PAPERS FOR SIG-IEP CIRCULATION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84B00049R000501360005-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 31
• Document Creation Date: December 20, 2016
• Document Release Date: March 31, 2008
• Sequence Number: 5
• Publication Date: September 10, 1982
• Content Type: MEMO

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V LG. I LVJ
September 10, 1982
MEMORANDUM FOR MR. DAVID E. PICKFORD
DEPARTMENT OF THE TREASURY
SUBJECT: Papers for SIG-IEP Circulation
Attached is a set of five discussion papers prepared for
circulation to participants in the SIG-IEP. The papers describe
the following elements of a United States approach to the Euro-
peans on pipeline sanctions:
1.
Oil and Gas Equipment and Technology
2.
Credit
3.
COCOM
4.
Alternate
Energy Supplies
5.
Reductions
in U.S. Export Controls
Also attached is a set of related background papers.
NSC review completed
Executive Secretary
CC : OVP
NSC
Agriculture
CEA
CIA
Commerce
Defense
Justice
OMB
OPD
USTR
State Dept. review completed
Michael
Raymond
William
0. Wheeler
Lett
Niskanen
Mr. Donald P. Gregg
Mr.
Mr.
Mr.
- Mrs. Helen Robbins
- COL John Stanford
- Mr. F. Henry Habicht
- Mr. Alton Keel
- Mr. Edwin Harper
- Mr. Dennis Whitfield
CONFIDEN~rIAL"
DECL:OADR
DIA review(s) completed.
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OIL AND GAS EQUIPMENT AND TECHNOLOGY
OBJECTIVE
Allied agreement to embargo future transfers of cLitical
oil and gas equipment and technology to the USSR.
ANALYSIS
Until the Reagan Administration the United States had
never developed a clear policy as to whether Soviet oil and
gas production furthered or impeded Western interests. Even
now the fact that our sanctions are tied to Poland reflects
some ambivalence.
In the late 1970's, one of the arguments for approval of
exports to the USSR of some mid-performance U.S. computers
for oil exploration seismic data processing was the possible
beneficial effect on the world oil market.
In 1978, the United States imposed controls on exports
to the USSR of equipment and technology for exploration and
production of oil and gas. But this action was designed as
a "flexible tool of foreign policy" and all license applica-
tions were approved until revocation of the Dresser drill
bit plant license in late 1980.
In March 1980, one of the escape clauses in the U.S.
post-Afghanistan proposal to COCOM for a no-exceptions
policy was "items that protect Western access to vital
commodities or services" and the example given was a computer
to regulate the flow of gas on the Orenburg pipeline.
In July 1981, the United States proposed at the Ottawa
Summit a "prudent approach" to East-West economic relations,
which pointed out the dangers of trade dependency relation-
ships with the USSR. The President also made clear at
Ottawa that we were opposed, specifically, to the Siberian
gas pipeline.
In addition to the vulnerability from dependence
argument, United States officials have stated that Soviet
hard currency earnings from sales of gas delivered through
the pipeline would strengthen the USSR economically, per-
mitting, inter alia, larger purchases of strategically
significant high technology.
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After the imposition of martial law in Poland on
December 13, 1981, U.S. controls were expanded on December 30
to cover transmission and refining for energy use and on
June 22 to cover non-U.S.-origin items from subs.-Liar.-Les an
products manufactured by licensees using previously transferred
technology. These controls had a clear impact on the
pipeline; but we have stated that they would be lifted if
the three conditions for improvement in Poland stipulated in
the NATO January 11 communique were met (lifting of martial
law, freedom for political detainees, and resumption of
dialogue with Solidarity and the church). To drop their
retroactive elements, we want Allied agreement on broadly
"equivalent" measures. Such an agreement would, of course,
benefit the alliance by burying a debilitating quarrel. It
would also enable us to avoid the inherent uncertainties
involved in meeting legal challenges to our efforts to
enforce the measures we have in place.
Allied agreement to embargo future transfers of critical
oil and gas equipment and technology would warrant lifting
of U.S. retroactive controls. For as long as they remained
in place, controls on future transfers would:
-- impact a crucial sector of the-Soviet economy, the
development of which depends on Western goods and
know-how;
-- affect Soviet exploitation of gas resources for
internal use; and
-- cap Soviet prospects for increased hard currency
earnings from gas exports.
But gaining Allied agreement to firm and reliable controls
will be no easy task. The Allies have consistently resisted
the imposition of controls on exports to the USSR for other
than strategic security purposes. The only agreed Allied
export control in response to Afghanistan was a COCOM
no-exceptions policy with escape clauses, and even this was
based on de facto observance rather than recorded agreement.
(In 1980, French and German firms replaced American steel
mill and aluminum smelter exports to the USSR denied by U.S.
post-Afghanistan sanctions.)
The only controls on exports to the USSR which our
Allies have historically agreed to impose affect items on
the COCOM list. Some equipment of significance to the oil
and gas industry is already on the COCOM list, principally
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exploration equipment (such as magnetometers, gravity meters,
computers, recording equipment, and hydrophones) and com-
puterized pipeline control equipment. These items are on
the COCOM list because of concerns other than oil and gas,
for example computerized seismic equipment is used not only
for oil exploration but also for anti-submarine warfare
(ASW). The United States proposed in 1978 that COCOM
tighten computer controls by adding a sub-item on special
signal processing, which would more effectively restrict
array transform processors (ATPs), which are used for both
oil exploration and ASW. COCOM did not concur, primarily
because the United States did not agree to liberalize
controls on general purpose computers. We are trying again
in 1982 to obtain tighter COCOM controls on ATPs, but other
COCOM members may once again insist on liberalization of
general purpose computers.
We will have an even more difficult time persuading the
Allies to control oil and gas equipment which does not also
have other uses of military concern.
The largest value item in Western exports of oil and gas
equipment to the USSR is pipe, mostly from Germany, Japan,
and Italy (about $1 billion per year). In the 1960's,
amidst much controversy, Germany eventually acceded to a
U.S. proposal to ban pipe exports to the USSR. The USSR
subsequently thanked the United States for this incentive to
develop an indigenous Soviet pipe industry. The ban on
Western pipe exports was shortlived. For many years, such
exports have supplemented Soviet production. Pipe purchases
are in bulk, with distribution made to a variety of Soviet
projects.
FRG pipe sales to the Soviet Union for the West Siberian
pipeline are contracted on an annual basis. This arrangement
was developed partly as an FRG response to Soviet demands
for lower interest rates. This reduced the size of the
overall contract and allowed negotiations to be based on
market terms and conditions closer to the actual time of
delivery. The US-EC arrangement on steel exports to the
United States is contingent on agreement by Mannesmann to
reduce exports of pipe and tube to the United States. Given
this history, European agreement to embargo pipe would be
very difficult to achieve.
At least some of the European arguments for opposing
controls on oil and gas equipment would be overcome if our
proposal was limited to items with substantial impact on
the USSR (other than pipe) and historically exported to the
USSR largely by the United States.
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The following fit the above description:
I. Exploration
Magnetomers, gravity meters, and seismic equipment
(including data processing hardware and software)
- These items are already either on the COCOM list
or in U.S. proposals to COCOM for revisions of.
that list. Therefore they need not be included in
a new request for Allied controls.
II. Drilling
Offshore positioning equipment, tensioners, risers,
and motion-compensating systems;
High-quality drill bits;
High pressure blow-out preventers with automatic
controls;
III. Production
Deep submersible pumps;
Gas wellhead assemblies and down hole completion
equipment;
IV. Gas pipeline
Pipelayers;
Compressors and turbines.
V. Gas processing equipment
Lists of significant Soviet purchases from the West of
such equipment during the period 1975 to 1980 are attached.
United States equipment and technology figured prominently
in these sales, although in many cases the sales were not
directly from the United States.
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Western Sales to the Soviet Union, 1975-1980,
Of Oil and Gas Equipment and Tec$r}ology
Proposed for Allied Controls~f
The following two Tables record a sampling of Western
exports of oil and gas equipment and technology to the
Soviet Union during the period 1975 to 1980 in the areas
proposed for new Allied controls. In key areas the United
States is the sole supplier (submersible pumps) or the
preferred supplier (gas turbine technology). Many European
exports are from subsidiaries of U.S. firms and much of the
technology that serves as a basis for European exports
originated in the United States.
Source - "Technology and Soviet Energy Availability,
Office of Technology Assessment, Congress of the United
States, November 1981. This document cites its source
as the bi-monthly publication "Soviet Business and
Trade". The OTA study states that U.S. industry represen-
tatives have indicated that information in this publica-
tion about their firms' activities is generally accurate
but that OTA has made no attempt to validate total
authenticity or completeness of the data.
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Credits to the USSR
U.S. Objectives
-- agreement in principle that the Summit countries should
work out a mechanism to manage the flow of official
and officially-guaranteed credits to the USSR;
-- that the U.S. proposal to the Versailles Summit should be
the basis from which the allies work in drawing up such a
mechanism, so that the principle of burdensharing is
strictly maintained;
-- that an independent monitoring group be established to
review the effect of the mechanism and recommend appropriate
changes;
Background/Analysis
Prior to, and at Versailles, the U.S. sought Summit
Country support for common restrictions on official credits
and guarantees to the Soviet Union. Our goals then and
now are to: 1) maintain a net flow of financial resources
from the USSR to the West, thus ensuring that Soviet external
debt cannot build up and be used as "reverse leverage," as in
Poland; 2) make Soviet resource allocation decisions (e.g.,
increasing defense spending) more difficult, at the margin;
and 3) eliminate, ultimately, Western subsidies to Soviet
growth and preparedness.
The Buckley Mission began its intensive work on this
in February with a view to wrapping up at least the outlines
of an agreement that leaders could bless at Versailles. In
the three high-level meetings, and one meeting of technical
experts, our approach stressed the need to "restrain"
official credits and guarantees for reasons of "financial
prudence,"_ and to ensure that government credits don't take
up the slack of a retreating private market. (Much of the
groundwork,in terms of a common understanding of the Soviet
financial position, has been laid.) Because of European
resistance, we subordinated the "strategic" argument, i.e.
that the uninhibited flow of Western credits is directly
related to the increase in Soviet defense capabilities. That
line of reasoning proved counterproductive with the skeptical
allies, given our ability to document it only with anecdotal
evidence.
A May 21 experts meeting produced agreement that a
technical basis does exist for an agreement which would
raise the cost -- and thus slow -- officially-backed credits
to the USSR, while preserving the fundamental principle of
equal burdensharing among participants. At the final
high-level meeting on-May 27, the U.S. tabled a draft
protocol involving five elements:
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1) all countries, except France, would raise cash downpayments
substantially above the 15 percent now required, and
shorten maturities from 8 1/2 to 5 years on the remaining
financed portion.
2) France (allegedly constrained by its credit protocol with
the USSR on down payments and maturities) would decrease
the proportion of subsidized official financing in favor
of private bank financing at market interest rates in
order to increase the blended interest rate, thus balancing
the policies adopted by the others;
3) countries could adopt alternative cost-raising measures
as long as equivalency is maintained;
4) all countries would increase substantially their up-front
fees; and
5) an independent monitoring group would be established.
The high-level Summit representatives made no decision
and kicked the issue up to the heads of government at
Versailles. There we achieved no meaningful progress,
though the communique language, in an attempt to cloak the
absence of substantive agreement, is ambiguous enough so
that we can continue to push for a specific arrangement, and
to provide the basis for a meaningful mechanism of credit
management, given the political will to do so. The communique
refers to the need to "handle cautiously financial relations
with the USSR ... in such a way as to ensure they are
conducted on a sound economic basis, including also the
need for commercial prudence in limiting export credits."
It also calls for greater exchange of information in the
OECD on "all aspects of our economic, commercial, and
financial relations" with the Soviet Union, and for a
"periodic ex post review" of these relations.
The allies, to varying degrees, accept only part of our
analysis regarding the danger of uninhibited credit flows to
the USSR, and of our argument for restraint and reduction of
subsidies. The allies either misunderstood or, much more
likely, they decided the price we were asking -- a meaningful
credit agreement -- was too much to pay to avoid an expansion
of the sanctions (which they may have considered unlikely in
any event). The question is whether they have changed their
minds now that the President has demonstrated his resolve.
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As during the Buckley Mission, France will be the key.
The French will contend that the agreement to raise interest
rates (and move the USSR and some others into the highest
category) in the OECD credit arrangement will cost them more
exports than the other countries, especially Germany and
Japan with their lower interest rate structure. At a time of
very high unemployment, Mitterrand will be very reluctant to
agree to a proposal that might cut more French jobs.
The Germans are the other major actor. They derive the
most benefits from their trade with Eastern Europe and
the Soviet Union, and are reluctant to cut back. The FRG hid
behind France on this issue, for the most part, but often
appeared to play a constructive role. Indeed, the German
proposal to raise the cost of credits rather than try to find
a way agreeable to all for direct quantitative restrictions
(our initial and still preferred thrust) served as the basis
for the experts decision and the U.S. proposal. The U.K. and
Italy (as well as Canada and Japan) were relatively accommodating
during the Buckley Mission. A table on Summit country trade
with the USSR is attached.
Drafted:EB/IFD/OMA:WBMilam:pms:9/8/82:x21114
Clearances:EUR/RPE:JHolmes
C:MMarks
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COCOM
OBJECTIVES
1) Allied reaffirmation of the existing commitment to
improve COCOM controls on the transfer of militarily sensitive
technologies.
2) Agreement to a second High Level Meeting in 1983.
3) Reiteration at a high level of our action program
for COCOM, including a successful list review.
ANALYSIS
The existing commitment consists primarily of a thirty-three
year history of confidential, informal cooperation in the fifteen-
member Coordinating Committee (NATO plus Japan minus Iceland). No
treaty or executive agreement binds the members to follow COCOM
rules. Members may assert their sovereign rights at any time. They
seldom do. But they strongly resist formalization of COCOM commit-
ments or publicity concerning COCOM agreements.
All decisions are taken unanimously. There is no written
agreement to this effect. But historically no other member has
wanted to give up either its right to veto proposals for a new con-
trol or its reliance on the United States to discipline the pro-
cedures for removing items from control or for approving exceptions
cases.
COCOM agreed at a January 1982 High Level Meeting (HLM) to
strengthen controls on "really critical" items (while decontrolling
items no longer critical) and to define better means to control
technology. Before agreement is reached on a revised list, techni-
cal discussions will be necessary at the forthcoming list review
scheduled to begin in October.
However, there is one significant improvement concerning
restrictions on technology related to listed commodities which
could be put into effect immediately. It awaits only confirmation
of United Kingdom agreement. The British have linked such confirma-
tion to COCOM adoption of a procedure to reduce delays. Such adop-
tion has been delayed by a Defense condition that others first agree
to modernize COCOM communications.
The upbeat atmosphere of the January HLM has not been maintained.
Since then manifestations of strains on the effective functioning
of COCOM have included:
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1) Informal statements by European officials speculating
that the dispute over pipeline sanctions will adversely affect
cooperation in COCOM;
2) British veto of a US proposal to add clad steel
technology to the list, without waiting for COCOM to resume
its meetings after the summer recess;
3) French August 19 approval of telephone circuit switching
equipment for the USSR without COCOM review;
4) British pressure for a new procedure whereby cases would
be considered approved if governments have not communicated a
position within ninety days;
5) British, French, German, and Dutch protests that the
United States is using COCOM for political rather than security
purposes by objecting to all cases for the USSR and Poland, no
matter how insignificant (other governments have licensed several
such cases despite our objections).
Reaffirmation of the commitments made at the HLM meeting in
January and agreement to another HLM meeting next year are reasonable
and specific objectives to be attained at a meeting designed to
resolve the dispute over pipeline-related sanctions. Nevertheless,
we should seize the occasion and complement our COCOM diplomatic
strategy by:
-- stressing support for our minimum list review goals,
-- urging dedication of greater resources for COCOM
enforcement, and
-- arguing the case that COCOM's administrative machinery
requires modernization.
We would state our objectives for COCOM, beyond the present
exercise, as follows:
List Review
Agreement in the first round of negotiations (October-December)
to priority coverage for: (1) gas turbine engines; (2) certain
metallurgical processes; (3) large floating dry docks; (4) elec-
tronic grade silicon; (5) printed circuit board technology;
(6) space launch vehicles and space craft; (7) robotics; (8) ceramic
materials for engines (including manufacturing systems); and
(9) certain advanced composites. (It is expected that full agree-
ment on communications switching and computer hardware and soft-
ware proposals will require more time as well as modification of
other going-in positions.)
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Agreement as to the upper limits of computer systems
approvable for export to Warsaw Pact countries.
(Stressing the above proposals does not mean that other
proposals, such a semiconductors and their manufacturing equip-
ment, are of less concern. These. technologies are already well
covered and generally need only upgrading.)
Enforcement
Agreement for: (1) prelicense and postshipment checks or
comparable monitoring of exports; (2) end-user certificates from
third countries in the absence of reexport licensing requirements;
(3) increased resources for enforcement; (4) better information
sharing; (5) harmonization of supporting materials accompanying
COCOM applications.
Administration
Agreement to review COCOM funding, facilities, communications,
and staff.
In putting forward our case, primary emphasis should be
placed on our minimum List Review goals.
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Alternative Energy Supply for Western Europe
U.S. Objectives:
1. To convey to the West Europeans our view of the
potential for timely development of indigenous Western
energy resources.
2. To stress the importance we attach to developing
these resources so that European markets are not preempted
in the 1990's by increased Soviet gas exports.
3. To inform the Europeans that the U.S. intends to
do all it can to free up its own energy markets for export
on a reliable, competitive basis.
Analysis
Western Europe's energy markets are rapidly changing.
The growing perception that oil prices will be stable or
even declining has upset a variety of energy and economic
calculations. The recession has caused energy demand to
weaken in all major sectors.
Demand for natural gas, one of the fastest growing
fuels in Europe in the 1970's, has been hit particularly
hard. In the 1980's, incremental supplies of natural gas,
including gas from the Soviet Union, will be considerably
more expensive than in the past. If oil prices are stable,
gas demand may continue to be uncertain, making planning
very difficult for gas importing countries.
On the supply side, Europe will face the depletion of
two medium-sized Norwegian gas fields, and the intention of
the Dutch to reduce (if not eliminate) gas export volumes in
order to meet longer-term domestic needs. Norway has major
undeveloped deposits, but each represents an engineering
challenge and costs are likely to be high. However, the
Norwegians are already shopping in the U.S. for the most
advanced technology and we understand certain companies
(e.g. Shell) are confident the technical challenge can be
met at reasonable cost.
This uncertain situation holds the risk that the
Soviets will seek to preempt the market for the development
of indigenous energy resources, again tempting the Europeans
with a gas pipeline mega-project. Using much of the same
infrastructure as in the first pipeline, a "second-strand"
line could be built for 30 percent less in real terms, but
still generate attractive equipment and pipe orders for the
Europeans. If such a pipeline were built, it would supply
up to 40-45% of West European gas consumption by 2000.
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Norwegian energy officials have informed us that the
giant "Troll" gas field in the North Sea will be ready for
advance sale to European gas consumers by as early as
1985. Gas from this field could start to flow in the early
1990's, but large volumes would not be available before the
middle of the decade. By itself Troll could provide
over half the currently expected increment in continental
European gas demand in the 1990's (35 of an estimated 60
billion cubic meters per year), equivalent to, or slightly
more than, what a Soviet "second-strand" pipeline could
deliver.
The competition for Europe's medium-term gas market,
therefore, will be between the Soviets and the Norwegians.
It is a competition in which the Soviets can be expected to
accept low (or negative) real returns in order to obtain
hard currency earnings. For their part, the Norwegians plan
to sell their gas to either the UK or continental Europe,
wherever the highest price can be obtained. Norway will
need the gas sales revenues in 1990's, however, and is
keenly interested in countering any Soviet proposals.
Ambassador Evan Galbraith, working with Jim Buckley's
interagency Alternative Energy Group, has been exploring the
commercial aspects of marketing new supplies of Norwegian
gas in Europe. Galbraith believes the most workable approach
would be for the Netherlands and Norway to reach an under-
standing on transporting, storing and marketing gas through
the year 2000. With such an agreement, the Dutch could
increase current gas export commitments, to be phased out
later and the gas replenished upon development of the large
new Norwegian fields. As a first phase, a pipeline could be
built to land gas in Holland from Norway's Sleipner field
for distribution through the existing Dutch gas grid.
Subsequently, gas from the Troll field could be fed in.
However, at least as of now, Norway refuses to commit its
gas supplies to a particular market in advance of commercial
negotiations.
Domestically, the Buckley group has been looking at
ways in which the U.S. might contribute to European energy
security. The group has identified several actions the U.S.
could take to enhance our credibility as a reliable and
long-term energy supplier to Western Europe, and intends to
present such a package to the NSC for its endorsement. Most
of these actions will require new legislation, however, and
there is serious dissent from OMB, CEA, OPD to some of the
recommendations. Nevertheless, we can go ahead and inform
the Europeans that as a matter of general policy, the U.S.
intends to do all it can to free up its own energy markets
so as to allow greater exports on a reliable, competitive
basis. Particularly significant for the Europeans as they
consider the high cost of future natural gas supplies will
be a renewed U.S. commitment to action on gas decontrol.
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CONFIDENTIAL
REDUCTION IN U.S. EXPORT CONTROLS
OBJECTIVE
The lifting of the retroactive features of U.S. controls
on exports to the USSR and to Poland if we achieve satisfactory
agreement with our Allies to (a) join our embargo of future
transfers of key categories of oil and gas equipment and
technology, (b) restrain export credits to the Soviets, (c)
reaffirm and expand the commitment to improve COCOM, and (d)
seek non-Soviet energy sources.
ANALYSIS
The feature of our sanctions that the Europeans find most
objectionable is their retroactive effect. In Margaret
Thatcher's words, "once you have got a deal, you have to
keep it, short of war..." The President has authorized the
elimination of this feature if we are able to achieve
satisfaction on our objectives.
Assuming success, we would then have to make appropriate
changes in order to eliminate their impact on contracts
entered into with the Soviets prior to December 30, 1981.
This will require several modifications in the sanctions, as
well as in the denial orders. These details, however, need
not be addressed in the meeting with the Europeans.
If sufficient progress is made in achieving essential
agreement at our first meeting, we might consider suspending
the denial orders in advance of working out all the details
of a final package of agreements.
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Cost to U.S. of Sanctions
The Europeans maintain that the United States is
being unreasonable in asking them to sacrifice pipeline-
related exports while the United States proceeds with grain
exports. However, various U. S. Government foreign policy
restrictions on trade with the USSR imposed since 1974 have
caused substantial sacrifices in U.S. exports to the USSR of
both agricultural and industrial items.
1) Jackson-Vanik Amendment - The Trade Act of 1974
(enacted in 1975) conditioned government-supported export
credits and most-favored-nation tariff treatment for the
USSR (and for other non-market economies) on satisfactory
emigration performance. The USSR responded by refusing to
ratify a 1972 US-USSR trade agreement. Soviet leaders
stated that the U.S. action caused them to divert from U.S.
to non-U.S. suppliers purchases valued at $2 billion. We
cannot document which contracts were so diverted. One
possible example is a Sperry Rand air traffic control (ATC)
system. Some Soviet officials maintained that the Datasaab
Swedish competition was chosen because of lower price but
other Soviet officials told Americans that selection of the
Swedish ATC system was politically motivated.
2) Reaction to dissident trial and harassment of
Americans - In 1978 the United States denied a Sperry
computer to TASS and imposed controls on oil and gas explora-
tion and production equipment in response to the Shcharansky
trial and the arrest and harassment of U.S. businessmen and
journalists. A French company, CII, thereupon sold a
replacement computer to TASS and a French company, Technip,
concluded a contract for gaslift equipment, valued at about
$200 million, which the American bidder, Teledyne, maintained
would have gone to it had it not had to wait for a U.S.
license.
3) Afghanistan sanctions - In 1980, in response to
the Soviet invasion of Afghanistan, the United States
imposed embargoes on grain and on phosphate fertilizers and
tightened controls on industrial goods.
.a) Grain - Sales in the 1979/80 year were expected to
be about 25 million tons. Actual sales were limited to 8
million tons, a loss of 17 million tons (c.$ billion).
Other suppliers replaced much of this at the time. Before
the embargo we expected to sell soybean meal to the USSR.
Since the embargo the Soviets have bought soybean meal
exclusively from non-U.S. suppliers.(c.$ million per
year).
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b) Phosphates - The phosphate embargo, which was in
effect from May 1980 to April 1981, suspended shipments of
super phosphoric acid (SPA) under a 20-year $20 billion
Occidental Petroleum deal. While the U.S. embargo was in
effect, the USSR contracted on a long-term basis to replace
approximately half of the SPA which was to have been supplied
by the United States, specifically:
i) a 20-year contract with Belgium for 160,000
metric tons of SPA;
ii) a 5-year contract with Morocco for 200,000
metric tons of merchant grade acid (a form of
phosphoric acid) for the first two years and
300,000 tons of SPA thereafter; and
iii) a 3-year contract with Tunisia for 230,000
metric tons of merchant grade acid.
c) Industrial goods - From January through March 1980
the U.S. suspended the validity of previously issued export
licenses and the issuance of any new licenses. Thereafter,
the United States instituted a policy of no-exceptions to
the USSR for items requiring COCOM review and administered
that policy more restrictively than did other COCOM members,
e.g., by not approving parts to service previously exported
equipment, by denying large cases with minor COCOM-controlled
components rather than approving such cases if the COCOM-
controlled components were removed, and by reviewing cases
for Eastern Europe on a more rigorous basis than before.
Specific results included the loss of the $90 million Armco
Steel portion of an Armco. Nippon Steel contract for the
construction of a steel mill (subsequently replaced by
Creusot-Loire) and of the $80 million Alcoa portion of a
contract for an aluminum smelter (subsequently replaced by
the German firm, Kloeckner). In addition, U.S. computer
manufacturers lost substantial markets in Eastern Europe to
Siemens and other European companies. The effect of U.S.
Afghanistan sanctions on new Soviet orders of U.S. machinery
and equipment was dramatic: from July through December of
1980 the United States received only $0.5 million such
orders, out of a total of new Western orders of $1,452.9
million for that period. This compared with the average six
month total of new U.S. orders in 1978 and 1979 of $208
million, out of an average total of new Western orders of
$1,360.5 million. (Six month averages in 1981-U.S. $148
million and total Western $3,416 million in complete data
for seven months of 1982-U.S. $35 million and total Western
$1,918 million.)
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4) Poland sanctions - The December and June U.S.
sanctions in response to the imposition of martial law in
Poland have had a further deleterious effect on U.S. exports,
both agricultural and non-agricultural.
a) Grain - In the wake of the embargo, the U.S. market
share has dropped from 70 percent to 30 percent, with no
expectation of regaining the lost ground. When negotiations
on a new long-term grain agreement were postponed in December,
the Soviets boycotted the U.S. grain market for two months.
In response to the U.S. expansion of sanctions in June the
Soviets boycotted the U.S. market once again. They have
made no purchases since May. For the first time, there are
no orders on the books for the next agreement year, which
begins October 1.
b) Industrial goods - In December the U.S. suspended
issuance of licenses for all items requiring a license for
export to the USSR. This included not only items requiring
COCOM review, but also items excluded from the 1980 U.S.
proposal to COCOM for a no-exceptions policy, items approvable
at national discretion under COCOM rules, and items controlled
unilaterally by the United States (including not only oil
and gas items but also all unpublished technical data
related to any industrial process). The June sanctions'
expanded the U.S. controls to all oil and gas exploration,
production, transmission, and refining for energy use, not
just from the U.S. but also from subsidiaries and licensees.
Examples of lost U.S. exports due to the December and June
controls on U.S. trade include:
- $500 million Fiat-Allis technology and kits for
crawler tractors;
- $175 million GE rotors.
- $100 million Cameron Iron Works blow-out preventers;
- $88 million Caterpillar pipelayers;
Also note that Soviet machinery orders for the first
seven months of 1982 (based on incomplete data) were only
$35 million from the United States, compared with $787
million from Germany, $190 million from Italy, $86 million
from France, and $50 million from the United Kingdom.
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SECRET
Credits and Strategic Concerns
The availability of officially backed credits provides
the Soviets with investment resources which they could not
finance on their own or obtain from the West under normal
commercial standards. This is particularly true for invest-
ments in capital goods, which marginally increase their
ability to undertake projects to produce new goods, upgrade
their quality levels, and avoid considerable research and
development expenses by importing western euqipment and
technology at low rates of interest. This contribution to
Soviet growth eases some resource constraints and allows a
portion of their own investments to be directed into militarily
significant industries instead of purely civilian channels.
However, imports backed by Western credits normally have
only an indirect impact on the Soviet military build-up. If
the Soviets want Western technology to meet a critical
military need, they are willing to pay-cash for it.
Overall, the USSR must finance with credit its current
account balance of payment deficits. This is largely a
function of massive grain purchases.
For items of military criticality, Western constraints
should be in the form of export controls rather than credit
controls. For machinery and equipment not sufficiently
critical to warrant COCOM control, the credit issue is not
substantially different from that which is relevant to items
of no direct military significance, such as grain.
'Nevertheless,.occasionally Western credit has facili-
tated transfers of machinery and equipment'of some military
significance, either because strategic export controls were
inadequate or because the military significance was too
indirect to warrant imposition of export controls.
There are three broad areas of general industry in
which the key role of Western imports is most evident as it
pertains to defense industrial support; the machinery
producing sector (including motor vehicles), the chemical
industry (including tires and plastics) and the electronics
industry (including computers and telecommunications).
During the 1970s imports of Western products for these
industries accounted for half of total hard currency. imports.
Of this amount, approximately a third was financed by
government backed, low interest credits and loans. However,
in a number of cases involving whole plant purchases or
major projects, 80 percent financing was provided by the
West. These major facilities account for a disproportionate
share of the high technology transferred from the West.
SECRET
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 /..
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SECRET
Although the machinery, chemical and electronics
sectors are not formally subordinate to the Ministry of
Defense, they have extremely close supplier relationships to
the final defense producing Ministries shown in enclosure 1.
In many cases ostensibly civilian plants have closed areas
in which either defense research is conducted or in which
military end items are actually produced.
Machinery and Equipment:
In 1980, the Soviets imported $6 billion of Western
machinery and equipment, accounting for 23 percent of their
trade with the West and one-third of all such Soviet end-use
imports. Some of the remaining machinery imports, primarily
from East Europe, are also from Western sources. This
volume of imports is equivalent to roughly 10 percent of the
machinery component of capital investment in the entire
economy. We are thus subsidizing 3% of Soviet investments
in this area.
While the imported machinery was supplied to all sectors
of the economy, particular emphasis was placed on those
areas most directly supporting the military effort. Western
financing, often at concessionary rates, enabled the Soviets
to obtain advanced technology at exceptionally low costs.
- Most of the NATO countries supplied equipment for the
Kama Truck Plant during the mid-1970s. This plant
produces heavy trucks for both military and civilian
use. Kamas trucks are in use by Soviet troops in
both Afghanistan and Eastern Europe. .
- In 1977, the FRG provided concessionary 7.5 percent
financing for the export of jet turbine shafts to the
USSR. The Soviet aircraft industry is almost totally
integrated. into the military production system.
- In August 1981, Japan granted the Soviets a credit
related to an order for 12-ton trailer trucks. The
size and specifications of these trucks make them
easily convertible -to missile and artillery trans-
porters.
Chemicals:
Soviet truck tire production is markedly inferior com-
pared to the West, with an average life one-eighth as long
as comparable U.S. truck tires. Truck production has been
the major priority in Soviet automotive production. Their
potential for dual civilian/military use as well as the
overall inadequacy of the Soviet road network are major
factors for this emphasis. One out of five trucks in the
USSR are estimated to be in military use; that is, 700,000
in a national inventory of about 4 million trucks.
SECRET
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SECRET
In May 1980, the French Government provided officially
backed export credits to a French firm providing 80
percent financing on a tire factory to be constructed
in the USSR. The total value of the credit was 11.8
million French francs.
In September 1978, the West German Government pro-
vided an officially backed export credit for a---
facility to produce rubber mixtures in a tire factory
at Tchimkent, USSR. Total value of contract: ?207
million DM.
A Japanese consortium has signed a $108.9 million
contract with the Soviet foreign trade organization
Techmashimport for the construction of two butadiene
plants at the Tobolsk Petrochemical Complex in West
Siberia. The Japanese are to provide machinery and
engineering technology and to supervise the plant's
construction and initial operations with financing to
be handled by the Japanese Eximbank.
Electronics:
Soviet electronic engineers have stated that prior to
Western imports there was no truly indigenious microelectronics
industry because of the virtual lack of this technology in
the USSR. Consequently, to close this gap, the USSR imported
a full range of technology, whole plants, materials and
equipment worth hundreds of millions of dollars and heavily
financed by low interest credits. Soviet engineers also
maintain that only one technological base exists in this
industry which serves both civilian and military needs.
They contend that. the military obtains the highest quality,
most reliable components.that the industry as a whole can
produce.
Conclusion:
The flow of legally exported Western technology, equipment
and materials to the Soviet Union has been of considerable
support to Soviet military programs. To the extent that
Western governments have provided credits to underwrite this
trade it has greatly facilitated the development and serial
production of modern weapons. The Soviets are putting
increasing emphasis on quality improvements in their weapons
now that they have achieved quantity goals. The emphasis on
quality will only heighten their need for Western products,
particularly during a period of serious domestic economic
stagnation. Since part of their economic dilemma is a
severe shortage of hard currency the USSR will be in need of
even more credit to.sustain trade with the West.
SE RET
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 11 ..
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SECRET
- 4 -
Hard currency available for manufactured goods will have
to be spent on continuing the purchase of spare parts and
components needed to keep their large inventory of Western
machinery producing. The impact of a reduction in the flow
of legally exported Western industrial products probably
would not be immediate. However, weapons being planned for
the late 1980s or 1990s could experience many developmental
and production problems if the Soviets are forced to-use
indigenous resources.
Enclosures:
1. The Defense Industrial Ministries, 1 Cy.
2. Examples.of Defense Production in Civilian Industry, 1 Cy
SECRET
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The g1e4eee:e Industrial Miniatri.c (S) SECRET
Ministry
ministry of Aviation
Industry (MAP)
Ministry of General Machine
Luilding (MOM)
ministry of Defense
Industry (MOP)
Ministry of Shipbuilding
Industry (MSP)
Ministry of medium machine
Building (MSM)
Ministry of Machine
Building (MM)
Ministry of Rddiu I;ndustt y
(MRP)
Minictry of L'lectroniec
Inductry (MF.P)
Ministry of Communication
Equipment Industry (MPSS)
Pz uduct Lines
Aircraft, aerodynamic mi;~::i )?~,
and defensive missiles.
Liquid-propellant ballistic mi!:-
siles, SLV, spacecraft, and
surface-to-surface cruise
missiles.
Conventional ground force
weapons, solid-propellant
hallistic missiles, optical
Naval vessels, naval fire-control
systems, mines/torpedoes.
Nuclear weapons, nuclear pro-
pulsion, and power sources.
Conventional ordnance munitions-,
fuzing,-and solid propellants.
Cvmjuters, radars, guidincc and
control systems, high-energy
losers, and avionicz equipment.
Semiconductnrc, intpgrarcc1 nir-
crti ra, anti vannIUm r1UhpS.
Communication equipment, radar
components, electronic warfare
equipment, and military
computers.
CiiziPled by DIA/I1F1-4
i---
nr.clasa!y on 6 Ma v 96t
Enclosure 1 (S-43, 116/Dii- )
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Mini*;tiy
Automotive Industry
Chemical and Pet rnletrm
Machinehuilding
Construction, Road and
Municipal Machinebuilding
Pr deduct L1 tics
Wheeled AFC's, military tiwv
Missile fuels and component
military and civil explosivt?r.
Military support equipment,
(trailers and missile laun-.:!iei :.) .
. Electrical Equipment InFuctry
Heavy and Transport
Machinebuilding
Instrumentbuilding, Autcma-
tion Equipment and Control
systems
Machine Tool and Toolbuilding
Industry
M a hincbuilJiny #Qi Light
and rood Induotry and
1Ioucahold Appliance
Power Machinebuilding
Tractor and Agricultural
Machinebuilding
AcroSpacc, naval clcctricnl
cycterrx; hydraulic moehant~~~,a inr
gun-cyetet . .
Tanks, tank destroyers, military
support equipment (launchers,
trailers, garages), turbines and
pumps for submarines.
Military computer-related
equipment.
Machine-tools for defense
industry.
Military logistical equipment.
Military generators.
Tracked AFC's/ICV's, artily-rv,
ACRV's - recon'vehicles,
MT-LB's - prime movers.
S'sclsssIfy ort~2~?i3y L ~:?- -
Enclosure 2 (S-414, 1 I (, / (lri-., r
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CONFIDENTIAL
Coordinating Allied Controls on
Exports to the USSR of Oil and Gas
Equipment and Technology
Agreement on multilateral controls on such exports will
require a multilateral mechanism to provide assurance that
self-restraint by one supplier country would not be undermined
by the competition in another.
The principal supplier countries are France, Germany,
Italy, Japan, the United Kingdom, and the United States.
Other occasional supplier countries are Canada, Netherlands,
and Norway. All these countries are members of COCOM; all
but Japan are members of NATO; all but Japan, the United
States, and Canada are members of the EC.
If the supplying countries look for an organization to
monitor the controls, the Europeans may initially think of
acting together under the EC Treaty (the Treaty of Rome).
They used the EC for controls on imports from Argentina and
the USSR. (They adopted a limited ban on exports to Iran
and a no-exceptions policy on exports to Poland of items
requiring COCOM review by acting together informally outside
the treaty.) But they may have second thoughts about using
the EC for oil and gas equipment controls because of the
following major disadvantages:
1) Enacting controls under article 113 of the Rome
Treaty, which permits collective trade restraints without
requiring subsequent national legislative action, would be
resisted by EC member countries which are not supplier
countries or which oppose use of this article for security-
related measures, such as Greece, Ireland, and, perhaps,
Denmark.
2) Basing controls on article 224 of the Treaty,
which permits trade control measures for security purposes
under national authority, would require that some EC members,
such as the UK, enact authorizing national legislation.
3) Informal EC coordination outside the Treaty frame
has the same drawback as using article 224.
4) EC coordination by itself would be inadequate
because of the need for at least United States and Japanese,
and perhaps also Canadian, participation in the process.
CONFIDENTIAL
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CONFIDENTIAL
The Europeans may recall that NATO was used to coordi-
nate the shortlived ban on pipe exports to the USSR in the
1960's. NATO was also used to coordinate contingency
planning in 1981 for controls on exports to the USSR in the
event of Soviet military intervention in Poland. However,
there are major problems in bringing Japan into NATO delibera-
tions. Moreover, use of NATO would not obviate the need for
national legislation in the UK and perhaps elsewhere.
The Europeans may resist using COCOM because of their
opposition to using COCOM for "economic warfare" or political
purposes (the COCOM strategic criteria call for controlling
items of Soviet deficiency with military significance in
peacetime). On the other hand, if they had the political
will to impose the controls we are suggesting, they might
conclude that COCOM was the best route, for the following
reasons:
1) COCOM is the only existing group which includes
all the major supplier countries.
2) COCOM has 33 years' experience in coordinating
the details of controls on exports to the USSR.
3) Other countries would not have to obtain new
legislative authority to impose additional COCOM controls.
4) There are COCOM precedents for temporary controls,
in the event that it was decided that the new controls
should be removed if and when the three conditions for
improvement in Poland in the NAC January 11 communique were
fulfilled. These take the form of "validity" notes, whereby
certain items are added to the list subject to the condition
that they may be removed from the list at the initiative of
any one member, provided notice is given before the expiration
of a stated temporary period (usually a year or two).
5) Other COCOM members have sometimes agreed to add
carefully defined items to the list, even if the justification
therefor in terms of the COCOM strategic criteria was
somewhat weak, if the United States was the major supplier
(as would be the case historically for the items under
consideration), especially if their future trade interests
were protected by validity notes.
CONFIDENTIAL
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Large U.S. Projects Without Government Credit
The following U.S. contracts were concluded without
benefit of government supported credits or credit guarantees:
$ Million
1975
Iron ore pelletizing
52
1975
Friction bearing plant
47
1976
Baby formula plant
25
1977
Sub-sea oil equipment plant
30
1978
Drill bit plant
148
1978
TV color picture tube project
46
1979
Steel mill (the Armco portion only;
there were some Japanese credits to
support the Nippon Steel portion)
90
?
- Offshore oil rig
1972-1978 - Parts and accessories for
laying tractors for use in
track
pipeline and railroad construc-
tion and in open pit mining
300
Total (excludes smaller value contracts)
778
(Also note the Commerce estimate that, from 1975 until
the imposition of Afghanistan sanctions in early 1980, the
United States lost at least $1 billion in exports as a
result of withdrawal of access to official credits for sales
of machinery and equipment to the Soviet Union. The U.S.
share of industrialized Western country exports of machinery
and transport equipment to the USSR fell from about 12% in
the mid-1970's to about 7% in 1979.)
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Increased Resources for National Enforcement of Export
Controls and for the COCOM International Secretariat
Need for More Resources
Other COCOM member countries have very small staffs
devoted to the national enforcement of export controls.
Despite widespread evasions of controls (estimated on the
order of $200 million over the past ten years), they
investigate very few suspected violations and they prosecute
almost no cases. The few investigations which do take place
are usually a result of a presentation by the United States
Government of intelligence suggesting the need for remedial
action.
Other COCOM members (except the British and, occasion-
ally, the French) seldom if ever involve their Defense
Ministries in the review of COCOM control lists and cases,
even though military significance is highly relevant to the
COCOM strategic criteria.
Noting the paucity of resources, some exporters might
conclude that their governments did not take the controls
very seriously.
The efficiency of the COCOM secretariat would be increased
by the acquisition of word processing equipment. The
efficiency of the entire COCOM operation would be increased
by the acquisition of a computer system to facilitate
finding precedent cases. More dignified quarters for the
secretariat and for the COCOM meetings would indicate to the
participants a heightened sense of the importance and
priority accorded to their work by the member governments.
Reasons Other Members Resist Devoting More Resources to COCOM
Budgetary problems are very real, especially during the
current period of economic difficulties.
Even in more prosperous times, other members resist
giving COCOM-related activities a high visibility. The
governments recognize the importance of the operation, but
they also are conscious of the following types of political
problems which might arise from a higher profile:
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- Since it is well known that the United States is by
far the strongest advocate of controls, others are
reluctant to give the impression that they are
blindly following the U.S. lead and are not suffi-
ciently mindful of their own national interests.
- Since it is well known that the USSR has reacted to
U.S. controls by buying even uncontrolled items
elsewhere, others want to protect their reputations
of being reliable suppliers of such items.
- Since some other members have sizable and vocal
minorities who are not sympathetic with the controls,
even those who are convinced of the need for the
controls are reluctant to publicize measures to
enforce them.
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