REVIEW OF SOVIET MILITARY-ECONOMIC ANALYSIS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85M00364R000300350035-6
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 7
• Document Creation Date: December 20, 2016
• Document Release Date: December 13, 2007
• Sequence Number: 35
• Publication Date: June 22, 1981
• Content Type: MEMO

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MRMORANDU'f FOR: The Director of Central Intelligence
PROM:
Chafxucan
M#Iitary-Economic Advisory Panel
SUBJECT: lReview of Soviet Military-Economic Analysis
As mentioned during our 8 May meeting with you, the Panel has.
undertaken ..to perform by the fall of 1981 a comprehensive review
of the Soviet military-economic (i.e., defense resources). and over-
.all economic analysis programs. With the exceptional, cooperation
of the Office of Strategic Research, we were able to make very good
progress on the military-economic portion of the program at our May
session; we hope to make comparable progress on the overall Soviet
economic program in the fall.
The value of Soviet defense activities.is measured in rubles.
for analysis of resource allocation and growth as this might appear
to Kremlin planners, and in dollars, for size comparisons wit?t. US
spending. CIA also costs US defense activities in rubles, for a
complementary method of sizing military spending.
We were unable to deal with the issue of comprehensiveness of
coverage in the estimates at this meeting. In general, however,
-1) we were pleased to see that dollar costing of Soviet defense
seems, to have stood the test of time, and our suggestions for im-
provement relate to conceptual clarifications. 2) There also-has
been significant improvement .in estimating Soviet defense spending
in ruble terms, although there are major problems that remain
unsolved. Estimates of Soviet defense spending in rubles and as a
percent of the Soviet GMp may change significantly as prices are
updated. It is. Important for the Agency's credibility that the
likelihood of these changes be indicated in advance, even though we
do not yet know their direction. 3) There is some additional
analysis pertaining both to dollar and ruble estimates which
should be undertaken.
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Taking the three areas in order:
I. Fetid zting the Doi Zar cost of Soviet defense. We were
impressed by the robustness of the dollar estimates as they have
been refined over time, and against a wide range of internal con-
sistency checks applied by OSR to the entire structure. We were
.particularly gratified to see the great progress OSR has made in
moving from US analogues as the basis of dollar cost estimates of
procurement to costing of actual Soviet equipment and designs.
This progress significantly improves the credibility of the procure-
ment estimates.
The personnel component of the dollar cost estimates
often has been criticized for the use of US pay and allowance rates
to cost Soviet manpower. There is nothing wrong with the procedure,
especially as the actual US rates reflect opportunity cost In the
United States far better than any suggested set of alternatives.
However, Agency reports could try to disarm this criticism more
effectively than they already do by placing greater emphasis an the
relative insensitivity of the aggregate estimates to the use of US
pay scales. ?eiatiLve US-Soviet defense spending for non-personnel
components is little different from the relative expenditures
including personnel costs.
Some of the criticism directed at the dollar cost
estimates shows a misunderstanding of the conceptual framework. There
are two possible approaches to dollar cost measurement. The first
asks, what would it cost the US in dollars to man, operate, and equip
the given Soviet forces as the Soviets do? The second asks, what
wnuld it cost the US to raise and maintain forces with the same
capabilities as those of the USSR? The first concept yields the
dollar costs of a particular set of forces; the second provides a
measure of the dollar cost of a particular level of cappabiZity. To
many people, the second concept seems preferable, but it requires
difficult and perhaps arbitrary judgments on relative capabilities of
Soviet and American systems. On grounds of replicability, -USR has
chosen to operate with the first concept. The Panel does not fault
the choice, but it believes the Agency should produce an unclassified
paper explaining the conceptual and methodological differences in the
two concepts with sample calculations demonstrating the different
outcomes under the two methods. Such a paper could remove one of the
important sources of confusion in the public debate on the size of
the Soviet defense budget.
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2. Estimating Soviet Spending in Rub Zes. We have no
problem with the basic concept of measuring the rate of growth in
Soviet military spending valued at constant ruble prices of a
particular base year. There are, however, two serious problems'in
practice.
a. At present, the ruble estimates are based on 1970
prices. As time goes on 1970 prices becomes a less and less
accurate representation of actual resource tradeoffs in the Soviet
economy. Thus, 1970 price-based findings on the structure and
rate of growth of spending in the 1980s could be significantly dis-
torted. In addition, it is possible that the burden of Soviet defense
(the defense share of GNP) would appear different in prices of the
1980s than in 1970 prices.* This would happen if the pace of cost
Inflation since 1970 were different in the Soviet defense sector than
in the economy as a whole. There. is great uncertainty now on the
direction and size of the changes in the military expenditure estimates
that will result from updating to a new price base. Moreover, in the
ordinary course of events, it is likely to be a number of years before
OSR can accumulate sufficient information to make the transition to,
say, 1982 prices.
b. Direct ruble estimates exist for only half the Soviet
defense budget. Worse still, that half includes R&Dtpeuditures,
which is believed to be the weakest component of OSR estimates.**
The other half of the Soviet budget is first estimated in dollars and
then converted to rubles. However, the ruble-dollar ratios used to
make these conversions are subject to varying margins of error.
in 1975-76, analysts realized that the ruble-dollar
ratios then in use were grossly understated; this led to the painful
.decision to double the ruble estimate for the base-year, 1970. At
that time, the root of the error was failure to recognize that a
major change in Soviet pricing policy had taken place at the time of
the 1967 price reform. It does not seem likely that another such
transformation will take place in 1982, when the Soviet government
carries out its latest projected price reform. Moreover, OSR now
pays more attention to consistency checks against Soviet economic
* Estimates of GNP will also change as prices are updated, and so
defense spending as a percent of GNP will change. We hope to
investigate OER's GNP estimates at an early opportunity.
*a For lack of time, we were unable to hear a briefing on R&D pre-
pared by OSR. The subject will be on our fall agenda.
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statistics than was the case in the mid-19709. As was indicated
under 2a above, however, when at some point a change is made from
using 1970 prices to those of a year in the 1980s this is likely
to lead to changes in the results of the ruble analysis. It would
be particularly important, in making that transition, to be
reasonably confident that the present approach to estimating ruble-
dollar ratios will generate. accurate ratios stated in 80s' prices.
OSR is aware. of these problems and has initiated a
challenging and perhaps costly effort to update the ruble-dollar
price ratios. The Panel believes that before launching this major
effort, OSR (perhaps in collaboration with OER) should organize a
workshop with participation of outside experts to review the problems
and suggest alternative ways of dealing with them. In the meantime,
we wish to (i) strongly encourage DER in its intention to construct
and maintain a running set of Soviet national accounts In current
prices, which is a necessary adjunct to the work of updating the ruble
''military expenditure estimates, and (ii) urge OSR to start making the
consumers of its estimates aware of these price problems by suitable
references in its publications. and in appearances by Agency repre-
sentatives. The latter recommendation is very important if the Agency
is to maintain its credibility.
3.' Other Areas of Analysis.
a. As noted earlier, US defense activities can be costed
in rubles for a size comparison with Soviet ruble spending that is
the complement of the dollar cost comparison. In principle, both are
pertinent measures of relative size. The Agency has concentrated on
costing Soviet activities in dollars because that is less difficult
than ruble costing US activities and also because the US policy
community is more interested in dollar comparisons. However, because
ruble valuation of both sides inevitably shows a smaller ratio of
Soviet to American defense than does dollar valuation, the Agency's
concentration on dollar comparisons is controversial. Moreover, there
is considerable misinformation among the public on the methodology
and reliability of the Agency's ruble size comparison. We hope to
bear a detailed presentation on this subject at our fall 1981 meeting.
b. Measurement of annual defense expenditures serves a
number of useful purposes--e.g., analysis of defense burden and
resource allocation policy. However, our ultimate interest in US-
Soviet comparisons of size is relative military capability and this
Is a function of all forces in being, not just those added during the
accounting year. Thus, there is a need for comparative estimates
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of stocks. Since we have relatively good data en inventories and
prices Of Soviet equipment, a good place to start would be to
estimate the current value of Soviet military &arrdware inventory.
Human capital-measuring current value in term, of training and
readiness of the military personnel-is more Alfficult and can wait.
Work on equipment stock values was begun several years,ago but
progress has been slow. Within the limits of current priorities,
'it would be desirable to accelerate, the work iu this area in terms
of both concept and data.
c. Military -power in a broader sense also is signifi-
cantly affected by the availability of econemvc reserves. Changes
in strategic non-military reserves--grain, petroleum, metals--may
be an.important indicator of alterations in Soviet military policy
and leadership intentions. There is still iesch work that remains
to be done to improve our monitoring capabilities in this area.
We reviewed earlier drafts and devoted an eeenin%,.,to a briefing
of NFAC's multi-disciplinary study. This study treats with con-
siderable skill a topic of far greater breadth than is usual in
Agency analyses. The Panel has long been cencemed about the need
for a study approach that cuts across 'office and discipline lines,
and we are, therefore, especially pleased at the success of this
experiment in using a task force of teams from several offices. We
hope that such approaches to inter-disciplinary analysis will be
encouraged, not just in relation to a few overarching and critical
themes' like Soviet military poser in the 1980s, but even for the
more mundane elements of the NFAC research program.
As for the study itself, possibly its most important conclusion
is that in the 1930s the Soviets a ' re facing an precedented set of
conflicting pressures in a period of major turnmver in leadership.
Because these events are without precedent, it is impossible to
place high confidence in extrapolation from past Soviet behavior.
In other words, the main estimate is that the estimates are likely'
to change. It is, therefore, particularly important to look for
early indications of change. The Agency should start now to identify
and flesh out the chief alternative possible directions of Soviet
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military-economic policy. A start toward such analysis is made in
the report, but an indicators intelligence strategy requires an
organized program to back it up.
The final topic we would Like to bring up with you concerns
ways to broaden the base of professional knowledge and analysis on
which the CIA can draw. We have not yet given this enough thought
to present a program to you, but it is clear that CIA analysts.will
have to interact fruitfully with their professional peers an the
outside. In order to make CIA work known to outsiders who might then
work on projects for or with Agency staff, it is essential that the
Agency have an .unclassified publication program. This program would
have a broader goal than just producing material that CIA's clients
in government could handle conveniently. Communicati.ou with the
academic and research communities working in areas of interest to
CIA, would become a major objective of the program rather than the
Incidental by-product that it is today. The Office o? Economic
Research now publishes extensively, but it is rare_to,,see unclassified
articles from the Offices of Political. Analysis or Strategic Research.
In the fall, we will report more fully on military, economic,
and perhaps political topics. In the meantime, we are available to
provide whatever help you might find useful.
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