese export performance and slack import demand in the major West European countries. National Developments Developed Countries 25X1 East German Trade Business at the Leipzig Trade Fair held earlier this month appears to have re- Possibly Returning to turned to near normal after two years of slow sales. Reduced credits from Normal Levels Western banks and East Berlin's severe austerity measures last year were responsible for the earlier decline. According to the Embassy in Berlin, many West European firms that attended the fair made trade credits available to East Berlin because they believe East Germany's general economic conditions have improved slightly and that it can continue to retire its external debt on schedule. Even Western firms that did not conclude deals appear optimistic about future sales. East Germany's buying practices at Leipzig-it bought more spare parts and luxury consumer items-and its continuing hard currency trade surpluses suggest that East Berlin is not as close to financial crisis as some Western observers have maintained. The Embassy also reported that East Germany was successful in selling to West German companies, indicating a possible reduction for the year of West Germany's large surplus in Australia's Wage With the support of the Hawke government, the Australian Arbitration Freeze Ends Commission last week ended Canberra's nine-month wage freeze by granting a 4.3-percent increase in wages, representing full indexation with inflation for first-half 1983. The wage increase is consistent with the incomes policy agreed to at last April's economic summit of business, labor, and government leaders and will cover nearly 90 percent of the Australian work force if adopted by state commissions as expected. The Commission also announced that wages will be fully indexed with the CPI for at least the next two years, which will make it difficult for Canberra to sharply lower inflation any further from the 9 Secret 30 September 1983 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Less Developed Countries Mexico Expands Mexico City began depreciating its "free" exchange rate last Friday for the Crawling Exchange first time since December 1982. The "free peso"-currently at 150 to the Rate dollar-now will slide by 13 centavos a day, matching the daily decline in the controlled exchange rate. During the past nine months, the controlled rate droped from 95 to 132 pesos to the dollar, while the "free" rate remained steady. International financiers applaud the move as a step in the right direction, demonstrating that Mexico City is controlling, not reacting to, economic developments. Government financial authorities, who plan to continue this policy until economic circumstances change markedly, believe that the parallel depreciation of the exchange rates will discourage currency speculation and ensure continuing large central bank profits on exchange transactions. The narrowing of the "free" and controlled exchange rates had gradually lowered the Bank of Mexico's gains from purchasing most foreign exchange at the cheaper controlled rate and reselling a substantial portion at the more expensive "free" rate. We believe the current 18 peso differential will allow the Bank of Mexico to net about $600 million from exchange transactions during the next 12 months, compared with some $1 billion during the past nine months. The policy initiative, however, does not address costly trade inefficiencies and will probably be insufficient to keep the exchange rate competitive for trade purposes, because we expect inflation to continue outpacing exchange adjust- ments. Until further exchange adjustments are made, we see only a small chance that ambitious government export expansion goals will be met or that the money Mexicans sent abroad during the last few years will return. The ex- change differential has also generated widespread smuggling operations, and aggravated official abuses, despite President de la Madrid's anticorruption campaign. Deepening Bolivian Economic conditions in Bolivia have worsened considerably since President Economic Problems Siles took power a year ago. The new administration's expansionary policies, including increases in the money supply and a burgeoning fiscal deficit, have driven inflation from about 200 percent in 1982 to a current annualized rate of some 350 to 400 percent. Rapidly rising costs, declining private investment, and labor agitation for major wage increases have hobbled national output. Mineral production-the mainstay of the economy-dropped about 10 percent during the first six months of 1983 because of work stoppages and insufficient spare parts for mining equipment. We estimate that these trends coupled with the devastating impact of adverse weather on agricultural output will lead to a 5-percent drop in GDP this year. Secret 30 September 1983 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Secret Major declines in mineral exports and increases in food imports, meanwhile, are boosting Bolivia's current account deficit from $355 million last year to an expected $450 million for 1983, causing a severe drain on reserves and increasing La Paz's difficulties in meeting foreign debt obligations. To relieve its acute foreign exchange pressures, Bolivia continues to seek to reschedule its nearly $4 billion foreign debt, subject to reaching an agreement with the IMF. An IMF agreement, however, will be difficult because of strong labor opposition to further politically sensitive austerity measures. If La Paz accepts IMF demands to drastically cut the fiscal deficit, enforce tight monetary policy, and close the gap between the official and the market exchange rate, these measures will likely heighten social and political pressures and provide Siles's military opponents with a rationale to intervene 25X1 Thailand Cuts According to the local press, the Thai Cabinet decided in early September to Tin Royalty reduce the royalty on tin by 18 percent to about $1.10 per pound in an attempt to curb the widespread smuggling of tin ore from the south of Thailand to smelters in Malaysia and Singapore. Before the cut, Thailand's combined royalty and taxes on tin averaged about $1.40 per pound, compared with about 25 cents in Malaysia. As a result of this differential, about 5,700 tons of tin worth about $50 million-15 percent of official exports in 1982-were 25X1 smuggled out of the country between October 1982 and A ril of this year ac- cording to the Thai Department of Mineral Resources. The cut was probably made because of pressure from the International Tin 25X1 Council, which in August warned Thailand to step up its suppression of smuggling activities before they further depress the world price of tin. The royalty cut is too small to have a major impact on the volume of smuggling, however, and additional substantial cuts are unlikely. The Finance Ministry, concerned about the country's large budget deficit, will fight any attempt to reduce revenues further. 25X1 Mauritanian Economy Faced with serious economic difficulties as a result of weak iron ore prices, a Under Strain significant decline in fishing revenues, and worsening drought conditions, Mauritania has appealed for emergency food aid and has sent emissaries to OPEC countries to ask for budgetary support loans. Several countries have agreed to supply Mauritania with 30,000 metric tons of food aid, most of which is wheat from the United States. Arab and OPEC multilateral organizations have provided some limited relief, but bilateral assistance from traditional Arab donors has dropped off this year, probably as a result of growing dissatisfaction with Mauritania's management of past funds, annoy- ance over President Haidalla's failure to reestablish relations with Morocco, and because of lower oil revenues of the donors. Assistance from the IMF is not likely in the near future unless Mauritania takes steps to devalue the ouguiya. Secret 30 September 1983 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 East European Data for first-half 1983 show that Eastern Europe's trade with non-Commu- Trade Trends nist countries is declining for the third consecutive year. Although the region's efforts to raise exports finally paid off in a small gain, the continuing reluctance of Western banks and governments to extend credits has forced more cuts in imports. Eastern Europe's 1983 trade surplus with the West will likely surpass last year's $1.7 billion figure by at least $400 million, but the cut in imports will further depress economic performance and living standards Delays in disbursing-the Western financial rescue package forced Yugoslavia to make the deepest cuts in imports in first-half 1983, reducing its hard currency trade deficit by $1.3 billion. Romania's export performance fell far short of expectations, forcing Bucharest to abandon its plans for reviving hard currency imports. Although Hungary posted respectable gains in exports, Budapest also reduced imports sharply to keep its financial recovery on track. Bulgaria and Czechoslovakia do not face the financial difficulties of the other East European countries, but slumping exports and conservative policies on hard currency trade led both regimes to limit imports from the West. Only Eastern Europe: Trade With Non-Communist Countries, January-June 1982 1983 1982 1983 Percent Change From Previous Year 1982 1983 Percent Change From Previous Year Total -80 1,210 15,849 16,20 1 2.2 15,929 14,991 -5.9 Bulgaria 311 293 1,454 1,31 9 -9.3 1,143 1,026 -10.2 Czechoslovakia 365 498 1,998 1,99 1 -0.4 1,633 1,493 -8.6 East Germany a 394 23 2,508 2,59 5 3.5 2,114 2,572 21.7 Hungary b -370 -86 1,576 1,73 1 9.8 1,946 1,817 -6.6 Poland 800 732 2,418 2,75 1 13.8 1,618 2,019 24.8 Romania 671 740 3,150 2,90 4 -7.8 2,479 2,164 -12.7 Yugoslavia c -2,251 -990 2,745 2,91 0 6.0 4,996 3,900 -21.9 a Does not include trade with developed countries. b Import data on a c.i.f. basis. Includes hard currency trade with socialist countries. Secret 30 September 1983 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Secret Poland and East Germany posted increases in both exports and imports. Poland's gains are somewhat deceiving, however, because trade was extraordi- narily low during first-half 1982. East Germany has used its special relation- ship with West Germany to full advantage, increasing imports from its neighbor by 33 percent in the first six months of 1983. Since trade with West Germany is conducted on a clearing basis, East Germany can save scarce hard currency by buying more from the West Germans and reducing purchases from other Western countries Hungarian Harvest This year's summer drought has taken a heavy toll on several of Hungary's key Shortfalls export crops. The US agricultural counselor estimates that the overall grain harvest will slump from 14.8 million tons last year to 12.7 million tons, almost entirely as the result of a drop in corn production, which fell from 7.8 million tons to 5.5 million tons. Production of sunflower seed-another important hard currency earner-will be 12 percent below planned levels. The poor weather also thwarted Hungary's plans to increase soybean production and thus reduce expensive imports of soybean meals from the West. Small grains (wheat, barley, rye, and oats), which are harvested earlier in the year, were less affected by the drought. Budapest is especially concerned about the impact that the mediocre harvest will have on its hard currency trade balance this year and next. The Chairman of the National Planning office predicted earlier this month that the shorfall in grain production alone could cost Hungary as much as $300 million in hard currency earnings, mainly from traditional CEMA markets. Shortages of corn for winter fodder will also require a slowdown in Hungary's livestock expansion program and could even result in some herd reductions in the hardest hit areas in the southeastern part of the country. We believe that the25X1 regime is counting on higher food prices-effective in mid-September-to dampen domestic demand and free additional goods for export 25X1 Hungary Establishing estern firms will be able to build facilities in Free Trade Zones Hungary for coproduction, contract work, and export sales. Foreign managers initially will run the individual firms in these zones. The firms will be expected eventually to train Hungarian managers to assume that responsibility. If adopted, the free trade zones-areas free from customs duties-will be the first in a country belonging to the Warsaw Pact. Budapest is mainly interested in attracting the technologies needed to modernize its heavy equipment industry and in increasing hard currency earnings. 25X1 Secret 30 September 1983 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 The zones are likely to give Hungary an opportunity to gain access to COCOM-controlled manufacturing technologies. There are currently no COCOM procedures specifically governing free trade zones in proscribed countries. Shipments to free trade zones in non-Communist countries are not considered exports, which may cause some confusion within Western indus- tries concerning the need for COCOM review of controlled equipment shipments to such zones in Hungary. By simply working in the plants, moreover, the Hungarians are likely to gain valuable practical experience in advanced manufacturing techniques. Vietnam Projects According to the official media, Vietnam has reached self-sufficency in food Self-Sufficiency and next year will have a small food surplus with which to reestablish a in Food reserve. The improvement in food production is a result of incentive programs instituted in 1979 that slowed collectivization of the south and allowed peasants nationwide to retain increases in grain output for sale on the free market. These policies boosted grain output 21 percent between 1979 and 1982 to reach 10.8 million metric tons. Official trade data show no food imports so far this year. Food imports had been declining for several years, from 1.4 million tons in 1978 to 310,000 tons in 1982. Self-sufficiency will be difficult to maintain. The policies that encouraged increases in grain output are already being rescinded by officials concerned about the growing free market. In addition, agriculture remains as vulnerable to drought as before because there has been little expansion of irrigated areas. Finally, the population is growing by about 1.4 million a year. To maintain self-sufficiency at the 1983 level, grain production must increase by about 3 percent a year. Secret 30 September 1983 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Secret The Middle East and South Asia: Regional Interdependence Because of the close interdependence among coun- tries in the Middle East and South Asian region, the economic effects of a prolonged soft oil market will be widespread. Although financial reserves will cover the loss of income for the major oil exporters in the short term, they face tough spending cuts if the soft oil market persists beyond the middle of the decade. Of the region's net oil-importing countries, only India and Israel, with large oil import bills and little dependence on worker remittances or Arab aid, are already benefiting from the oil market downturn. Those countries that depend heavily on the major oil exporters for expatriate worker re- mittances and/or aid-including key US allies such as Pakistan, Jordan, Egypt, and Morocco- face mounting financial, and possibly political, difficulties if the soft oil market persists beyond a year or two. These nations will look increasingly to the United States and Western financial institu- tions for support to cover foreign exchange deficits. Segments of their population that suffer from austerity measures will be more susceptible to political manipulation. Oil Producers: The Big Money Losers Most of the region's producers have already begun to make adjustments to cope with lower incomes. Revenues in 1982 of $163 billion were more than $60 billion below peak revenues in 1980, and we expect income to decline by an additional $25-50 billion this ear. some payments to foreign contractors have been put on hold, and new investment for oil facilities and other capital projects has been slowed or halted. Several of the Gulf states also have tightened new employ- ment opportunities for expatriate laborers, cut do- mestic subsidies on petroleum products, and are considering cuts in social programs. We expect the major Arab oil exporters to take a harder look at aid requests but believe that they will be discour- aged from making sizable cuts because their securi- ty and influence abroad rests heavily on cash transfers. The impact on military spending has been mixed. According to the Defense Minister and other Saudi officials, the military is committed to stepped-up purchases of equipment. On the other hand, UAE officials have reported to the US Embassy that the high cost of military equipment and maintenance combined with lower oil revenues is likely to slow future purchases. Although there has been some belt tightening and will be more, we believe that most of the OPEC oil producers can weather the effects of the oil price 25X1 cuts because of their large reserves. Combined foreign official assets at the end of 1982 were about $300 billion. We expect all of the OPEC states to continue to draw on foreign reserves to forestall 25X1 political and social unrest. We believe that, among the OPEC states, the governments of Libya and Iraq are least likely to meet domestic expectations because their financial reserves are already limited and they have been least able or willing to give consumer welfare a high priority. We believe that a further deterioration in economic 25X1 conditions in Libya or in the other OPEC states could set the stage for political instability. Addi- 25X1 tional cutbacks in the availability of basic goods in25X1 Libya, for example, could increase popular discon- tent with the regime. If the soft oil market persists beyond two or three years, we believe that cuts in domestic spending could even foster internal dis- content and assist Iranian recruitment of dissident Secret DI IEEW 83-039 30 September 1983 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Middle Eastern and South Asian Oil Producers: Production and Revenue 1980 OPEC 20,760 1,700 1,195 50 1981 1982 17,160 14,020 805 700 995 970 1,130 820 1,135 1,185 405 330 9,810 6,485 1,500 1,250 1,250 1,310 45 45 a Does not include natural gas liquids. Based on industry and US Embassy reporting from producing countries. Data rounded to nearest 5,000 b/d. Algeria 1,020 Iraq 2,515 Kuwait c 1,660 Libya 1,830 Qatar 470 Saudi Arabia c 9,905 2.8 2.9 3.3 3.1 0.6 1.1 0.6 0.6 b CIA estimate. Includes revenue from exports of crude oil, products, and natural gas liquids. Includes one-half production from the Neutral Zone. Shias in politically stable countries such as Saudi Arabia and Kuwait. We believe reduced spending on foreign aid could result in retaliation from aid recipients in the form of support for terrorist activities in the major donor countries of Saudi Arabia, Kuwait, and the UAE The non-OPEC oil producers, while also suffering from lower prices for their oil, are taking less severe revenue cuts because they have cut prices to main- tain sales. In most cases, they have maintained or even increased production to compensate for lower per-barrel revenue. Output in Egypt and Oman, for example, has reached record levels as they have undercut the terms adhered to by OPEC countries. The non-OPEC states cannot, however, count on Secret 30 September 1983 growing oil revenues to alleviate tight foreign ex- change situations and stimulate economic develop- ment because most are already producing near capacity. Among the non-OPEC producers, we believe that Egypt and Bahrain face the greatest political threat from lower oil earnings. In Egypt, we believe that austerity measures enacted to cope with financial shortfalls could cause political problems for Presi- dent Mubarak. In Bahrain, we expect the economic slowdown to exacerbate the government's problems in dealing with a large and often restless Shia population. Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 14.9 12.2 10.7 12.9 11.3 18.7 1980 1981 1982 18.5 13.3 22.8 15.2 5.4 5.5 99.2 110.7 18.7 19.0 7.3 8.5 1.2 1.2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Secret Oil-Importing Countries The countries in the Middle Eastern and South Asian region that are net oil importers have re- ceived immediate benefits from lowered oil import bills. We expect the OPEC price of $29 per barrel combined with interim cuts in spot and unofficial prices to cut about $2 billion this year off the combined 1981 bill of nearly $13 billionF India, which has accounted for 40 percent of regional oil imports, has the most to gain. If oil prices remain stable, India will save about $600 million in 1983-roughly equivalent to one-sixth of its projected current account deficit. Jordan and Bangladesh, also will benefit from lower oil prices; Jordan's oil bill has been roughly three-fourths of its exports Job Prospects in the Middle East Threatened. The tight job market in the major oil-exporting coun- tries will have a major impact in the region. According to US Embassy reporting and academic studies, approximately 5 million Middle Eastern and South Asian expatriate laborers currently work in the oil-exporting states-more than 80 percent of the total expatriate work force there. They annually remit to their home countries more than $10 billion, which is significant in meeting their hard currency needs. We expect that if oil prices remain depressed, South Asian worker recruitment and their remit- tances will slow or even fall in absolute terms. Officials in three Gulf countries-the UAE, Qatar, and Iraq-have already reported a net reduction in the number of expatriate workers. According to US Embassy reporting, however, labor importing coun- tries overall have not reduced the size of their expatriate labor forces A leveling or decline in remittances from workers in the major oil-exporting countries will have im- portant implications for hard currency earnings in South Asia. On the basis of official government statistics, we estimate that remittances from the Middle East totaled $3-3.5 billion last year and Middle Eastern and South Asian Oil Importers: Oil Imports ,1981 25X1 25X1 Net Oil Imports (thousand) Net Oil Import Bill (million Savings a in 1983 (million b/d us $) US $) Middle East and North Africa 410 5,055 755 Israel 160 2,050 310 Jordan 40 540 80 Lebanon 60 700 105 Mauritania 5 65 10 Morocco 95 1,070 160 North Yemen 15 170 25 South Yemen 10 115 15 Sudan 25 345 50 South Asia 570 7,900 945 Afghanistan 10 175 25 Bangladesh 35 460 70 India 400 5,600 600 Pakistan 95 1;260 190 Sri Lanka 30 405 60 a Assumes imports maintained at the 1981 level and a 15-percent cut in oil prices except for India, where increased domestic productio12 5X 1 has allowed for a reduction in oil imports. constituted 60 to 70 percent of total South Asian worker remittances. Pakistan, which has supplied nearly three-fourths (1.5 million, 5 percent of its labor force) of the South Asian workers to the oil- exporting states, has the most to lose if a persistent soft oil market begins to limit jobs We also expect the soft oil market to contribute to 25X1 the leveling off or even a decline in absolute 25X1 numbers of expatriate Arab workers. If there is a further drop in oil prices and a large expulsion of foreign workers, however, we would expect the Arab laborers to fare better than the Asians. As Secret 30 September 1983 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Official Foreign Exchange Earnings From Worker Remittances' Arabic speakers and the original migrant workers, they stand a better chance of keeping their jobs. In addition, the host governments would face political pressure from other Arab states if Arab "brothers" were sent home before Asians. Cutbacks in Arab Aid? Although we do not expect a dramatic cutback in Arab aid unless depressed oil prices persist beyond another year or two, some cutbacks already have been made and more are expected. Preliminary evidence indicates that eco- nomic assistance is being hit harder than military assistance. Some of the aid, especially from Saudi Arabia and Kuwait, is now being paid in the form of oil rather than money. The Gulf Arab oil exporters have paid out an average of $13 billion annually in bilateral aid, the bulk of this went to fellow Arab states. Saudi Arabia normally disperses $7-8 billion annually, Kuwait and the UAE most of the rest. Libya, while frequently associated with financing radical causes, has not been especially generous with economic aid. 25X1 0 1978 79 80 81 82 83b a Fiscal years. b Projected. cIncludes estimate of earnings only from other Middle Eastern countries; total remittances reached an estimated $3 billion in 1982. 300758 9-83 Secret 30 September 1983 In our view, if the major Arab oil exporters find that additional cuts in aid disbursements are neces- sary for domestic reasons, they will look first to cut the states least vital to their security-first the countries outside the Middle East and South Asia, followed by India and Bangladesh, Pakistan, and Morocco. We believe that support to the Arab confrontation states and to Iraq would continue relatively unscathed. We expect, however, that aid payments from some of the states may not be as timely as they were in the past. Foreign Trade Only Slightly Affected. We believe that the oil importers will be only marginally affected if, as we expect, reduced revenues to the oil exporters result in cutbacks in their merchandise imports. Merchandise exports from the region's oil importers to the oil exporters total only $3.5 billion, 12 percent of their total exports. Much of this is foodstuffs that are unlikely to be cut off. India Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Secret stands to be a loser because construction materials and equipment for development projects make up about 30 percent of the value of its exports to the Middle East. We expect that, at least for the next two years or so, the populations of most major oil-exporting states, will be sheltered from the adverse impact of the soft oil market by the surplus revenues accumu- lated throughout the 1970s. Possible exceptions are Libya, already in economic trouble because of bureaucratic mismanagement and questionable military spending, and Iraq, in financial straits because of the war with Iran and the loss of oil production and facilities. In our view, most of the non-OPEC oil producers will not face severe finan- cial hardships from the soft oil market so long as prices remain stable. On balance, we expect the oil-importing countries in the region to benefit from a soft oil market for the next two years or so. Lower oil prices will provide immediate relief on import bills. The need for foreign workers is not likely to decline apprecia- bly over this period. Aid donations from the oil exporters are lagging behind last year's pace, but we do not believe there will be a dramatic cut from previous levels because of the donors' concerns for their own security if they reduce aid. In our view, a soft oil market that persists for more than two or three years would raise the risk of political instability even in Saudi Arabia and the Gulf sheikhdoms. Although their small populations could be cared for with financial reserves and revenues from limited oil production, we believe that even the threat of austerity measures could significantly heighten discontent, particularly among the Shias In the long term, diminished opportunities for foreign workers in the oil-exporting states would eliminate the major employment outlet for the rapidly growing labor forces in the labor-surplus Secret 30 September 1983 countries of the region. We expect that the accom- panying slowdown in the growth of remittances would adversely affect economic development, es- pecially in Pakistan, Jordan, Egypt, and North 25X1 Yemen. A sharp decline in hard currency from remittances, particularly if accompanied by a cut- off in Arab aid, would force many to adopt unpopu- lar austerity measures. If the governments failed to meet the economic and social expectations of re- turning migrants, a likely event under such a scenario, we expect that forces opposing the govern- ments would pick up additional political support and provide opportunities for Soviet or other out- Implications for the United States We believe that, if the soft oil market persists, the United States will be faced with increased demands for financial assistance. With a reduction in worker remittances and aid from the oil-exporting states, the oil-importing nations will look increasingly to the United States and Western financial institu- tions for support to cover projected deficits in We believe that the United States faces a special problem with Pakistan and Egypt on financing 25X1 their future military purchases and development projects. If Cairo and Islamabad are not successful in soliciting additional funding for their military modernization programs from the Arab oil export- ers, we expect them to look to the United States. Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Secret Persian Gulf Oil Still at Risk: Some Economic Implications The delivery of five French Super Etendard air- craft to Iraq, which we believe is likely, increases the possibility of an escalation of the Iran-Iraq war that could disrupt Persian Gulf oil exports. We estimate that for each 1 million b/d net loss in oil supplies for one year, oil prices would rise by about $8 per barrel and OECD GNP growth would be reduced by 0.3 percentage point. Under a worse case scenario, closure of the Strait of Hormuz and the Iraq-Turkey pipeline could remove some 13 million b/d of Free World productive oil capacity and reduce net oil supplies to consumers by 5-9 million b/d over the next year. Despite the Strate- gic Petroleum Reserve and relatively small amount of US oil imports from the Persian Gulf, the United States would not be insulated from the adverse effects of a major disruption in Persian Gulf oil flows Western Dependence on Persian Gulf Oil Persian Gulf countries ' currently account for nearly 30 percent of non-Communist oil supplies. We and many oil industry analysts expect this level of Free World dependence to continue and perhaps increase through the late 1980s because of the Gulf countries' vast oil reserves. This year US imports of Persian Gulf oil have been reduced to about 200,000 b/d-only 5 percent of total imports and 1 percent of domestic consumption-largely because of conservation and stock drawdowns. Other OECD members last year relied on Persian Gulf oil for about 55 percent of oil imports and 40 percent of consumption. Although the United States could draw on non-Gulf surplus capacity to cover a loss in Persian Gulf imports, it probably would be required to share the burden of any OECD net supply reduction either through the formal IEA program or adjustments in company distribution systems. 25X1 25X1 Growing economic pressures on Iraqi President Saddam Husayn, together with an enhanced mili- tary capability from scheduled delivery of French fighter aircraft, increase the probability that Irag25X1 will take action to cut the flow of Iranian oil exports. retired senior military officers are advising Saddam to use French-supplied Super Etendard aircraft to attack tankers transporting Iranian oil from Khark Island. If tanker owners were unwilling to load from Khark Island, nearly all of Iran's current oil exports of 2 million b/d would be lost. 25X1 In our judgment, an Iraqi attack on Khark Island would almost certainly lead Iran to retaliate by shutting down the Iraq-Turkey pipeline, Iraq's only remaining oil outlet. It would probably lead to attacks on Kuwaiti ports that receive Iraqi imports or tankers serving Kuwait. In addition, Tehran could selectively harass tankers serving Iraq's other Gulf allies. Indeed, Ayatollah Khomeini and other Iranian officials have threatened to retaliate against all oil shipping in the Gulf if its exports are cut off. Under this worse case scenario, we estimate that 13 million b/d in Persian Gulf productive capacity would be lost to the market if the Gulf were closed and exports were restricted to 2 million b/d through the Saudi pipeline. Secret DI IEEW 83-039 30 September 1983 25X1 25X1 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Middle East: Major Oil Pipelines 7a9-Turk a 01 r, Syria Tripoli Lebanon Mediterranean BEIRU T Sea Sidon, Tel Aviv-Yafo' I ' *AMMAN .J c~nj~~ t Israel~$1 Jordan lArmistice r Line A yn S/ioe r SuNled~ipeline to Sidi kr rir /Egypt/ Saudi Arabia Secret 30 September 1983 KUWAIT?. wr al Antaya 4-* Mina at Pakr O Oilfield Oil terminal - Oil pipeline ^ Pump station 1.85 Pipeline capacity (million b/d) Note: Pipeline alignments are approximate. 0 300 Kilometers Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 No-South P kene Ile. PPe Qre Iraq-Saudi Arabia Neutral Zone *DAMASCUS Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Secret Projecting the Net Reduction in Oil Supplies The magnitude of the net reduction in Free World oil supplies that could result from a disruption of Persian Gulf oil flows depends largely on estimates of oil demand, surplus oil productive capacity, and the level and behavior of stocks. Oil Demand. Based on oil industry estimates, our low oil demand case assumes average annual OECD growth of about 2.5 percent in 1984 and 1985 with ample nonoil energy supplies and pro- jects Free World oil consumption at 44-45 million b/d at current prices. Under a high demand case with average annual growth of nearly 4.5 percent in 1984 and 1985 and reduced availability of nonoil energy supplies, Free World consumption could run to 48-50 million b/d at current prices. Surplus Oil Capacity. Currently, we estimate that the surplus of available oil productive capacity in the Free World stands at 8 million b/d, 3 million b/d of which lies outside the Persian Gulf. Because most industry analysts believe at least a 2-million- b/d cushion of surplus capacity is needed for market stability-and historical data substantiate this point-the effective level of surplus ca acit is probably about 6 million b/d. Stocks. While our projected net reductions in oil supplies do not take into account the behavior of inventory holders, stock levels can be critical in shaping the impact of a supply disruption. Price runups following the 1973/74 Arab oil embargo and the 1979 Iranian revolution were due in part to demand pressures from efforts of government and commercial stockholders to rebuild and add to inventories. In contrast, the oil market remained fairly stable following the outbreak of the Iran-Iraq war and the initial 3-4 million b/d loss of exports. This largely reflects weak oil demand and the willingness of commercial stockholders to deplete excess stocks. With current commercial stockpiles near normal levels, we would expect stockholders to be less willing to sharply deplete inventories if supplies were interrupted. In our judgment, there is CIA Projections of Net Reductions in Free World Oil Supply From Disruption of Persian Gulf Oil Supplies Low demand case 44 45 High demand case 48 50 Available surplus capacity Low demand case 8 7 High demand case 4 2 Persian Gulf capacity 17 17 Pipeline export capacity 3 3 Saudi Arabia 2 2 Iraq 1 1 Strait of Hormuz 12 12 Net reduction from closure of Strait Low demand case High demand case a good possibility that attempts would be made to add to inventories because of prospects for higher prices and the uncertainty surrounding the dura- tion of the disruption. Under our assumptions, effective surplus productive capacity outside the Gulf over the next two years would be insufficient to offset losses incurred from the closure of the Strait of Hormuz. Impact on Oil Prices and OECD Growth Based on historical time series, we calculate that for every 1 million b/d net reduction in Free World oil supplies for one year, prices would increase approximately $8 per barrel to clear the market and OECD growth would be reduced by about 0.3 percentage point, assuming unchanged monetary Secret 30 September 1983 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 OECD: Economic Indicators and Oil Price Trends 300773 (A035(4) 9-83 Secret 30 September 1983 and fiscal policies in the major developing coun- tries. Policy responses, however, will be an impor- tant factor in determining exactly how oil prices will affect growth, inflation, and trade. If most Western governments opt for restrictive policies in the short run to reduce inflationary pressures and ease balance-of-payments problems, as they have in previous oil price runups, real economic losses would be substantially greater than calculated. On the other hand, attempts to offset the contraction- ary impact of higher oil prices with traditional macroeconomic remedies would increase energy demand and drive oil prices up even further Impact on the International Financial System We believe a major runup in oil prices resulting from an interruption of Persian Gulf oil supplies would have severe adverse repercussions on the international financial system. While on balance, commercial lenders would be trading the recovery of one group of troubled debtors-non-Persian Gulf oil producers-for worse conditions in anoth- er-net oil importers-the initial oil price shock would be destabilizing in our judgment, particular- ly for those banking centers and countries with high loan exposure to nonoil exporting LDCs. Moreover, recent banker experience with LDC debt moratori- ums and reschedulings could hamper smooth recy- cling of surpluses elsewhere to the nonoil LDCs. In addition, unlike the last two major oil price in- creases, financial surpluses would accrue largely to those countries with high propensities to spend, currently running balance-of-payments deficits, in- stead of the wealthy Persian Gulf countries who have large asset holdings and are more likely to deposit their excess funds with international banks. OECD governments, faced with the prospect of severe recessions, are unlikely to increase aid sub- stantially. At the same time, the prospects for increasing IMF resources to handle lar a new loan requests would dim. Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Secret OPEC Members. We project that even a moderate disruption of Persian Gulf oil leading to a 1-million-b/d net decline in Free World supplies would result in a near balanced current account to a $30 billion surplus depending on the import behavior of non-Gulf members. This would be in sharp contrast to the $20-30 billion deficit we currently project for 1983 and 1984 with current oil prices remaining stable. The combined current account surpluses for the seven non-Gulf members-Nigeria, Ecuador, Ven- ezuela, Indonesia, Algeria, Libya, and Gabon- would more than offset the limited oil earnings accruing to the Persian Gulf members. While a 1-million-b/d net supply decline would help Lagos to forego rescheduling arrangements and IMF loans, Venezuela and Ecuador would still require some debt rescheduling or large new credits in 1984. A larger windfall, resulting from a complete cutoff of Persian Gulf supplies, would solve their debt problems and allow import growth and the lifting of unpopular austerity measures. In the case of Libya, a Hormuz closure would give Qadhafi unprecedented financial surpluses. Of the six Persian Gulf producers, Saudi Arabia could experience financial gains from the closure of the Strait of Hormuz provided the current operat- ing pipeline continues to function and major oil price increases occur. Iran and Iraq would be hardest hit by the closure of the Hormuz Strait and the Iraq-Turkey pipeline. Faced with a loss of income and large import needs, Tehran would be forced to draw down foreign assets, which we estimate at $13 billion at yearend 1982, and cut imports, including those needed to fulfill the Kho- meini regime's first five-year development plan. With foreign assets nearly depleted closure of the pipeline would make Baghdad even more depend- ent on foreign financial assistance Large foreign asset holdings and modest import needs would enable, Kuwait, UAE, and Qatar to absorb the loss of oil revenue from the Hormuz Strait closure over the short term. We estimate that these governments would have to draw down $15 billion in foreign assets to maintain current import levels and cover projected current account deficits over 12 months. Private capital outflows, which we believe would be high in this pessimistic climate, would force even larger asset drawdowns. Private outflows could also erode any surplus the Saudi 25X1 Government may accrue. Despite large foreign reserves, the need for economic stringency under these circumstances will pose difficult questions for these governments concerning domestic spending, asset management, and foreign aid levels. Non-OPEC LDC Oil Exporters. The economies of 25X1 Mexico, Egypt, Malaysia, Cameroon, and Peru would benefit from substantially higher oil reve- nues, and in the case of Mexico and Egypt a large oil price windfall would alleviate current debt servicing problems and substantially reduce the possibility of political or social unrest. Emerging oil exporters, Ivory Coast and Zaire, would gain only 25X1 if the price hike spurred exploration effort,. could boost net oil exports at a later date. Oil Importing LDCs. In our judgment, major 25X1 debtors, Brazil, Chile, Philippines, Pakistan, Mo- rocco, Sudan, India, and South Korea would have trouble meeting scheduled external payments even assuming a moderate rise in oil prices. Without liberal rescheduling arrangements from private and official creditors, the odds would greatly increase that they would be forced to declare a debt morato- rium. Closure of the Strait of Hormuz-unless resolved quickly-would make such an event al- most a certainty. Higher oil prices would also create payments prob- lems for many smaller Central American, African, and Middle Eastern oil dependent economies with 25X1 limited financial reserves. Potential debt troubled and even financially sound LDCs would have to Secret 30 September 1983 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Persian Gulf Oil Exporters: Foreign Exchange Impact of a Closure of the Hormuz Strait Projected Projected Projected Oil Oil Current at Account R E t Estimated 1983 Im orts Official Foreign Assets Estimated Export Capability Loss/Gain if Oil Price Rises to evenue xpor s 1983 Current Balance (thousand b/d) Prices 1983 (billion (billion) US $) US $) p (billion US $) Yearend 1982 (billion US $) if Hormuz Strait Closed a (thousand b/d) $70/b (billion US $) $100/b (billion US $) Saudi Arabia 4,415 44.8 -14.2 39.0 153 1,900 3.7 24.5 Kuwait 730 7.4 4.5 7.0 73 0 -7.4 -7.4 United Arab 1,120 12.3 Emirates 1.7 8.0 35 0 -12.3 -12.3 Iran 1,945 20.2 4.5 12.0 13 0 -20.2 -20.2 Iraq 600 6.8 -14.8 16.0 8 0 -6.8 -6.8 Qatar 290 3.2 2.0 1.5 15 0 -3.2 -3.2 Major LDC Debtors and Net Oil Exporters: Foreign Exchange Impact of a Major Oil Price Increase Net Oil Exporters Projected Net Oil E t Projected Net Oil R enues Proj Curr Acco ected ent unt Estimated Debt Due in 1983 a Estimated Surplus Productive Additional Oil Revenues at Full Capacity if Prices Rise to xpor s, 1983 (thousand b/d) ev at $29/b (billion US $) Bala 1983 (billi US $ nce, on ) (billion US $) Capacity (thousand b/d) $37/b (billion US $) $70/b (billion US $) $100/b (billion US $) Mexico 1,500 15.5 2. 5 23.0 400 9.1 30.6 50.2 Argentina 10 0.1 -1. 1 3.8 NEGL NEGL 0.1 0.2 Venezuela b 1,570 15.2 -1. 1 22.5 430 9.4 31.3 51.2 Indonesia b 930 9.9 -4. 8 7.5 200 5.5 19.3 31.8 Egypt 200 2.1 -3. 0 5.9 NEGL 1.0 3.5 6.0 Algeria b 855 9.0 -2. 4 6.7 140 4.3 16.2 27.0 Nigeria b 1,090 11.7 -1. 9 5.7 880 15.2 39.1 60.9 Peru 60 0.6 -0. 6 5.4 NEGL 0.2 0.8 1.5 Malaysia 120 1.5 -3. 2 3.4 NEGL 0.4 2.1 3.7 Ecuador b 100 1.0 -1. 6 2.6 0 0.3 1.4 2.4 a Includes short-term debt maturities, principal payments on medium- and long-term debt, and interest due on all debt maturi- ties but does not include interbank debt. For Mexico, Argentina, Nigeria, Peru, and Ecuador any debt rescheduled through 14 September 1983 is not included in the total debt service figures. b OPEC member. Secret 30 September 1983 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Secret Major LDC Debtors and Net Oil Importers: Foreign Exchange Impact of a Major Oil Price Increase Net Oil Importers Projected Net Oil Imports, 1983 Projected Net Oil Import Bill 1983 Projected Current Account Estimated Debt Due in 1983 a (billion US $) Additional Foreign Exchange Requirement if Oil Price Rises to (thousand b/d) , at Current Prices (billion US $) Balance, 1983 (billion US $) $37/b (billion US $) $70/b (billion US $) $100/b (billion US $) Brazil 700 7.6 -7.5 31.0 2.0 10.5 18.1 South Korea 530 6.1 -2.3 19.1 1.5 7.9 13.7 India 335 4.1 -3.4 2.7 1.0 5.0 8.7 Chile 58 0.8 -1.6 6.7 0.2 0.9 1.5 Philippines 200 2.2 -3.0 7.6 0.6 3.0 5.2 Morocco 95 1.0 -1.8 4.9 0.3 1.3 2.2 Taiwan 340 4.1 4.0 6.1 1.0 5.1 8.8 Thailand 230 2.6 -2.0 4.1 0.7 3.4 6.0 Pakistan 105 1.1 -1.3 2.0 0.3 1.6 2.7 Sudan 45 0.5 -0.7 0.4 0.1 0.5 0.8 Ivory Coast 20 0.2 - 1.1 1.5 0.1 0.3 0.5 a Includes short-term debt maturities, principal payments on any debt rescheduled through 14 September 1983 is not included in medium- and long-term debt, and interest due on all debt maturities the total debt service figures. but does not include interbank debt. For Brazil, Chile, and Sudan either dramatically cut back oil use, crippling their economies, or greatly increase their borrowing,, which could quickly move them into the ranks of the debt-troubled LDCs. As things now stand, we believe that many of these LDCs would have difficulty obtaining loans to finance their much higher oil bills. Because of this, we expect that many would turn to Washington for funding and leadership in handling an oil price crisis. Lacking adequate financing, they would face severe recessions and growing unemployment, which for many governments have the potential for stimulating serious political and social unrest. Secret 30 September 1983 25X1 25X1 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Secret Iraq: Economy Under Siege Iraq's war of attrition with Iran is strangling its economy. With major oil export facilities inopera- ble and Damascus refusing to allow oil deliveries through the Iraq-Syria pipeline, Iraq's oil revenues have plummeted to less than one-third of prewar levels. The Iraqis already have virtually shelved their development program, and Baghdad has been forced to slash imports this year for the first time since the war began in 1980. The next year will be critical for Iraq. We do not believe it will be able to obtain the amount of financial assistance in 1984 that it received this year, and the private sector, particularly consum- ers, will bear the brunt of new austerity measures. Some slowdown in military spending might also be required. Under these circumstances, the Iraqis will feel increasingly compelled to carry the war to Iran. An attack on Iran's oil facilities could easily lead to an escalation of the war throughout the region, putting Gulf oil exports at risk Tightening Financial Squeeze We estimate that Iraqi oil revenue will plunge to about $7 billion in 1983 compared to more than $9 billion last year and a peak of $26 billion in 1980. The loss of its Persian Gulf oil export terminals at the outset of the war and the closure of the oil pipeline across Syria in April 1982 leaves Baghdad with the 700,000 b/d pipeline across Turkey as its sole route for oil exports. Moreover, a $5 per barrel price cut to meet OPEC guidelines last March is costing Iraq $100 million a month in lost oil revenue Iraq is taking steps to increase oil sales. Expansion of the Turkish pipeline-by about 200,000 b/d could be completed by yearend Meanwhile, Iraq now is 25X1 using flow-enhancing chemicals to squeeze an addi- tional 100,000 b/d of oil through the pipeline. Iraq also is arranging for the transport of small amounts of oil by truck. 25X1 More importantly, Baghdad is arranging oil barter 25X1 deals involving Saudi Arabia and Kuwait who in turn are selling their oil on Iraqi account. These oil sales to Iraq's customers probably will average up to 400,000 b/d for the year, worth about $3-4 billion. 25X1 We believe that declining revenues will force Iraq to reduce import spending this year to $14-16 billion, compared with $19 billion last year. Early 1983 trade data for some of Iraq's most important trading partners indicate that imports of heavy industrial machinery, electrical equipment, and construction materials are well off last year's pace. Imports of most consumer goods and raw materials 25X1 for the light industrial sector are also being re- duced. Consumer goods imports from Japan, Iraq's second-largest trading partner, were down 85 per- cent during first-half 1983 from the same period last year. The regime has constrained private-sector imports by delaying import licenses and, cutting- total value to 30 percent of 1982 levels. We estimate Iraqi imports from the West in 1983 25X1 will reach only some $10-11 billion compared with $14 billion in 1982. OECD trade data indicate that Iraq's imports from the West fell by over one- 25X1 half-to $3.5 billion-in the first six months of 1983 from the same period last year. The big losers were Japan, West Germany, and France, which accounted for 60 percent of the drop. Secret DI IEEW 83-039 30 September 1983 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 fI Oil barter deals, however, probably will allow an increase in imports in second-half 1983. France and the USSR-Iraq's two largest arms suppliers- have agreed to take oil to help pay for about $1 billion owed each country for military hardware this year. Saudi Arabia is providing oil to the Soviets on Iraqi account. Iraq also is striking oil barter arrangements with civilian trading partners, including Japanese trading companies. Imports from the USSR this year probably will approach last year's $1.4 billion despite a slow start. Soviet deliveries to Iraq-plummeted to $75 million in first-quarter 1983 compared with about $580 million for first-quarter 1982, according to Soviet trade data. The drop probably resulted from a temporary difference between Moscow and Bagh- dad over a payments scheme for Soviet military deliveries. The USSR is Iraq's most important arms supplier; last year, Baghdad signed arms deals with Moscow valued at about $3 billion. We believe Iraq will have a roughly $14 billion deficit on its current account this year, down only slightly from the levels of the last two years. The trade deficit will reach $7-9 billion and other foreign exchange outflows will total about $6 bil- lion-most of it in remittances by Iraq's still sizable foreign labor force. With the labor market already tight because of draft callups-approxi- mately 600,000 men are in the regular armed forces and tens of thousands more in militia and security units-Iraq has not been able to signifi- cantly reduce its foreign labor force. Covering the Current Account Shortfall Iraq is closing the current account gap with de- ferred payments, Gulf aid, and reserve drawdowns. We project it will negotiate deferred payments-or Secret 30 September 1983 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Secret Iraq: Current Account Balance and Financing Arrangements -7.0 -9.0 -3.7 -3.7 7.0 7.0 7.3 9.3 6.7 6.7 7.0 9.0 0.3 0.3 0.3 0.3 Imports (c.i.f.) 20.1 19.4 14.0 16.0 11.0 13.0 Net services and private transfers -6.0 -7.1 -6.0 -6.0 -4.3 -5.3 Freight and insurance -4.0 -3.5 -2.6 -2.7 -1.5 -2.1 Investment income d 3.2 1.6 0.6 0.7 0.3 0.3 -5.2 -5.2 -4.0 -4.0 -3.1 -3.5 -2.0 -1.0 Current account balance -17.1 -17.8 -13.0 -15.0 -8.0 -9.0 Financing the current account 18.0 18.5 13.0 15.0 8.0 9.0 8.0 5.2 1.2 1.2 1.0 1.0 3.0 3.5 2.0 3.0 Commercial loans 0 0 0.5 0.5 0.5 0.5 Arrearages 0 0 4.8 5.8 2.0 3.0 Reserves 10.0 13.0 3.5 4.0 2.5 1.5 a Estimated. b Alternative scenarios for import spending and current account balances depend on our assumed levels of foreign assistance and reserve drawdowns. c Assumes Turkish pipeline expansion completed in early 1984. d Represents earnings on official foreign assets only. simply be late in paying-some $5-6 billion owed foreign companies for project-related and other imports in 1983. Iraq generally is demanding that payments begin in 1985 with interest rates below commercial levels. Many firms are under tremen- dous pressure to come to terms with Iraq to protect their investments. Prospects for participation in postwar development also motivate the companies to accede to Iraq's demands. To avoid piling up its own debt, Baghdad is requiring foreign firms to find their own financing for the deferred payments. So far, Iraq has obtained a $1 billion credit to cover the deferral of payments due French civilian con- tractors this year, according to press reports, and is negotiating with other foreign firms, including Jap- anese, West German, Italian, and British compa- nies. We estimate the Iraqi 1983 obligation to firms from these five countries alone is at least $3 billion. We believe other OECD countries will follow suit, and several Third World countries, including Jor- dan and Turkey, also are deferring payments due this year. 25X1 We estimate Gulf state aid-including oil sales on Iraq's behalf-will contribute approximately $4-5 billion to Baghdad's foreign exchange needs, com- pared with $5.5 billion in direct financial assistance 25X1 Secret 30 September 1983 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 last year. As they cope with their own revenue problems because of the soft oil market, the Gulf states are unlikely to increase direct aid much above the $1.2 billion they already have provided this year. Commercial loans from the international banking community in 1983 probably will not substantially exceed the present level of about $500 million. In out judgment, many Western banks, already con- cerned about their overexposure in other LDCs, will be reluctant to lend to Iraq until the war is over. Arab financial institutions-which may be more willing-probably have fewer funds available than in the past because other OPEC countries are withdrawing deposits to cover their own financial needs. We estimate Iraqi foreign exchange reserve draw- downs could reach $4-5 billion in 1983 assuming no other assistance is forthcoming. Although Iraq drew down its assets by $3-5 billion during the first quarter suggests that Saudi oil sales and deferred payments have enabled Iraq to temporarily reverse this trend. In any event, the reserve position has deteriorated markedly in the last few years; foreign exchange assets amounted to about $35 billion before the war; they were only $8 billion at yearend 1982. Underscoring the severity of Iraq's financial condi- tion, the government is conducting a "voluntary" drive to collect gold from the citizenry. Domestic Impact The war has been responsible for a sharp slowdown in the economy. Agricultural and industrial pro- duction are stagnating or falling because of the shortages of equipment and raw materials, and the government has virtually abandoned its economic development program. Baghdad has canceled al- most all new contracts not related to the military effort or the petroleum sector and postponed work on several nonessential projects already under way. These developments represent a sharp reversal from the guns and butter approach the government Iraq: Official Foreign Exchange Assetsa 0 1974 75 76 77 78 79 80 81 82 83b a End of year data. b Estimated. The Iraqi consumer is increasingly feeling the effects of the import cuts. Imported staples, espe- cially fresh food, and luxury goods are either in short supply or available only at exorbitant prices. The shortage of imported goods has fueled an inflation rate that we estimate is as high as 50 percent and has encouraged black-market activity. We believe the remainder of this year and 1984 will be a critical period for the Iraqi economy. The oil export outlook remains gloomy. The 1.2-million b/d Syrian pipeline is likely to remain closed as long as Iran provides Damascus with oil, and the Iraqis are unlikely to be able to resume exports from the Gulf as long as the war continues. In- creased exports through the expanded Turkish maintained during the first two years of the war. Secret 30 September 1983 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Secret pipeline could add as much as $2 billion to revenues in 1984, but Saudi Arabia and Kuwait may reduce their oil sales accordingly to keep Iraq within its OPEC production guideline. Moreover, foreign ex- change reserves will, at best, allow a drawdown at Implications of the Conflict With Iran The tightening economic vise is forcing Baghdad to seriously consider desperate measures to bring an end to the war with Iran. Iraq's efforts to acquire French Super Etendard aircraft armed with Exocet antiship missiles and public threats to use them against oil tankers in the Gulf servicing Iran represent a major attempt to break the economic stranglehold. The Iraqis could well make good their threat in the hope that it would cut off Iranian oil exports and force Iran into negotiations to end the war. More realistically, however, the Iraqis proba-25X1 bly would count on major Western powers to intervene and enable Iraq to resume exporting oil 2 A11 the 1983 rate As a result, Baghdad faces the prospect of obtain- ing foreign financing for another large current account deficit in 1984-on the order of $9 bil- lion-even if it makes additional sharp import cuts. The Gulf states' oil sales are not likely to recover enough in 1984 to prompt them to increase their aid to Iraq; they may even cut back. Commercial banks probably will refrain from giving major loans to Iraq while the war continueda Iraq thus will have to defer again a sizable share of 1984 payments-probably including some 1982-83 payments-or slash imports. Should Baghdad re- nege on deferred payments due in 1984, bank financing for essential commodity purchases also is likely to be adversely affected. Moreover, Baghdad probably will encounter greater resistance from foreign contractors and suppliers who are less able or willing to finance delayed Iraqi payments. Sever- al West German firms, for example, have stated they anticipate serious obstacles to financing in 1984, according to the press. The Iraqi populace will tolerate the stoppage of the development program-few Iraqis directly feel the effect-but a substantial reduction in imports of food and other basic commodities probably will heighten discontent. Iraq depends on imports for about one-half of its grain consumption alone, according to agricultural trade statistics. To ease the burden on the population, the government may attempt to reduce defense-related spending. Mili- tary contracts signed last year for nearly $5 billion, however, ensure continued high levels of arms spending. Meanwhile, Baghdad's threats also serve as a form of blackmail to force the Gulf states to increase substantially their subsidies to Iraq. If this works, the Iraqis might hold off escalation.7 Iranian retaliation for an Iraqi attack on Tehran's 25X1 oil export facilities could have a profound impact on world oil supplies and the world economy. A successful Iranian attack on Gulf state oil facilities 25X1 or the mining of the Straits of Hormuz, for exam- ple, would sharply reduce Free World oil supplies. Secret 30 September 1983 25X1 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Secret OPEC Persian Gulf States: Reduced Foreign Aid Aid disbursements by four OPEC Persian Gulf states-Saudi Arabia, Kuwait, the United Arab Emirates, and Qatar-declined by over 20 percent in 1982 to $11.4 billion. Iraq was by far the biggest loser; its aid receipts fell by $2.5 billion. First-half 1983 aid transactions indicate OPEC states have begun to limit new aid pledges and are slowing transfers on previous pledges Aid commitments by the four OPEC Persian Gulf states-Saudia Arabia, Kuwait, the UAE, and Qatar-reached a record $20 billion in 1982. Of the new commitments, military aid to non-OPEC LDCs totaled $7.6 billion, economic assistance to non-OPEC LDCs was $5.1 billion, and $7.4 billion was co lance-of- payments support. A major element of OPEC security-related aid in 1982 continued to be the Baghdad Pact Subven- tions (BPS). Instituted in 1978 to help defray military and development expenditures of the con- frontation states and the PLO, the BPS remained the single largest channel for aid to Jordan and Syria. As much as 60 percent of BPS funds have been defense related; the rest helped to underwrite development projects and other economic pro- grams. In 1982 reliable sources confirmed that all ' Gulf states' aid channeled to LDCs via multilateral institutions- a flow that recently has averaged about $1 billion-is not ad- dressed. We have made no attempt to categorize Gulf states' aid to Iraq either economic or military assistance. Therefore, references to economic or military aid do not include aid to Iraq except where of the Gulf states met their Baghdad Pact obliga- tions, although several payments were delayed for up to six months for political or economic reasons. 25X1 Lagging Disbursements. Overall aid disbursements of $11.4 billion lagged far behind commitments. While military aid transfers rose slightly in 1982, 25X1 they were more than offset by a $2.5 billion decrease in flows to Iraq and a $600 million decline in economic disbursements. We estimate that the combined military and economic assistance dis- bursed to Syria reached a one-year high of $2.0 billion, while total financial assistance to Jordan of $1.0 billion remained close to the 1981 level. These two countries accounted for one-half of the total non-Iraqi aid disbursed Military Aid Jumps in 1982 The four Persian Gulf states pledged about $7.6 billion to non-OPEC LDCs for direct military assistance in 1982, more than twice the 1981 level. More than three-fourths of the 1982 commitments were directed to cover current or planned arms purchases. The preponderance of OPEC military aid commitments in 1982 was directed toward friendly Arab and non-Arab Islamic regimes: ? Long-term GCC commitments totaling $3.7 bil- lion were provided to strengthen the armed forces of Bahrain and Oman, according to senior offi- cials of both governments. ? Western military attaches in Cairo reported a $1 billion pledge by the four states to underwrite the modernization of Egypt's fighter aircraft inven- tories with French Mirage 2000s. 25X1 Secret DI IEEW 83-039 30 September 1983 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 OPEC Persian Gulf States: Donor Shares of Aid Commitments and Disbursements, 1982 Syria, almost half of it as war aid in the after- math of Syrian losses at the hands of Israel and the rest as continuine aid under the BPS. Almost as noteworthy as the new pledges in 1982 were appeals for aid that the Gulf states either refused outright or only partly fulfilled: ? Although Riyadh and Kuwait transferred $600 million to Syria during the Lebanese crisis, Da- mascus failed to convince the Gulf countries of the need to underwrite a new multibillion-dollar Soviet arms agreement. over $250 million was spent by Saudi Arabia and the UAE to pay the expenses of foreign Islamic forces stationed on their soil. ? Saudi Arabia has sent several million dollars worth of military hardware and munitions to Chad. ? A $2 billion Jordanian request made to the Saudis to finance arms modernization was turned down because of oil revenue shortfalls, according to senior Jordanian officials. Several transfers observed in 1983 indicate, however, that Riyadh may have since agreed to a modest new commitment. Secret 30 September 1983 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Secret OPEC Persian Gulf States: Bilateral Official Development Assistance Disbursements to Non-OPEC LDCs Saudi Arabia Kuwait UAE 3,175 2,280 440 345 2,645 1,870 360 305 380 195 90 60 390 255 65 45 Morocco 565 560 5 0 Syria 705 395 115 145 Others 605 465 85 55 Non-Arab Islamic countries 410 345 45 20 135 110 25 NEGL Pakistan 35 25 10 0 Turkey 150 150 0 0 Others 90 60 10 20 120 65 35 20 Qatar Total Saudi Arabia Kuwait UAE Qatar 2,615 1,730 565 210 110 1,975 1,295 385 185 110 405 230 85 55 35 140 5 65 45 25 450 335 115 0 0 575 325 115 85 50 405 400 5 0 0 480 355 110 15 0 55 55 0 NEGL 0 215 105 110 NEGL 0 15 15 0 0 0 195 180 0 15 0 160 80 70 10 0 ? Saudi Arabia refused to fund North Yemen's arms bills due to the USSR, according to the US Embassy. In 1982 our estimates indicate that economic aid transfers fell by $600 million, to $2.6 billion, the lowest level since 1979. This drop is consistent with the pattern that prevailed during 1978-79, when the Gulf states, facing a decline in oil revenues, chose to maintain highly political military aid programs but cut economic aid programs. In 1982, about 95 percent of the Persian Gulf economic aid disbursements went to Islamic states compared with the 1979-80 average of 70 percent. Jordan, Lebanon, Morocco, North Yemen, and Syria con- tinued to absorb the bulk of the assistance-$1.7 billion of the total $2.6 billion disbursed in 19825X1 Gulf state bilateral economic assistance: ? Covered at least 25 percent of the current ac- count deficits (before official transfers) of Moroc- co, Jordan, and North Yemen. ? Covered 15 percent or more of the current account deficits (before official transfers) of Paki- stan, Syria, Turkey, Somalia, Sudan, South Ye- men, and Sri Lanka. Saudi Arabia dis- counted substantial quantities of crude oil to select- ed LDCs in 1982 as a form of economic assistance. Somalia received financial assistance equivalent to more than $100 million in the form of discounted Secret 30 September 1983 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 OPEC Persian Gulf States: Economic and Military Aid to LDCs OPEC Persian Gulf States: Recipient Shares of Aid Commitments and Disbursements, 1982 US $20.0 billion Islamic Arab Confrontation Statesa ajordan and Syria 14 300760 9-83 Secret 30 September 1983 Non-Islamic Arab States /- Other Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 secret OPEC Persian Gulf States: Military Aid Commitments to Non-OPEC LDCs Bahrain Egypt Jordan Morocco Oman Syria Others Non-Arab Islamic countries Bangledesh Pakistan Somalia Others Total Saudi Arabia Kuwait UAE Qatar 3,645 145 3,645 145 0 0 0 0 0 125 125 0 0 0 545 290 120 85 50 320 320 0 0 0 70 70 0 0 0 1,785 1,325 175 190 95 800 665 20 115 0 NEGL NEGL 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 NEGL NEGL 0 0 0 NEGL 0 0 NEGL 0 Total Saudi Arabia Kuwait UAE Qatar 7,565 3,270 1,830 1,690 775 6,885 2,880 1,830 1,400 775 1,760 615 440 440 265 1,000 500 200 200 100 555 300 120 85 50 325 300 0 25 0 1,935 680 485 485 285 1,080 325 555 125 75 230 160 30 40 0 680 390 0 290 0 200 200 0 0 0 380 130 0 250 0 100 60 0 40 0 0 0 0 0 0 NEGL NEGL 0 0 0 Saudi crude oil. In addition, Embassy reporting indicates that in late 1982 a similar agreement may have been signed between Saudi Arabia and the Sudan. On an annual basis, the discount may be worth $10 million to $20 million Iraq: The Special Case Although $7.4 billion was committed to Iraq in 1982, OPEC financial assistance actually disbursed fell to $5.5 billion from the $8 billion recorded the previous year. Saudi Arabia had prepaid $1 billion of its $3 billion commitment in 1981 and together with the other three countries transferred an addi- tional $5 billion to Iraq in the first four months of 1982. We believe that Qatar and the UAE, collec- tively, failed to pay some $500 million of their 1982 commitments. After April the only new commit- ment of financial assistance to. Iraq was a fourth- quarter $400 million loan from Saudi Arabia. 25X1 Based on reduced and delayed payments observed so far this year, OPEC financial assistance trans- fers of all types are likely to be down at least $1.5- 2.5 billion from the 1982 level. This year much of Saudi and Kuwaiti aid to Iraq is taking the form of crude oil sales to Iraqi customers. At current levels of 300,000 to 500,000 b/d, these sales would amount to $2 to $4 billion if maintained throughout the year. In addition, another $1 billion in direct financial assistance has been disbursed to Iraq. As a result, Gulf state aid to Iraq in 1983 probably will amount to at most $5 billion, down from last year's Secret 30 September 1983 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 OPEC Persian Gulf States: Military Aid Disbursement to Non-OPEC LDCs Total Arab countries Jordan Morocco Sudan Syria Others Non-Arab Islamic countries Pakistan Others Other countries Total Saudi Arabia Kuwait UAE Qatar 3,110 2,105 295 515 195 2,715 1,785 295 465 170 795 440 120 185 50 225 225 0 0 0 250 210 0 40 0 1,085 625 175 190 95 360 285 0 50 25 395 320 0 50 25 325 250 0 50 25 70 70 0 0 0 NEGL 0 NEGL 0 0 OPEC Persian Gulf States: Bilateral Official Development Assistance Commitments to Non-OPEC LDCs Total Saudi Arabia Kuwait UAE Qatar 3,225 1,905 750 385 185 2,910 1,665 750 335 160 625 370 120 85 50 185 160 0 25 0 175 125 0 50 0 1,380 625 555 125 75 545 385 75 50 35 315 240 0 50 25 215 140 0 50 25 100 100 0 0 0 NEGL NEGL 0 0 0 Total Saudi Kuwait UAE Qatar Total Saudi Kuwait UAE Qatar Arabia Arabia Total 5,095 3,520 1,060 390 125 5,055 3,315 1,110 520 110 Arab countries 3,510 2,485 550 350 125 3,295 2,110 695 380 110 Jordan 575 240 160 140 35 670 270 220 145 35 Lebanon 390 255 65 45 25 250 115 65 45 25 Morocco 600 500 10 80 10 610 500 80 30 0 535 Syria 610 Others 800 920 240 225 5 210 240 665 535 0 0 360 115 85 595 200 0 670 230 20 180 60 0 105 120 0 5 0 0 210 0 0 170 50 20 365 280 20 585 535 50 0 560 310 115 85 620 380 165 75 1,160 845 185 130 130 105 0 25 170 150 15 5 230 130 65 35 165 125 40 0 465 335 65 65 600 360 230 10 Secret 30 September 1983 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Secret Commit- Disburse- ments ments Commit- Disburse- ments ments Commit- Disburse- ments ments Commit- Disburse- ments ments Commit- Disburse- ments ments Total 7,000 7,000 7,000 8,000 7,400 5,520 500 950 b 21,900 21,570 Saudi Arabia 3,000 3,000 3,000 4,000 3,400 2,400 200 200 9,600 9,600 Kuwait 2,000 2,000 2,000 2,000 2,000 2,000 300 300 6,300 6,300 United Arab Emirates 1,400 1,400 1,400 1,400 1,400 800 0 450 4,200 4,050 600 600 600 600 600 320 0 0 1,800 1,520 a As of 15 September 1983. b In addition, Kuwait and Saudi Arabia have agreed to fulfill $2-4 billion worth of Iraqi oil sales contracts in 1983, an unknown portion of which has already been shipped. $5.5 billion. Jordan and Syria are also having difficulty maintaining aid receipt levels; only Saudi Arabia has made its Baghdad Pact payments on schedule in 1983. As of September, Kuwait has made only one of its three payments to Jordan and none to Syria, and the UAE and Qatar have not made payments to either country. New military aid commitments of $1.8 billion in the first six months of 1983, while below the record annual rate in 1982, are close to the average pace in 1979-81 ($3.6 billion). Military aid disburse- ments of $1.3 billion in first-half 1983, however, are lagging behind last year's rate of $3.2 billion. Syria continues to be the largest recipient, receiv- ing $650 million in the first half of this year compared with the $1.4 billion received during all Economic assistance also has declined in 1983. According to press reports, the Abu Dhabi Fund will reduce aid disbursements this year as a result of oil revenue constraints, while published informa- tion shows the Kuwait Fund authorized only one new project loan in first-quarter 1983, compared with nine in the previous quarter and 14 during first-quarter 1982. We estimate that in the first six months of 1983, new commitments by the Saudi and the Kuwaiti Funds totaled $350 million com- pared with $695 million committed in the first half of 1982. In first-half 1983, commitments of total economic aid by the Gulf states amounted to $1.4 billion, less than half the pace set in 1982. Ec n m- ic aid disbursements total about $600 million For the other large OPEC aid recipients such as 25X1 Morocco, Pakistan, and Bangladesh, it would take only a 20- to 40-percent decline in OPEC funds from last year's level to offset benefits from lower oil import bills. In our judgment, it is likely that 25X1 these countries will call upon Washington to help make up any financing shortfalls Secret 30 September 1983 25X1 25X1 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2 Secret Secret Sanitized Copy Approved for Release 2010/10/28: CIA-RDP84-00898R000300120009-2