Document Type: 
Document Number (FOIA) /ESDN (CREST): 
Release Decision: 
Original Classification: 
Document Page Count: 
Document Creation Date: 
December 21, 2016
Document Release Date: 
September 19, 2008
Sequence Number: 
Case Number: 
Publication Date: 
May 1, 1983
Content Type: 
PDF icon CIA-RDP84S00555R000200050003-4.pdf1.82 MB
Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Directorate of Secret Intelligence Western Europe: Economic Links With the Soviet Bloc State Dept. review completed Secret EUR 83-10132 May 1983 Copy 41 1 Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Intelligence Western Europe: Economic Links With the Soviet Bloc This paper was prepared by Comments and queries are welcome and may be directed to the Chief, West European Division, EURA, Secret EUR 83-10132 May 1983 Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 25X1 25X1 Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Secret Western Europe: Economic Links With the Soviet Bloc Key Judgments Western Europe's economic links to the Soviet Bloc ` are dominated by Information available merchandise trade. While other categories of economic relationships, such as of 1 April 1983 as flows of services and investments, are generally extremely small, the was used in this report. large loans made to Bloc countries during the 1970s make some West European banks vulnerable to a Bloc default. Although a default by a single country probably would not cause major problems, a Bloc-wide default might force the West European governments to intervene to protect their banking systems. Even the trade links to the Bloc are relatively small. Last year the Bloc's share of exports from the NATO countries of Western Europe was only 3.2 percent,2 the lowest level in at least 20 years; over half of these exports came from West Germany. Imports from the Bloc have held up better, due mainly to purchases of Soviet oil and gas. The Bloc's share of total European NATO imports reached 4.5 percent, its highest level since 1964. Over the years the Soviet Union has accounted for an increasing proportion of the Bloc's trade with NATO Europe. In the 1960s and early 1970s, the Soviet share of total trade (exports plus imports) was typically about one- third. Last year, for the first time, it exceeded one-half. On the import side, NATO Europe's purchases were increasingly concentrated on the USSR because of its ability to provide oil and natural gas. Meanwhile financial problems forced East European countries to reduce'their imports and raised the Soviet share in Europe's exports to the Bloc NATO Europe's trade with the Bloc is largely an exchange of capital- intensive manufactures for simpler goods. Exports to the USSR are dominated by machinery and steel, although chemicals and foodstuffs are also important. Exports to Eastern Europe are more diversified. Machinery is still the largest category, but consumer goods, foodstuffs, chemicals, steel, and other semifinished goods are also significant. Four-fifths of imports from the USSR consist of fuels-crude oil, oil products, and natural gas-whereas a wide range of products is imported from Eastern Europe. ' The Soviet Bloc refers to the USSR and the East European countries of Poland, East Germany, Czechoslovakia, Hungary, Bulgaria, and Romania. 2 All trade data presented in this paper are from Western sources. In all cases the export data is shown on an f.o.b. basis while the import data is c.i.f. iii Secret EUR 83-10132 May 1983 Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 25X1 25X1 Approved For Release 2008/09/19: CIA-RDP84S00555R000200050003-4 The importance of East-West trade for employment tends to be exagger- ated by the West Europeans. For West Germany, where the data are best, we estimate that in 1982 only about 0.9 percent of the labor force depended on this trade for their jobs. The percentage in the rest of NATO Europe was presumably even lower because these countries combined sold slightly less to the Bloc than did West Germany. The West Europeans still strongly defend their trade with the Bloc and em- phatically reject any measures that suggest "economic warfare." They continue to believe that trade with the West will tend to restrain Soviet be- havior-although optimism on this score has declined substantially in the wake of the events in Poland and Afghanistan. Proponents of trade with the Bloc now tend to focus more on the economic benefits of such trade. Economic ties between Western Europe and the Soviet Bloc are not likely to increase substantially during this decade. Western banks will remain reluctant to boost lending to the Bloc, and Bloc export prospects will be limited by the sluggish economic growth expected in Western Europe. Increased Soviet gas earnings will be offset by declining oil exports. With its access to hard currency thus limited, the Bloc's share of Western Europe's exports is not likely to increase. The West Europeans may be willing to make some concessions in order to avoid episodes such as last year's dispute over the Soviet pipeline. In particular they might be willing to renounce an additional Soviet pipeline as a means of meeting their gas needs in the 1990s-in part because another pipeline would greatly increase their feeling of vulnerability and in part because projections of gas demand are being revised downward. They might also agree to some further tightening of COCOM rules, especially if the United States can make a strong case that the Soviets have used COCOM-approved material in the past to strengthen their military. Another possibility is a broad framework accord on credits for the Soviet Bloc, although the West Europeans will argue that not much more is needed because of the drastic curtailment of private lending to the Bloc and the OECD consensus agreement last July that raised minimum interest rates on government-backed credits for the Soviets. The West Europeans will attempt to ensure that any agreement implies equal burden sharing among the Western countries and, in addition, does not have the appearance of US imposition of its policies on others. Approved For Release 2008/09/19: CIA-RDP84S00555R000200050003-4 Approved For Release 2008/09/19: CIA-RDP84S00555R000200050003-4 Secret Key Judgments Other Economic Relationships Approved For Release 2008/09/19: CIA-RDP84S00555R000200050003-4 Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Secret Western Europe: Economic Links With the Soviet Bloc General Attitudes Toward East-West Trade Figure 1 The West Europeans generally believe that increased NATO Europe: Trade With the Soviet Bloc trade with the East is both a result and a promoter of detente. The view probably is less firmly held than in the mid-1970s because of the dropoff in exports late in Billion US $ the decade, the continuing Soviet military buildup, 35 and the events in Poland and Afghanistan. Neverthe- less, most West Europeans still argue that Soviet behavior will be more restrained if the USSR has a large stake in the international economic system. West European governments generally reject the use of economic sanctions against the Soviet Bloc except in very limited cases for the purpose of making a political point. An example would be the very modest trade restrictions imposed by the EC on the USSR in response to the declaration -of martial law in Poland. The West European rationale basically is that sane- Lions=may hur-t tthe West-as-mush-as-the-East-and; in- --_-- any event, do not affect Soviet behavior. Underlying this attitude is a strong feeling that the cost of sanctions will not be distributed evenly among the Western countries and that Western Europe in partic- t-ri'~1'~T 0 1962 64 66 68 70 72 74 76 78 80 82 - LL10.1 Y1111 uV0.1 a ilia 1 1 1G Ul L11G UU1 UG11. The West Europeans nonetheless do not view trade with the East purely as an economic phenomenon. This is shown, for example, by the participation, of the major_W. -est-European_governments-in 000OM strictions on exports that could improve Soviet mili- earnings and credits from Western banks and govern- tary capabilities. Even here, however, they tend to ments. Since then the Bloc's share of NATO Europe's take much=narro- - - -- v_than does-thelJnited- - exports-has-fallen_dramaticalt States in deciding what goods fall into this category. attempts to curb the growth of its hard currency debt. Last year the share was down to 3.2 percent, the lowest level in at least 20 years, as NATO Europe's Trade Patterns exports to the Bloc declined even in value terms. Taken as a whole, the trade of the NATO countries of Western Europe with the Soviet Bloc is relatively The Bloc's relative. decline as a market for NATO small. Over the last two decades the Bloc share of Europe's exports is due mainly to Eastern Europe. In their exports usually has been in the 3- to 4-percent the mid- 1960s exports to these countries were double range, with a peak of 4.9 percent in 1975. The mid- 1970s export boom was financed mainly by Soviet oil Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Table 1 NATO Europe: Trade With the Soviet Bloc, 1982 a Poland East Germany Czecho- slovakia Hungary Bulgaria Romania Total EE USSR Total Soviet Bloc Exports 2,078 3,294 1,375 1,941 1,016 1,094 10,799 9,196 19,995 West Germany 873 2,538 773 1,072 . 486 368 6,110 3,936 10,046 France 442 258 108 198 106 159 1,271 1,558 2,830 Italy 167 125 109 222 163 131 917 1,529 2,446 United Kingdom 230 110 120 132 82 210 885 623 1,508 Netherlands 144 101 87 132 44 52 560 424 984 74 51 63 88 46 48 370 533 903 Denmark 48 30 24 36 7 5 150 86 236 Norway 48 9 18 20 3 15 113 97 210 Spain 40 53 32 25 32 34 216 224 440 9 14 38 13 43 64 181 135 316 Imports 2,366 4,260 1,764 1,538 630 1,883 12,441 17,658 30,099 West Germany 884 2,716 840 755 194 537 5,926 4,669 10,595 France 330 284 172 173 101 386 1,446 2,883 4,329 Italy 289 168 249 301 121 549 1,677 3,632 5,309 United Kingdom 257 242 144 73 35 92 843 1,129 1,972 Netherlands 151 209 128 83 20 99 690 2,518 3,208 Belgium-Luxembourg 106 137 55 34 27 26 385 1,456 1,841 106 159 61 35 10 17 388 333 721 97 183 36 19 1 11 347 225 572 Spain 94 105 30 20 16 112 377 495 872 Portugal b 5 11 8 2 1 4 31 96 127 Greece 47 46 41 43 104 50 331 222 553 a Because of rounding, components may not add to totals shown. b January to November data only for Portugal. those to the USSR, and this proportion was main- tained in the early 1970s as the East Europeans stepped up imports of Western goods to modernize their economies and upgrade living standards. The rising tide of imports was financed largely by credits, which the East Europeans planned to repay through improved export performance. However, systemic in- efficiencies coupled with recession and rising protec- tionism in the West dashed their hopes for strong growth of hard currency sales With their debt service obligations increasing, most East European countries began to retrench in the late 1970s and slowed growth largely through steep cuts in investment. Only East Germany held to a growth policy based on rising hard currency imports and debt. In 1981, Poland's economic decline, Romania's finan- cial chaos, and mounting concern among Western lenders over creditworthiness of the Council for Mu- tual Economic Assistance (CEMA) countries gen- erally forced all except Bulgaria to cut hard currency Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Secret Figure 2 European NATO Countries: Trade With the USSR and Eastern Europe USSR Exports Imports 0 1962 64 66 68 70 72 74 76 78 80 82 Eastern Europe Exports Imports 0 1962 64 66 68 70 72 74 76 78 80 82 -West Germany France Italy United Kingdom -Small NATO countries 0 1962 64 66 68 70 72 74 76 78 80 82 25X1 Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 imports. As a result NATO Europe's exports to Eastern Europe fell sharply in dollar terms-ending two decades of steady growth-and the decline accel- erated in 1982. Last year NATO Europe's exports to Eastern Europe totaled $10.8 billion and accounted for just 1.7 percent of total exports-barely half the percentage recorded in 1974 and 1975 The Bloc's share of NATO Europe's imports has risen in recent years, following a long period of decline during the 1960s and stagnation during the early 1970s. The pickup mainly reflects increased purchases of energy from the USSR. Imports from the Bloc totaled $30.1 billion in 1982, of which almost three- fifths came from the Soviet Union. The Bloc's share of imports reached 4.5 percent, its highest level since 1964. Higher imports from the East coupled with slumping exports have pushed NATO Europe's trade with the Soviet Bloc sharply into deficit. The $4 billion surplus of 1975 had by 1981 turned into a $4 billion deficit, and last year the deficit soared to $10.1 billion-of which $8.5 billion was with the USSR. NATO Europe's trade with the USSR is largely an exchange of steel and machinery for fuels. Energy products now account for about four-fifths of Soviet exports to the area; roughly two-thirds of these energy exports consist of crude oil and oil products, with natural gas accounting for most of the remainder. By the end of the decade most energy forecasters expect natural gas to become the dominant commodity as Soviet oil exports taper off and the new gas pipeline comes into operation. Other significant Soviet exports are raw materials, chemicals, gold, and diamonds. West European exports to the USSR are dominated by machinery, especially heavy industrial machinery, and steel products, especially large-diameter pipe. In recent years exports of agricultural products have gained importance, accounting for more than one- fifth of the total in 1981. Trade with the other Bloc countries is considerably more diversified. More than three-fourths of NATO Europe's shipments to Eastern Europe are manufac- tured goods-primarily machinery, semifinished products (mainly steel and textiles), and chemicals. Foodstuffs have gained importance as the East Euro- peans cut back on investment and now account for 15 percent of exports. On the import side foodstuffs and raw materials each account for more than 10 percent, fuels for more than 20 percent, and manufac- tures for just over half of the total. About one-third of the manufactured imports are semifinished goods, particularly textiles and basic metals, while another one-third consist of clothing and other consumer goods. The Jobs Factor The importance of exports to the Soviet Bloc for West European employment probably has been exaggerat- number of West German workers that depend, direct- ly or indirectly, on exports to the Bloc is probably close to 250,000-equal to 1.0 percent of total em- ployment or 0.9 percent of the labor force. While the number of jobs is relatively small, the political signifi- cance is magnified by the fact that the jobs tend to be concentrated in industries that are both highly union- ized and badly hurt by the current recession. For example, in the steel industry we estimate that 5.9 percent of the jobs (or 15,000 workers) depend on exports to the Bloc, while in the machiner industry the figure is 2.6 percent (26,000 workers). For the other NATO European countries combined, the total number of jobs dependent on exports to the Bloc probably is greater than the 250,000 figure that we estimate for West Germany. Their exports to the Bloc almost matched West Germany's in dollar value in 1982, and the goods they sold probably were, on average, more labor intensive than those of West Germany. It is likely, however, that in each of the other NATO European countries, the percentage of total employment dependent on exports to the Bloc is below the 1.0 percent estimate for West Germany. 25X1 25X1 25X1 25X1 25X1 25X1 Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Secret Figure 3 NATO Europe's Trade With the Soviet Bloc: Commodity Composition 1970 Exports Other- 1.0 Chemicals Machinery 1980 Exports 13.7 25.7 5.5 6.3 18.5 26.2 Semifinished mods Other Chemicals Machinery Semifinished goods Foodstuffs Other Economic Relationships Other categories of economic ties that play a major role among Western countries-such as flows of services and investment-are extremely small be- tween East and West. The major exception is the large debt that the Bloc countries ran up with West- ern Europe, mostly during the 1970s. Although the West Europeans now find themselves overexposed, we believe that they could cope reasonably well with a default by any single Bloc country. The greatest exposure is that of West German banks to Poland, and their nervousness has been an important determi- nant of West German attitudes and policy on East- West issues. Nevertheless, as of last year each of the Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 six most heavily involved banks had sufficient loss reserves to write off its Polish loans. In fact, the stronger banks have already begun to do so. Although it seems highly unlikely, a Bloc-wide default would obviously be far more serious, and we suspect it would lead to a major intervention by the West European governments to prevent a banking crisis. The Siberian Gas Pipeline The acrimonious pipeline dispute arose in part be- cause both Americans and West Europeans initially underestimated the importance that the other side attached to the pipeline. By the time Washington raised strong objections, the West European govern- ments had already committed themselves to the deal, and contract negotiations were well under way. More- over, the US arguments initially focused on the question of energy dependence on the USSR-an issue that the West Europeans said they had already studied carefully and resolved to their satisfaction. Given the advantages that the West Europeans see in the pipeline deal, however, we doubt that any shift in the timing or nature of the US objections would have altered the outcome. The West Europeans clearly are convinced that the -pipeline deal is a good one for them, taking into account their projected energy needs and considering such aspects as the cost and reliability of Soviet gas, the cost of their export credit subsidies, and the export sales for West European industry that are likely to result. And, despite less bullish demand forecasts now than three years ago, they remain convinced that they will need large additional gas supplies, especially in the 1990s. The West Europeans stress that the pipe- line will not increase their overall energy dependence on the Soviets because their oil imports from the USSR will fall sharply over the next few years. In our judgment they have not focused extensively on what the additional gas revenue might do for Soviet mili- tary power, but they tend to argue that the Soviet military will get the resources it wants whether or not the pipeline is built. They are skeptical that it is in the West's interest to cause cutbacks,in Moscow's con- sumer-oriented and civil investment expenditures that they believe would result if earnings from the pipeline were reduced or cut off. Numerous statements by West European leaders make it clear that their prime energy goal is to reduce their dependence on OPEC. While that dependence has fallen significantly since 1973, a sustained OPEC embargo would still have a devastating impact. In searching for OPEC substitutes, the West Europeans obviously would prefer to find energy sources in the industrial West because of their reliability. It is partly for this reason that they plan to expand substantially their use of coal and nuclear power. The Soviet gas will help reduce dependence on OPEC by substituting for oil in home heating, and to date there have been no alternative gas sources that could match the Soviet offer. West European gas producers have been neither willing nor able to expand production sufficiently in the 1980s, or to boost exploration/development to ensure deliveries down the line; moreover, potential non-European sources-such as Algeria, Nigeria, Qatar, Indonesia, Iran, or Canada-appear too unre- liable, too expensive, or both. The West Europeans argue further that the Soviet gas deal is relatively advantageous in terms of security, flexibility, and price: ? Security. The deal provides the West Europeans with a 25-year (1984-2008) gas supply from a partner that they clearly consider to be more reli- able than OPEC. They have repeatedly stated their belief that Moscow will deliver the gas on schedule both to maintain its hard currency earnings and to preserve its reputation as a reliable trade partner. ? Flexibility. The Soviets also agreed to significant flexibility in gas deliveries. Numerous reports con- firm that West Germany has a one-time option to permanently reduce the base amount of gas in its contract (10.5 billion cubic meters per year, exclud- ing West Berlin) by up to 20 percent.' More impor- tant, each purchasing country in each year of the contract will have the right to reduce deliveries during that year up to 20 percent below the base amount. This option likely will be utilized during the early years of the contract, when the West Europeans appear to be facing a gas surplus. Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Secret Table 2 NATO Europe: Energy Dependence on the USSR, 1980 a Million Percent Million Percent Million Percent Million Percent Million Percent Million Percent tons oil equiva- lent from USSR tons oil from equiva- USSR lent tons oil from equiva- USSR lent tons oil from equiva- USSR lent tons oil from equiva- USSR lent tons oil from equiva- USSR lent Total 1,106.7 5.0 259.6 0.8 575.1 6.6 172.4 9.7 39.1 0 60.4 0 West Germany 272.2 6.1 83.5 0.2 130.5 5.5 43.3 21.0 10.1 0 4.8 0 France 198.2 6.2 35.7 2.5 109.3 7.9 21.9 12.2 14.4 0 16.9 0 Italy 142.1 9.2 13.2 5.2 93.4 8.0 23.1 21.2 0.5 0 11.8 0 United Kingdom 201.5 0.5 69.6 0 80.6 1.2 41.1 0 9.0 0 1.2 0 Netherlands 65.5 9.7 4.1 0 29.6 21.5 31.0 0 0.9 0 0 0 Belgium/ Luxembourg 50.4 5.1 13.4 1.3 24.2 9.8 9.5 0 3.0 0 0.3 0 Denmark 19.2 7.7 6.1 0.1 13.2 11.1 0 0 0 0 -0.1 0 Norway 24.1 0.6 1.4 0 9.1 1.5 0.9 0 0 0 12.6 0 Spain 75.2 2.3 15.3 0.3 49.9 3.3 1.6 0 1.2 0 7.1 0 Portugal 10.7 4.5 0.5 0.6 8.2 5.9 0 0 0 0 2.1 0 Greece 16.2 4.6 3.5 0.6 11.7 6.2 0 0 0 0 0.9 0 Turkey 31.4 0.6 13.3 0 15.4 1.3 0 0 0 0 2.8 0 a Because of rounding, components may not add to totals shown. ? Price. While the recent decline in oil prices makes the Soviet gas deal appear less attractive than when it was signed, recent reporting from the Paris and Bonn Embassies make it clear that the West Euro- pean purchasers are still satisfied. We believe that all the contracts are patterned on the one signed by Ruhrgas of West Germany. According to the Bonn Embassy, this contract specifies a minimum deutsche mark price for the gas, which, at the 1 May 1983 exchange rate of 2.46 deutsche marks per US dollar, works out to about $4.80 per million Btu. On an energy-equivalent basis, this corresponds to oil at $27 per barrel. For comparison, at the time of signing the price of oil was $34 and was expected to continue rising. The contract also contains an escalator clause linked to oil prices. Although the link is mainly to heavy fuel oil and heating oil rather than crude, the escalator clause probably would go into effect only when the price of crude rises above $40. At that point the gas price would begin rising above the minimum figure, in proportion to any additional oil price increases. The purchasers thus seemed assured of always getting the gas at a price substantially below the energy-equivalent price for oil. The recent drop in oil prices, along with the possibility of further declines, has created an unex- pected situation. It appears, however, that the gas contracts also contain an escape clause that permits the purchasers to pay the prevailing market rate for gas should it drop below the minimum price for an extended period. In any event, press and embassy reports agree that the companies buying the gas do not seem to be worried by the drop in oil prices. Two recent studies tend to support the West European view of the security aspects of their gas contracts. A detailed report by the US Embassy in Bonn concludes that West Germany-usually considered to be the Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Approved For Release 2008/09/19: CIA-RDP84S00555R000200050003-4 The key energy question now facing the West Europe- ans is how they will cover their gas needs in the 1990s and beyond. Although gas consumption has declined for three consecutive years, most energy forecasters believe that this trend will be reversed when economic recovery begins and that consumption will increase by one-third or more by the end of the century. Domestic gas production meanwhile will fall substantially. In particular, production in the Netherlands will drop sharply, due to both declining fields and government policy: The Hague wants to preserve more gas for domestic use and thus does not plan to renew many gas export contracts that expire in the 1990s. French gas production also' will fall as its major fields near exhaustion. All told, the West Europeans appear to be facing a gas deficit toward the end of the century that could equal the throughput of one-and possibly even two-Soviet export pipelines. Norway offers Western Europe's only hope of meeting its additional gas needs from domestic sources. Nor- wegian offshore reserves are large enough, but the gas would be expensive because of the difficult operating conditions. A second problem is the go-slow approach of the Norwegian Government, which does not want the economy to become overly dependent on energy production. The Netherlands could produce more gas in the 1990s than it now plans; if budget deficits remain large, The Hague might be pushed in this direction. Another possible option is a Dutch-Norwe- gian gas swap, whereby the Netherlands would step up gas output through the mid-1990s and receive Norwegian gas in later years in exchange. We doubt, however, that the economics of such a swap would be attractive to The Hague. Among non-European gas sources, only Algeria seems clearly able to supply large additional amounts of gas at reasonable cost in the 1990s. Buying Algerian gas would not, however, contribute to the West Europeans' goal of reducing their energy dependence on OPEC. Algeria, moreover, has so far established a rather poor reputation for reliability as an energy supplier. most vulnerable country-could cope quite well with an indefinite cutoff of Soviet deliveries even after the new pipeline is completed. The West Germans would accomplish this partly by stock drawdowns and fuel switching, but mainly by exercising their contractual right to step up gas purchases from the Netherlands. In fact, according to the report, with just a few hours' notice Bonn could boost its Dutch imports by more than enough to offset a complete Soviet cutoff- although we do not know how long the higher delivery rate could be maintained. The embassy report also states that the West German pipeline system is capable of redistributing the gas to southern Germany where most of the Soviet gas is consumed. A draft concludes that through the mid-1990s West Germa- ny, France, and Italy could all cope with a Soviet gas cutoff. The report points to the relatively large gas storage capacity that should be in place by the 1990s, the large number of industrial gas users with inter- ruptible contracts, and the surge production capacity in the Netherlands. Outlook Economic ties between Western Europe and the Soviet Bloc are not likely to increase substantially during the remainder of this decade.'The surge in trade that occurred in the mid-1970s was financed mainly by increased lending from Western banks and higher Soviet oil earnings following the 1973 OPEC price increase; there is little chance that either of these events will be repeated. The banks clearly do not want to increase their exposure to Eastern Europe, and Soviet oil exports are almost certain to fall over the next few years-perhaps more than offsetting increased earnings from gas exports via the new Siberian pipeline. Bloc exports of raw materials and manufactured goods will be restrained by the slug- gishness of economic growth in Western Europe and by continuing high unemployment rates in industries such as clothing and textiles. With its access to hard currency thus restricted, the Soviet Bloc is not likely to increase its share of NATO Europe's exports much above the 3.2 percent figure recorded in 1982. 25X1 Approved For Release 2008/09/19: CIA-RDP84S00555R000200050003-4 Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Secret While the West Europeans are anxious to avoid a repeat of the pipeline dispute, they almost certainly will be adamant on several prerequisites to any agree- ment on future economic policy toward the USSR: (1) the burden must appear to be shared evenly among the Western countries; (2) the measures must not be applied retroactively, and, (3) the measures must be aimed at Soviet military power, not at the civilian economy. Possible areas of compromise might include: ? The second strand of the pipeline. Construction of a second Soviet pipeline would be one way to meet Western Europe's projected gas shortfall in the 1990s, although there are no negotiations in imme- diate prospect. The West Europeans would be concerned about substantially increasing their dependence on Soviet gas. The gas needs, moreover, perhaps could be satisfied by some combination of other measures: conservation, substitution of other fuels, or expanded gas production in Norway and the Netherlands. Given these possibilities, the West Europeans might be willing to renounce the Soviet option. ? Tighter COCOM restrictions. We believe that sensi- tivity to COCOM issues in Western Europe has increased over the last year or so, in part because of evidence presented by the United States showing that technology transfers have contributed signifi- cantly to Soviet military improvements. Neverthe- less, the West Europeans will continue to take a much narrower view of the subject than does the United States and likely will agree to only limited changes in COCOM procedures. ? Tighter credit terms. There is considerable sup- port-particularly from West Germany-for ending subsidized interest rates on Soviet credits. Paris still strongly opposes the elimination of subsidies, al- though there is at least some technical-level support for the idea within the French Government. The West Europeans are likely to argue, however, that formal agreement is no longer necessary because US objectives in this area have already been sub- stantially achieved. They will point out that private credit to the Soviet Bloc has been sharply curtailed and that future official subsidies will be much reduced by last July's agreement within the OECD consensus.to raise the minimum rate on Soviet credits to 12.4 percent. The subsidy issue has also been defused to some extent by the decline in market interest rates over the past year; it would revive if interest rates turn up again. On two issues the West Europeans are not likely to yield any ground: (1) that export credit guarantees are a legitimate export promotion device, and (2) that the intent of the OECD consensus can be satisfied by charging low nominal interest rates on export credits and inflating the price of the goods to compensate. Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Secret Appendix Policies and Positions of Major Countries West Germany Basic Setting West Germany's postwar prosperity has been substan- tially based on foreign trade-probably to a greater extent than for any of the other major Western countries except Japan. In this context it is not surprising that, across the political spectrum, most West Germans favor relatively unrestricted foreign trade, including trade with the East. While East-West trade is valued mainly for its economic benefits, there also has been a feeling-particularly during the mid- 1970s-that it could contribute to improved political relations. Underlying Bonn's whole approach to East-West af- fairs is the long-term goal of national reconciliation. The 1949 West German Constitution enjoins the government to pursue this goal, and the aspiration is overwhelmingly popular. Bonn's decision in 1955 to rearm in support of Western Europe's defense was . made in part because the United States, the United Kingdom, and France agreed in principle to support this German national objective. West Germany's trade ties with the Soviet Bloc predate Ostpolitik because of both geographic prox- imity and historic trading patterns. Prior to the war, the East European countries and Germany were each other's most important trading partners. Thus, for a number of West German firms, trade with the East involved only reestablishing old relations disrupted by the war or temporarily severed by the new Communist regimes. Perhaps even more important, West German firms were already known within the Bloc and the high quality of West German products was well established. Bonn does not, however, regard East-West trade as a purely economic phenomenon. For example, last sum- mer the Interior Ministry publicly cautioned West German firms to be more circumspect in their deal- ings with Bloc countries, pointing out the techniques Communist negotiators use to obtain technical know- how free of cost. 25X1 25X6 25X6 Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 $240 million. interest-free loan-by means of the "swing credit"- although its importance has declined somewhat over the last few years. In 1981 the amount of swing credit utilized by the East Germans averaged about this accounted for only.16 percent of their Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 The Special Case of East Germany The Potsdam Agreement of 1945 officially set the stage for trade ties- between West and East Germany by calling for Germany to be treated as an economic unit. The Interzonal Trade Agreement of 1951 estab- lished rules to govern the flow of goods between the two parts of Germany and, in later years, Bonn implemented a number of other policies aimed at facilitating interzonal trade, including tax relief measures, trade credits, and simplification of adminis- trative procedures. As a result, West Germany has become East Germany's second-largest trading part- ner, following the Soviet Union. In 1982, sales to East Germany amounted to $2.5 billion and accounted for 1.4 percent of total West German exports. From an official -standpoint, moreover, trade with East Ger- many still is not considered foreign trade, and this special status is recognized by the European Commu- nity in the Treaty of Rome. Because of the unique relationship, trade with East Germany is more broadly based than with other Bloc countries. As is the case for other Eastern countries, exports are concentrated in machinery, chemicals, and iron and steel, but consumer goods and fuels each accounted for about 14 percent of goods sold to East Germany in 1982. On the import side, oil-mostly East German refined products going to West Berlin- and consumer goods each account for about one- fourth of goods purchased. There are also significant personal and financial interactions between the two Germanys, many of which benefit East Germany. For example, the East Germans appear to receive unusu- ally high fees for the services they provide for West Berlin and-to Bonn's great irritation-they require West German visitors to convert at least 25 deutsche marks daily into East German currency. West Ger- many also in effect provides East Germany with an total debt to West Germany, the balance being financed at commercial rates. As for personal con- tacts, retired East German citizens are allowed to spend up to 30 days annually in Western countries, and many take advantage of this to visit friends and relatives in West Germany. Largely as a result of this traffic, East Germany sent 3.3 million visitors to the West in 1981-more than the other East European countries combined. West Germans are relatively free to visit East Germany, and they accounted for almost 90 percent of the 5.1 million Western visitors to East Germany in 1981. Trade Patterns For many years West Germany has been the main Western trading partner for both the USSR and Eastern Europe. From the West German side, how- ever, the Bloc has never been a key trading partner although it did gain in importance during the 1970s and now accounts for over 5 percent of exports and over 6 percent of imports. Rising eneigy prices boost- ed imports from the USSR particularly rapidly, push- ing their share of total West German imports from 1.1 percent in the early 1970s to 3.0 percent during 1982. The recent fall in oil prices probably will cause that share to shrink this year. Exports to the Soviet Union consist overwhelmingly of manufactured goods, although foodstuffs have gained in importance recently and now account for 9 percent of the total. The manufactured goods category in turn is dominated by steel and machinery. In 1982 steel sales to the USSR exceeded $1 billion and accounted for 11 percent of total West German steel exports. Machinery sales to the USSR topped $1.3 billion; in, the subcategory of metalworking machinery the USSR took $300 million or 9 percent of the total foreign sales. 25X1 25X1 25X1 25X1 Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Secret Table 3 West Germany: Trade With the Soviet Bloc and the United States, 1982 a World (million USSR Eastern Europe United States US $) Million us $ Percent trillion US $ Percent Million US $ Percent Exports 178,979 3,936 2.2 6,110 3.4 11,347 6.3 Foodstuffs 10,168 335 3.3 638 6.3 326 3.2 Raw materials 4,413 71 1.6 156 3.5 103 2.3 Fuels 6,971 21 0.3 420 6.0 14 0.2 Manufactures 152,903 3,390 2.2 4,772 3.1 10,848 7.1 Chemicals 21,709 387 1.8 1,240 5.7 1,080 5.0 Semifinished 32,201 1,358 4.2 1,350 4.2 1,833 5.7 Steel 9,761 1,056 10.8 434 4.4 1,003 10.3 Machinery 48,869 1,338 2.7 1,711 3.5 3,484 7.1 Metalworking 3,302 298 9.0 315 9.5 283 8.6 Transport equipment 35,039 242 0.7 142 0.4 3,865 11.0 Consumer goods 15,087 65 0.4 330 2.2 585 3.9 Other 4,523 119 2.6 126 2.8 57 1.3 Imports 158,093 4,669 3.0 5,926 3.7 10,602 6.7 Foodstuffs 19,865 32 0.2 757 3.8 2,261 11.4 Raw materials 12,353 357 2.9 482 3.9 938 7.6 Fuels 37,277 3,739 10.0 1,315 3.5 413 1.1 Coal 943 4 0.4 295 31.3 181 19.2 Crude oil 18,443 793 4.3 0 0 0 0 Oil products 10,727 1,428 13.3 1,004 9.4 231 2.2 Natural gas, electricity 7,163 1,514 21.1 16 0.2 0 0 Manufactures 83,281 278 0.3 3,305 4.0 6,938 8.3 Chemicals 12,352 168 1.4 566 4.6 1,191 9.6 Semifinished 21,460 66 0.3 992 4.6 706 3.3 Machinery 19,494 15 0.1 371 1.9 3,863 19.8 Transport equipment 12,132 14 0.1 36 0.3 550 4.5 Consumer goods 17,844 15 0.1 1,340 7.5 628 3.5 5,317 264 5.0 65 1.2 53 1.0 a Trade with East Germany is included in the Eastern Europe and World totals even though Bonn does not officially treat this as foreign trade. Because of rounding, components may not add to totals shown. Four-fifths of West German imports from the USSR In trade with Eastern Europe (excluding East Germa- consist of fuels, and these cover approximately ny) manufactures dominate in both the export and 6 percent of the country's primary energy require- import categories. Machinery accounted for more ment. Last year West Germany obtained one-fifth of than one-third of total sales in 1982, while chemicals its natural gas imports and 7 percent of its oil imports and semifinished goods (mostly textiles and metals) (crude plus products) from the Soviets at a total cost of $3.7 billion. Other significant imports were raw materials, gold, and chemicals. Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 were each over one-fifth. On the import side, food- stuffs, raw materials, and fuels each constituted 13 to 16 percent of the total versus 56 percent for manufac- tures. Consumer goods (especially clothing) and semi- finished goods (especially steel) were the key manufac- tured items. During this period West Germany was a net importer of steel from Eastern Europe. Trade Promotion The overall framework for West German economic relations with the Soviet Bloc has been set down in a succession of broad economic cooperation agreements. These accords, however, are little more than declara- tions of intent; actual projects or deals are negotiated on a case-by-case basis. The first West German- Soviet trade accord was signed in 1958 and called on West Germany to sell, among other things, steel products and various machinery and equipment in return for raw materials, chemicals, nonferrous met- als, and oil-the same goods that compose the bulk of trade today. The accord also extended most-favored- nation status in mutual trade The 1972 long-term Agreement on Trade and Eco- nomic Cooperation was the first West German-Soviet trade accord to go beyond simple trade relations into the broader area of economic, industrial, and techni- cal cooperation. It called for establishment of indus- trial complexes, modernization of individual industrial enterprises, and exchange of patents, licenses, and technical documentation. This agreement also first formalized the system of mixed commissions to inves- tigate specific trade deals. The most recent cooperation accord was signed in 1978 for a 10-year period and may be renewed for three additional five-year periods. Like previous ar- rangements, it calls for economic, industrial, and technical cooperation between the two countries in a wide range of areas, including raw materials and energy development, construction of industrial plants, joint development and production of goods, and coop- eration with firms in third countries. During Chancel- lor Schmidt's visit to Moscow in the summer of 1980, West Germany and the- USSR signed another long-- term cooperation agreement intended to "add sub- Possibilities for intensifying trade and cooperative ventures are examined in the mixed commissions, headed by government officials, and their sector- oriented working groups, usually headed by industry representatives. The working groups act as trade associations and thereby open the door to prospective buyers and sellers. West German businessmen and Soviet officials negotiate specific projects and trade deals; the West German Government does not negoti- ate for its firms. Credits for financing West German exports to the Soviet Bloc generally carry no special provisions or government subsidies. Financing is arranged through commercial banks and, in effect, at market rates. . When the Soviets demand interest rates below market levels, the exporting firm usually makes up the differ- ence between the negotiated rate and the market rate by raising the selling price. The Soviets are well aware of this practice. The West Germans, of course, benefit from the fact that their market interest rates usually are low relative to most other Western countries. Bonn's principal trade promotion device is export credit quarantees. The guarantees are provided by the private Hermes company, operating as Bonn's agent; the government thus sets policy and bears the ulti- mate risk. It is up to the individual West German exporter or bank to request Hermes coverage, depend- ing on the perception of risk; exports to Western industrial countries are almost never insured. The fee structure is based only on the amount of the export credit, its maturity, and whether the importer is a public or a private entity-not on the country in- volved. Taking a five-year credit as an example, the fee is slightly over 2 percent in the case of a state purchaser, almost double that for a private entity. The maximum maturity allowed is ten years for LDCs and eight and a half years for Communist countries. Repayments must be made in equal semiannual in- stallments with no grace period. The system appears to operate in a nondiscriminatory fashion, although guarantees for exports to the Soviet Bloc always benefit from the lower fee because the importer is, by -definition, a state entity. ---stance'' to-the 1975 accord.-The agreement,-however,- did little more than reaffirm the areas of cooperation specified in the earlier accord. Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Secret In recent years, 8 to 13 percent of total exports have been covered by Hermes guarantees, although the figures are much higher for sales to LDCs and Communist countries. Outstanding guarantees cur- rently total about $60 billion. As of early 1982 about half of the guarantees went to OPEC countries and one-sixth to the Soviet Bloc. Saudi Arabia was the largest single recipient, followed by the USSR-with about 10 percent of the total. Guarantees for the USSR rose sharply in 1981 and apparently took another upward jump in early 1982. The increases most likely were due to the finalizing of previously negotiated contracts, including some deals related to the gas pipeline. Some West German firms may have hastened their applications for credit insurance in the wake of the Polish crisis fearing that restrictions might be imposed. Shortly thereafter a Bonn spokes- man stated that the Soviet share of guarantees would not increase any further. It is likely, however, that East Europe's share of Hermes coverage has contin- ued to rise during the past year due to the increasing reluctance of West German banks to make unguaran- year and has a cumulative profit for 1949-82 of about $500 million. The West Germans also note that countries such as France and the United Kingdom provide guarantees-plus direct interest rate subsi- dies-for a much larger proportion of their exports. Basic Setting France's pursuit of a "special relationship" with both the Soviet Union and Eastern Europe began in the 1960s under Charles de Gaulle. Over time, this policy became an integral part of the French position in the world, maintained to serve three underlying purposes: ? To foster commercial advantages for French busi- ness. Simply put, Soviet and East European buyers of Western goods and services were expected to prefer dealing with firms from the Western country that had the best political relations with Moscow. teed loans to the area. For the most part the Hermes system operates accord- ing to economic criteria. If the risk seems large that a particular country may not repay the loans, Bonn may set ceilings for the guarantees, require larger down- payments, or reduce the percentage of the loan that is guaranteed. Political considerations can play an im- portant role, however. The guarantees provided for Poland in 1981 were based solely on political grounds, as are the special restrictions which currently apply for guarantees for South Africa and Chile. The West Germans are strongly opposed to altering the Hermes system, believing that it enhances the free market rather than interferes with it. They argue that ideally private enterprise should provide such guaran- tees but cannot because West Germany's foreign trade is so large relative to the size of its banking system. (All West German banks have an aggregate reserve for losses on the order of $9 billion, equal to about one-sixth of the Hermes guarantees outstand- ing.) Bonn officials point out that Hermes normally makes a profit and that self-financing guarantee systems are not considered export subsidies, according to GATT definitions. Although Hermes lost about $300 million in 1981, it edged back into the black last ? To establish France as the conduit for more commu- nications between West and East. There also was at least the hope that closer Eastern political and economic relations with the West would contribute to internal pressures to liberalize the Communist systems. ? Finally, to highlight France's position in the geome- try of.world power. French policymakers saw the special relationship with the East as a means of demonstrating France's independence without com- promising its membership in the Atlantic Alliance. Before the Soviet invasion of Afghanistan, few if any French policymakers would have been likely to judge the Franco-Soviet special relationship a failure. In- stead, statements of government officials and editori- alists alike indicated the judgment that the relation- ship had increased French stature in the world and even indirectly had stimulated East European reform pressures. Nevertheless, French expectations and am- bitions for the relationship have never been achieved Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Approved For Release 2008/09/19: CIA-RDP84S00555R000200050003-4 in practice. This is most obvious in economic terms, given the stagnant Soviet share of French exports. French firms have only rarely benefited from any special preference in dealing with the Soviets, accord- ing to the French press and the US Embassy, and the meager follow-on benefits have disillusioned many in the business community. Since Afghanistan, Paris has taken a harder line toward the USSR and references to the special rela- tionship have all but disappeared. The Soviet military posture in Europe and the situation in Poland have increasingly suggested the special relationship's obso- lescence and forcibly demonstrated that basic French interests lie with the West. Results from the Giscard- Brezhnev meeting in Warsaw in May 1980 were particularly meager. Giscard apparently hoped to elicit some Soviet movement on Afghanistan, thus lowering East-West tension and confirming an impor- tant mediating role for France in salvaging detente. The special relationship, however, proved unequal to the task and emerged badly shaken. The 1981 election of a Socialist government in France marked the end of French pretensions about the special relationship, although overall policy toward the USSR probably has changed little. The French Communist Party (PCF), of course, has long been one of Moscow's staunchest supporters in Western Eu- rope, and it favors much closer economic ties. Presi- dent Mitterrand, however, is profoundly opposed to the Soviet system and to Soviet actions in Poland and Afghanistan, and he has effectively denied the PCF a significant role in setting foreign policy. A member of Foreign Minister Cheysson's cabinet told an Embassy officer last September that the French and West European view of the USSR is basically pragmatic, while the US view is ideological. Pointing out that Western Europe shares a continent and a long history of relations with the USSR, the official argued that in the absence of trade the USSR would see Western Europe exclusively in military terms. He said that Paris regards the Soviet economy as basically strong and expressed doubts that US sanctions would alter Soviet foreign policy. Even without the revenues from the gas pipeline, he argued, Soviet military capabilities would not be diminished because the military always gets all it wants. Proceed- ing from this assessment of the reality of dealing with Moscow, the Mitterrand government strongly believes that the West must achieve military equality with the Soviets. This more pragmatic and hard-nosed posture seems to have shown itself in recent months in the negotiations for the Astrakhan gas project. This huge gas deposit, located near the Caspian Sea, has a high sulfur content and cannot be exploited by the Soviets with- out corrosion-resistant Western pipe and equipment. Although anxious for a piece of the business, the French-in marked contrast with earlier positions- resisted Soviet demands for low-interest-rate credits. They insisted that the USSR pay the higher OECD consensus rate either directly, or indirectly via an inflated price for the equipment, and they eventually obtained a substantial contract in spite of their firm position. The French attributed this success, in part, to a political decision by Moscow and it is likely that Paris's hammering away on the widening bilateral trade deficit did convince Moscow that a concession was necessary. Despite his anti-Soviet feelings, Mitterrand is as wary of perceived US slights to French sovereignty as de Gaulle ever was. This showed up most clearly in the pipeline dispute in which France took by far the strongest stance against the US sanctions. French officials publicly labeled the sanctions as illegal and an infringement of European sovereignty and de- scribed them as an attempt to wage economic war against the USSR. In the end, when the first post- sanctions shipping date arrived, Paris took the lead in ordering one of its companies to violate the sanctions by shipping the embargoed equipment. The French participated in the post-La Sapiniere talks that led to the revocation of the US sanctions, but they insist that they are under no obligation to accept any conclusions flowing from the follow-on studies in the OECD, NATO, and COCOM. This position is due in part to their lingering unhappiness over the sanctions controversy itself, but it also stems from their longstanding insistence on exercising fully their national sovereignty in policy matters. Paris may 25X1 25X1 25X1 25X1 Approved For Release 2008/09/19: CIA-RDP84S00555R000200050003-4 Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Secret Table 4 France: Trade With the Soviet Bloc and the United States, 1982 a World (million USSR US $) Million US $ Percent Million us $ Percent Million US $ Percent Exports 92,705 1,558 1.7 1,271 1.4 5,215 5.6 Foodstuffs 15,421 515 3.3 296 1.9 607 3.9 Raw materials 3,858 9 0.2 61 1.6 93 2.4 Fuels 3,712 20 0.5 8 0.2 33 0.9 Manufactures 69,245 1,014 1.5 905 1.3 4,477 6.5 Chemicals 11,880 250 2.1 250 2.1 652 5.5 Semifinished 17,412 299 1.7 270 1.6 1,053 6.0 Steel 5,636 218 3.9 70 1.2 514 9.1 Machinery 17,770 416 2.3 258 1.5 1,137 6.4 Metalworking 369 28 7.6 13 3.5 19 5.1 Transport equipment 14,059 13 0.1 82 0.6 1,196 8.5 Consumer goods 8,124 35 0.4 45 0.6 440 5.4 Other 469 0 0 0 0 6 1.3 Imports 115,702 2,883 2.5 1,446 1.3 9,109 7.9 Foodstuffs 12,330 24 0.2 173 1.4 989 8.0 Raw materials 7,627 317 4.2 151 2.0 467 6.1 Fuels 30,874 2,338 7.6 332 1.1 828 2.7 Coal 1,672 7 0.4 102 6.1 579 34.6 Crude oil 19,893 877 4.4 0 0 0 0 Oil products 5,228 823 15.7 230 4.4 228 4.4 Natural gas, electricity 4,081 632 15.5 0 0 21 0.5 Manufactures 64,347 202 0.3 790 1.2 6,803 10.6 Chemicals 9,849 122 1.2 108 1.1 904 9.2 Semifinished 15,599 17 0.1 226 1.4 525 3.4 Machinery 18,226 11 0.1 121 0.7 4,191 23.0 Transport equipment 8,616 45 0.5 39 0.5 520 6.0 Consumer goods 12,057 6 NEGL 298 2.5 662 5.5 Other 524 2 1 0.2 22 4.2 be willing to accept tighter strategic trade controls, but only if a convincing case for them can be made. Agreement is likely to be limited to narrowly defined items of military significance, and the French will attempt to rally their West European partners to resist perceived US efforts to expand controls on strategic exports into a more broadly discriminatory system. Trade Patterns Over the last two decades the Soviet Bloc generally has taken about 4 percent of French exports. A surge in sales in 1975 pushed the figure to its peak of 4.9 percent, but exports have slumped badly during the last two years reflecting hard currency shortages in the Bloc. Exports in 1982 totaled $2.8 billion, down Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 more than a third from the 1980 high. Their share of total French exports was only 3.1 percent-the lowest share since 1965. Exports to the USSR alone have held up slightly better, accounting for 1.7 percent of total exports versus a peak of 2.3 percent in 1977. For the last three years the Bloc has accounted for about 4 percent of total imports, up from 3 percent during most of the 1970s. The increase since 1979 mainly reflects larger deliveries of natural gas from the USSR. France actually had been contracting for Soviet gas for several years, but there was no pipeline to deliver it until early 1980. As a result, Paris arranged a gas swap with Italy, which did have a pipeline link to the USSR: until 1980 Italy took France's Soviet gas, and France took deliveries of Dutch gas contracted by Italy Exports to the USSR and Eastern Europe are domi- nated by manufactures-especially semifinished goods and machinery-but foodstuffs account for more than one-fourth of the total. Imports from Eastern Europe are varied, ranging from raw materi- als to finished consumer goods; more than half are manufactured products. By contrast, imports from the USSR during 1982 consisted almost wholly of fuels (81 percent) and raw materials (11 percent). During this period the USSR provided almost 7 percent of French oil imports and one-sixth of gas imports and accounted for about 6 percent of France's total energy supplies. Trade Promotion Economic relations between France and the Soviet Bloc are governed by long-term cooperation accords that set general guidelines for trade patterns from which specific scientific, technical, and economic agreements may be worked out. In addition, France and Bloc nations meet periodically at "Grande" and "Petite Commissions." The higher level Grande Com- mission traditionally reviews the broad range of coop- eration in economic, commercial, technical, and scien- tific affairs. The Petite Commission handles these issues at the working level in specialized industrial groups made up of business and government repre- sentatives. April 1979-lays out a program of economic, indus- trial, and technical exchanges until 1990; it includes compensation deals, trade in and access to French technology, and favorable financial terms. A number of shorter term economic cooperation pacts also were signed: a proposed tripling of commercial trade be- tween France and the Soviet Union by 1985 to match the increase in 1976-80; an improvement in direct communications between the Kremlin and the Elysee Palace; and greater cooperation in scientific, techno- logical, and oceanographic research. Moscow and Paris also resolved to coordinate bilateral and multi- lateral efforts in the fields of energy, environment, and foreign aid. France traditionally has been a leader in providing package lending and in extending government-backed credits and guarantees at below-market rates. Al- though not alone in occasionally breaking and often bending the "gentleman's agreement" on export cred- its, Paris has been one of the most reluctant to tighten the terms of the agreement. French trade officials have expressed the fear that in the absence of attrac- tive financing terms, they would be unable to compete with what they regard as better organized banks or trading houses in the United States, West Germany, or Japan. The French export credit system, which was estab- lished in the 1950s, became especially important as a tool of French trade policy following the 1974-75 balance-of-payments crisis. The substantial use of official interest rate subsidies helped to boost exports from a wide range of sectors-especially machine tools and construction projects-at a time of slowing world demand. During 1975-80 the share of French exports financed through the government's export credit program rose from 7 percent to 10 percent. About one-third of total credits go to the Soviet Union and Eastern Europe, covering about the same share of total French sales to the East. In 1980 the US Embassy in Paris estimated the direct budgetary cost of the worldwide export credit program-including interest rate subsidies, insurance payments, and treas- ury loans-at nearly $2 billion annually to support about $10 billion in gross export credit disbursements. The current 10-year economic accord with the Soviet Union-signed during Giscard's trip to Moscow in 25X1 25X1 Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Approved For Release 2008/09/19: CIA-RDP84S 00555R000200050003-4 Secret France's export credit system offers a comprehensive range of financing and insurance. The official export bank, Banque Francaise du Commerce Exterieur (BFCE), refinances export-related credits extended by French banks or French branches of foreign banks and lends official export credits. BFCE obtains funds by refinancing wiih the Bank of France, borrowing from the French Treasury and private banks, and selling its securities on capital markets. Insurance coverage for export credits is provided by the semioffi- cial export and credit insurance agency Compagnie Francaise d'Assurance pour le Commerce Exterieur (COFACE). French exporters may obtain insurance against political and commercial losses covering 80 to 90 percent of credits extended; French banks are guaranteed against losses up to 95 percent of the value of their direct loans to foreign buyers. In addition, all export credits of at least 18 months are subsidized by the French Government for the full term of the loan. Other important forms of support include protection against losses due to foreign exchange fluctuations and inflationary pressures, as well as the blending of public "concessional" funds with private export credits. The most recent Franco-Soviet five-year export credit agreement was concluded in February 1980. Interest rates on export credits were fixed through September 1981 at a maximum 7.75 percent for all projects between five and eight years. Similar terms were extended to East European countries. The Soviets pressed hard and succeeded in signing contracts for equipment for the gas export pipeline before the low interest rate expired. French-Soviet trade is also promoted by firms set up in France with the participation of Soviet foreign trade organizations. These formal organizations, which are subordinate to the Soviet Ministry of Foreign Trade, are responsible for a wide range of commercial activities including shipping, fishing, in- surance, banking, manufactured products, and raw materials. Important French-Soviet joint ventures in France include the marketing firms GISOFRA (heavy machinery and technology), ACTIF-AVTO (tractors and other farm equipment), FRANSOV (fishing), PROMOLEASE (leasing heavy equipment), RUSBOIS (timber), and SOGO (chemicals, raw ma- terials, medicine). French-Soviet joint ventures are also located in Moscow, representing such sectors as automobiles, electronics, heavy machinery, medical products, and metals. In addition, the wholly Soviet owned Banque Commerciale pour I'Europe du Nord (BCEN, or Eurobank) located in Paris is active in organizing and taking part in consortium loans, in placing bond issues, and in financing East-West trade. Six French banks, including the three largest, have offices in Moscow to facilitate trade. Italy Basic Setting Close economic ties between Rome and the Soviet Bloc predate the heyday of detente in the 1970s. In fact, at the height of the cold war, large Italian firms such as Fiat and ENI (the state energy agency) were in the forefront of expanding East-West trade, partic- ularly with Eastern Europe. Rome often opposed EC, NATO, and US attempts to restrict economic rela- tions. With the advent of detente, Italy hoped to exploit the relaxation in tensions to broaden its eco- nomic links with the Bloc, to parlay them into im- 25X1 proved political relations, and to provide a further underpinning for the international rapprochement al- ready under way. Rome viewed the economic and political interdependence between East and West fostered by detente as an important constraint on Soviet "adventurism" and a buttress to international security. The flowering of detente pushed Rome to- ward even closer relations with Moscow, as did do- 25X1 mestic rapprochment between the governing parties and the Italian Communists during the 1970s. The major Italian political parties have rather differ- ent views on East-West trade. The two largest parties generally have favored it-the Christian Democrats to please a large business constituency and the Com- munists for ideological reasons. The Socialists and Social Democrats, on the other hand, take a strong anti-Soviet stand and have been particularly outspo- ken in their opposition to the Siberian gas pipeline. The Italian Communist Party (PCI), however, no longer plays as direct a role in facilitating trade with the East as it once did. Until 1976, the Soviet Union Approved For Release 2008/09/19: CIA-RDP84S00555R000200050003-4 Approved For Release 2008/09/19: CIA-RDP84S00555R000200050003-4 and other Bloc countries gave preferential trade treat- ment to four PCI-owned East-West trading firms; the commissions went to PCI coffers. To comply with a 1975 law on political party financing, however, the PCI sold its trading companies to the National League of Cooperatives. Italian-Soviet relations cooled substantially after the invasion of Afghanistan. Rome immediately post- poned the January 1980 meeting of the Italo-Soviet Mixed Economic Commission and decided to limit Italian participation in the Moscow Olympics. The government even decided in favor of limited economic sanctions against the USSR, despite pressure from Italian business. Although Rome does not consider such boycotts effective, it apparently was willing to go along in this instance to impress Washington with its reliability as an ally Rome has continued to take an uncharacteristically forceful stance in later encounters with the Soviets. During a visit to Moscow in October 1980-ostensibly to normalize bilateral political and economic rela- tions-Foreign Minister Colombo declared that the Soviets were responsible for the major obstacles to a revival of detente. He called for: ? The withdrawal of Soviet troops from Afghanistan. ? An end to the Soviet threat to Poland. ? The deployment of INF missiles in Western Europe unless Moscow agrees to a sharp reduction of its own missiles. Soviet-Italian relations deteriorated further in early 1981 when Italian President Pertini implied publicly that Moscow might be behind Italian terrorism. This statement prompted bitter Soviet press criticism of Italy's increasing pro-American stance. Immediately after the declaration of martial law in Poland, Rome announced a "pause for reflection" on the purchase of Siberian gas, even though the contract was just about ready for signing. Italian officials were also relatively receptive to US overtures concerning limiting official subsidies and guarantees on export credits for the USSR. Foreign Minister Colombo, however, stated in early 1982 that, if the Europeans were to be prevented from selling pipeline equipment to the Soviets, then Washington should also embargo grain sales. The Siberian gas contract remains un- signed in early 1983, although it is now probably being held up mainly by squabbling among the politi- cal parties. Trade Patterns Over the last two decades Italy has oriented its trade somewhat more to the Soviet Bloc than have most other West European countries. Through the 1960s the USSR generally took about 2 percent of Italy's exports and Eastern Europe about 3 percent. The Bloc's export share peaked in 1975 at 6.2 percent, including 2.9 percent for the USSR. Since then the Bloc share has fallen dramatically, averaging only 3.3 percent in 1982. The USSR-down to 2.1 per- cent-and Poland accounted for most of the drop, but the export shares of all the East European countries were below their 1975 levels. The value of exports to the Bloc was $2.4 billion for the year, only slightly ahead of the 1975 pace Although the USSR was only Italy's 12th-largest export market in 1982, sales to the USSR remain quite important to some larger, often state-owned, Italian firms. Among the companies with strong trade ties to the East are Fiat, Italy's largest private employer; Montedison, the troubled chemical giant; Finsider, a state-owned steel producer; and ENI. Pirelli, the tire manufacturer, and Olivetti, a producer of office machines, also have fairly extensive dealings with the East. Energy-related equipment is another important area for Italian-Soviet trade. Nuovo Pig- none, an ENI subsidiary, is providing 57 turbines for the Siberian pipeline-almost half of the total needed. Over the last 20 years, imports from the Bloc have usually accounted for 5 to 6 percent of total imports, with a peak of 7 percent in 1967. Imports picked up considerably last year, totaling $5.3 billion and push- ing the Bloc's share to 6.2 percent-the highest level since 1968. The increase was due largely to higher energy purchases from the USSR, which attained a record 4.2-percent share of total Italian imports. 25X1 25X1 25X1 25X1 Approved For Release 2008/09/19: CIA-RDP84S00555R000200050003-4 Approved For Release 2008/09/19: CIA-RDP84S00555R000200050003-4 Secret Table 5 Italy: Trade With the Soviet Bloc and the United States, 1981 a World (million USSR Eastern Europe United States US $) Million US$ Percent Million Us$ Percent Million US$ Percent Exports 75,246 1,284 1.7 1,185 1.6 5,109 6.8 Foodstuffs 5,597 111 2.0 99 1.8 371 6.6 Raw Materials 1,664 7 0.4 45 2.7 65 3.9 Fuels 4,725 15 0.3 63 1.3 169 3.6 Manufactures 63,181 1,151 1.8 978 1.5 4,488 7.1 Chemicals 5,338 101 1.9 204 3.8 240 4.5 Semifinished 17,725 625 3.5 332 1.9 1,251 7.1 Steel 4,100 441 10.8 78 1.9 548 13.4 Machinery 16,473 365 2.2 328 2.0 975 5.9 Metalworking 975 49 5.0 58 6.0 53 5.4 Transport equipment 7,030 41 0.6 43 0.6 566 8.1 Consumer goods 16,615 19 0.1 72 0.4 1,455 8.8 Other 80 0 0 NEGL 0.1 17 21.7 Imports 88,996 3,085 3.5 1,612 1.8 6,136 6.9 Foodstuffs 10,952 14 0.1 296 2.7 1,250 11.4 Raw materials 9,394 267 2.8 152 1.6 584 6.2 Fuels 30,741 2,631 8.6 397 1.3 842 2.7 Coal 1,440 17 1.2 74 5.1 651 45.2 Crude oil 22,202 1,283 5.8 0 0 0 0 Oil products 4,525 286 6.3 312 6.9 191 4.2 Natural gas, electricity 2,574 1,044 40.6 11 0.4 0 0 Manufactures 37,708 173 0.5 759? 2.0 3,451 9.2 Chemicals 7,224 105 1.5 176 2.4 574 7.9 Semifinished 8,468 33 0.4 226 2.7 433 5.1 Machinery 10,272 23 0.2 146 1.4 1,613 15.7 Transport equipment 7,392 9 0.1 105 1.4 562 7.6 Consumer goods 4,352 3 0.1 106 2.4 269 6.2 Other 203 NEGL 0.2 8 4.0 10 4.8 Some Italian imports from the East stem from buy- Italian multinationals can usually absorb such prod- back provisions in past contracts. Montedison pio- ucts with little difficulty, smaller Italian firms often neered this type of agreement with the Soviets in 1973 find Soviet emphasis on compensation agreements when it provided them with seven chemical plants and difficult to accommodate accepted subsequent Soviet shipments of finished chemical products as payment. The firm signed a similar accord with the USSR in 1980. Although Approved For Release 2008/09/19: CIA-RDP84S00555R000200050003-4 Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Exports to the Bloc consist overwhelmingly of manu- factures, particularly semifinished goods and machin- ery. In 1981 the USSR accounted for about 2 percent of Italian machinery exports and 11 percent of steel exports. While Italian imports from Eastern Europe are widely diversified, fuel accounts for 85 percent of imports from the USSR. As of 1980 the Soviets provided for about 8 percent of Italy's oil supplies (crude plus products) and one-fifth of its natural gas. All told, about 9 percent of Italy's primary energy supply came from the USSR, the highest level of dependence among the major West European coun- Trade Promotion Rome's willingness to provide generous state guaran- tees and subsidized trade credits has been a principal characteristic of Italian-Soviet trade since the early 1960s. Indeed, Italy was.one of the first Western countries to offer such credits, and Rome granted Moscow a total of approximately $3 billion during 1973-79. The Soviets have not been hesitant about pressing the Italians for loans. Faced with a severe balance-of-payments crisis in late 1976 and early 1977, Rome was reluctant to grant additional credits. In response, the Soviet Deputy Minister of Foreign Trade threatened to renegotiate all past contracts, and the Italians eventually agreed to a 7.55-percent interest rate, claiming that the new line of credit was really an extension of previous agreements and there- fore permissible under the grandfather clause of the gentleman's agreement on export credits.F_ To date the changing trade relationship has had only a marginal impact on export credit policy. Before 1980 Rome periodically extended credit lines for Soviet purchases of Italian capital goods. Following the Afghanistan invasion, Rome suspended credit negotiations for a time, then resumed issuing credits on a case-by-case basis. In particular, a large credit was approved to finance Italian exports of equipment for the Siberian pipeline. Rome continues to subsidize these credits. Mediocredito Centrale, a public institu- tion, doles out subsidies equal to the difference be- tween OECD consensus rates and commercial financ- ing costs. The 1980 budget, for example, gave. Mediocredito $425 million to provide credit subsidies for exports to non-EC countries. Despite Rome's desire to promote Italian exports, the cost of providing these subsidies has become a contentious issue as fiscal problems have mounted. United Kingdom Basic Setting Great Britain's trade and financial links with the Soviet Bloc remain more limited than those of any other major West European country. F British officials emphasize the importance of continued economic and political contacts. They have told US representatives that such contacts help to maintain at least a minimal level of detente and demonstrate to British voters, to neutral countries, and to smaller NATO Allies that the West is not inflexible in dealing with the Soviets. There is little concern about the potential leverage Soviet economic and political ties could have because of the low level of trade. Moreover, Britain is not dependent on the Soviets for strategic minerals or for energy, and relatively few British workers depend on Soviet trade for their jobs. Given the relative y t m economic re a- tionship between the two countries, we believe London is more concerned about the potential for Soviet influence inherent in the economic relationships other West European nations, notably West Germany, have with the Soviet Union. Foreign Office officials have expressed agreement with the widespread European perception that commercial ties make the Soviets more conscious of the risks of certain actions, notably intervention in Poland, but they doubt that a threat- ened cut in Western business ties would deter Moscow from action it believed essential to protect its vital interests. 25X1 25X6 Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 secret Despite misgivings about the possible implications of growing West European-Soviet trade, both British politicians and government officials essentially see sanctions as an ineffective weapon. In the Foreign Office view, sanctions work better as a threat than they do when put into practice. There is both a philosophical and practical dimension to the British view: ? The British have traditionally argued that the politi- cal nature of a regime should not affect trade relations; the sanctions imposed on Argentina and Rhodesia are regarded as "special cases." During the Iranian hostage crisis London backed off from sanctions under Conservative pressure. Representatives of all major parties have expressed the view that it is almost impossible to monitor enforcement of sanctions, a skepticism acquired through experience with various forms of sanctions in Rhodesia, South Africa, and Iran. contract with the USSR to provide 21 gas turbines, about one-sixth of the total needed for the pipeline. London's response to the declaration of martial law in Poland was moderate, restrained perhaps by self- interest and by a public that reacted to the situation in Poland more with interest than with indignation. The Thatcher government agreed with Washington on the need to send a clear political signal to the Soviets and thus announced a package of sanctions in February 1982. Most of the measures chosen were symbolic, however, such as travel restrictions on Soviet diplo- mats. The most significant step was London's decision to support the idea of reclassifying the USSR as a rich country within the OECD consensus. This step, agreed to in July 1982, means that the Soviets will face higher interest rates and shorter repayment periods for export credits in the future. London's primary concern in the wake of Poland was the prevention of splits within the Alliance, both to The British see little hope that other Western maintain a united front against the USSR and to nations more dependent on trade with the East ' avoid being forced to choose between its Common would be willing to support sanctions over an ex- Market partners and the United States. Throughout tended period of time. This feeling was reinforced the sanctions crisis the British tried to play a calming by the recent Falklands experience, when Britain's and mediating role, pushing for compromise that EC partners quickly moved to resume trade as soon would be acceptable on both sides of the Atlantic. as hostilities ended. Nevertheless, Thatcher emphatically stated her un- Despite these misgivings, the Thatcher government took a fairly firm stance after the Soviet invasion of Afghanistan. In the wake of the Soviet move, London cut off intergovernmental trade talks, participated in the EC grain export curb, and declined to renew the $2 billion 1975 Wilson credit agreement. While the Soviets had not made extensive use of the Wilson arrangement-they had drawn only.$1.2 billion be- fore it expired-it nonetheless offered them credit terms below the OECD consensus because it was negotiated prior to the 1976 "gentlemen's agreement" on export credits. London did not, however, impose any restrictions on pipeline-related negotiations, and, in September 1981, John Brown Engineering signed a happiness with the sanctions and on the key issue of existing contracts sided firmly with Britain's conti- nental neighbors. Taking the position that signed contracts must be honored and that US efforts to block those contracts were an unacceptable infringe- ment on British sovereignty, Thatcher ordered the British firms involved to ignore the sanctions. Trade Patterns Of the four major West European countries, the United Kingdom depends least on trade with the Soviet Bloc. In the 1950s, when Western trade with the East was recovering rapidly, Britain kept pace with other West European countries; as late as 1963, the Soviet Bloc accounted for about 4 percent of UK imports and 3 percent of exports. In the 1960s, however, Soviet imports increasingly centered on Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Approved For Release 2008/09/19: CIA-RDP84SO0555ROO0200050003-4 Table 6 United Kingdom: Trade With the Soviet Bloc and the United States, 1982 a World (million USSR US $) Million US $ Percent Million us $ Percent Million US $ Percent 0.6 885 0.9 13,054 13.4 0.6 123 1.8 664 9.5 Manufactures 65,322 516 0.8 640 1.0 6,668 10.2 Chemicals 10,712 105 1.0 190 1.8 725 6.8 Semifinished 13,901 122 0.9 121 0.9 1,362 9.8 Steel 2,264 34 1.5 15 0.7 261 . 11.5 Machinery 30,766 232 0.8 240 0.8 3250 . 10.6 914 12 1.3 27 3.0 161 17.6 9,029 45 0.5 63 0.7 1170 13.0 3,047 9 0.3 13 0.4 223 7.3 Imports 99,674 1,129 1.1 843 0.8 11,620 11.7 Foodstuffs 13,248 11 0.1 44 0.3 741 5.6 Raw materials 6,325 218 3.5 144 2.3 835 13.2 12,956 740 5.7 46 0.4 355 2.7 392 2 0.4 23 5.8 135 34.4 Oil, crude and products 10,983 738 6.7 23 0.2 219 2.0 Natural gas, electricity 1,581 0 0 0 0 2 0.1 64,914 142 0.2 607 0.9 8,907 13.7 Chemicals 7,319 32 0.4 67 0.9 753 10.3 Semifinished 17,262 42 0.2 229 1.3 1,075 6.2 Machinery 27,968 51 0.2 122 0.4 5,029 18.0 666 NEGL 0.1 5 0.8 147 22.0 11,699, 17 0.1 184 1.6 1,903 16.3 2,232 18 0.8 .2 0.1 784 35.1 heavy machinery and industrial equipment, mainly from West Germany and Japan. Moscow's poor grain harvests and its need for pipe and drilling equipment to boost energy production also shifted imports from the United Kingdom to the United States, West Germany, and Japan. As a result, Britain's share of Soviet trade has slipped fairly steadily in relation to most other Western countries. Trade with the Soviet Bloc remained sluggish during 1982. Exports to the area declined by one-fourth to $1.5 billion, while imports picked up to almost $2 billion. The Soviet Union accounted for just 0.6 percent of total exports and 1.1 percent of imports, while Eastern Europe accounted for just under 1 percent of both exports and imports. Approved For Release 2008/09/19: CIA-RDP84SO0555ROO0200050003-4 Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Secret British imports of Soviet goods last year consisted mostly of crude oil and oil products (65 percent) and raw materials (19 percent); manufactured goods ac- counted for only 13 percent of the total. Imports of Soviet oil and products are confined to lower grades and will decline in importance as energy conservation measures and increases in North Sea production push down British demand for foreign energy products. Soviet attempts to increase sales of manufactures and finished goods in the United Kingdom have been largely ineffective. Britain's dependence on the Soviet Union for strategic minerals is practically nil. 0 British exports to the USSR last year fell mainly in the categories of machinery (37 percent), chemicals (17 percent), and metals (11 percent). Machinery exports are largely industrial and power-generation equipment. Steel and unprocessed nonferrous metals make up the largest part of the metals category. Machinery accounted for roughly one-fourth of ex- ports to Eastern Europe; other important export cate- gories were chemicals, foodstuffs, and semifinished goods. In sharp contrast to trade with the USSR, almost three-fourths of imports from Eastern Europe consisted of manufactured items. The main subcate- gories were semifinished goods, consumer goods, and machinery. Trade Promotion British Government support for export financing is handled by the Export Credits Guarantee Depart- ment, which is responsible to the Secretary of State for Trade. It insures credits. and can also subsidize them so as to guarantee the lending banks a commer- cial rate of return. All ECGD operations require the consent of the Treasury, but in practice only questions involving new credit policies, large amounts, or espe- cially long terms are submitted to the Treasury. ECGD provides credit insurance to exporters and guarantees of repayment to private banks (either suppliers or buyers) for export credits. It accepts 90 percent of the risk of the buyer's failure to pay and 90 to 100 percent of the political risk on comprehen- sive insurance. On bank guarantees, ECGD accepts 100 percent of the risk. Over the last two years British banks seem to have adopted a more cautious attitude toward lending to the Bloc. The switch is based mainly on economic considerations, with banks typically trying to shorten maturities and in some cases refusing new short-term loans and rollovers. The government, however, appears hesitant to tighten credit restrictions against the Bloc despite concerns about the level of Western credit exposure to the USSR. British officials have expressed their concern that the US approach would place a disproportionate share of the burden on the West Europeans and their skepticism of the impact credit restraints would have on Soviet military capabilities: The government be- lieves that reducing the subsidy element of official guarantees also would give low-interest-rate countries a large advantage in manufacturing trade. British firms, hard pressed by a profit squeeze and only partially regaining the losses in export competitive- ness suffered over the last several years, will push the government to continue its current program. Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Secret Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4 Secret Approved For Release 2008/09/19: CIA-RDP84SO0555R000200050003-4