POLICY IMPLICATIONS OF THE SLOWDOWN IN SOVIET ECONOMIC GROWTH

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00313R000200040004-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 48
• Document Creation Date: December 21, 2016
• Document Release Date: April 20, 2009
• Sequence Number: 4
• Publication Date: July 1, 1984
• Content Type: REPORT

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Directorate of
Intelligence
Policy Implications
of the Slowdown in
Soviet Economic Growth
Secret
Secret
SOV 84-10104
July 1984
Copy 4 8 4
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Directorate of . , Secret
Intelligence
Policy Implications
of the Slowdown in
Soviet Economic Growth
An Intelligence Assessment
This paper was prepared byl 25X1
Office of Soviet Analysis. 25X1
Comments and queries are welcome and may be
directed to the Chief, Policy Analysis Division,
SOYA, 25X1
Secret
SOV 84-10104
July 1984
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Secret
Key Judgments
Information available
as of 1 May 1984
was used in this report.
Policy Implications
of the Slowdown in
Soviet Economic Growth
Average annual growth in Soviet GNP (as measured by the CIA) and in
per capita consumption is likely to remain at low levels throughout this
decade.
with some increase in the growth of military procurement.
Moscow's hopes for reversing a long-term declining growth trend depend
critically upon improvement in productivity and acceleration of investment.
But at least over the midterm, competing demands of consumption and
defense, together with political opposition to major reform, will constrain
Soviet room for maneuver. The Soviet leadership is concerned about
possible political instability arising from consumer discontent. The Politbu-
ro will probably seek through the 1980s to combine at least some growth in
living standards and increasing allocations for new plant and equipment
World, or push the Kremlin into high-risk adventures abroad.
Although individual large-scale localized disturbances could well occur,
the chances are low that, by 1990, the growth slowdown will precipitate
sustained and widespread popular unrest in the USSR or compel the
leadership to shift to a decentralized socialist market economy like that of
Yugoslavia or even Hungary. The slowdown is not likely to lead Moscow to
forgo major weapons programs, forsake any of its force modernization
goals, or introduce major changes in military force dispositions. Nor is it
likely to substantially increase economically based Western olitical
leverage, drive the leadership to accept arms control agreements it would
otherwise reject, substantially moderate Soviet behavior in the Third
ters would probably still not significantly affect our conclusions.
Analysis of the results of a variety of alternative economic scenarios-
which place greater emphasis respectively on consumption, military spend-
ing, or investment-suggests that less "balanced" resource allocation
strategies based on realistically conceivable adjustments in these parame-
Soviet responses to the economic slowdown are likely to accentuate certain
already existing challenges to US interests. The need: 25X1
? To rationalize stagnating living standards and justify sacrifice by the
population will probably lead Moscow to continue to saturate its media
with mendacious propaganda about the US threat to Soviet security-
with serious effects on Soviet public opinion.
? For trade with the West will probably lead Moscow to redouble efforts,
rooted in political and military objectives, to exploit and widen existing
differences between the United States and its allies over East-West trade
policies.
iii Secret
SOV 84-10104
July 1984
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? To increase hard currency earnings is likely to intensify Soviet efforts to
expand commercially profitable relations with the Middle East, and it
might tempt Moscow to encourage a squeeze by others on deliveries of
Middle East oil to the world market to raise the price of its own oil and
gas exports.
? To increase hard currency earnings will provide an additional impetus to
Soviet efforts to sell arms not only in the Middle East, but elsewhere in
the Third World as well
But, the Soviet slowdown in growth may also broaden various potential
opportunities for US action:
? The Soviet population's support for the regime should be vulnerable to in-
formation that reinforces the perception that living standards are not
what the public believes they ought to be.
? Moscow will have to tighten the economic screws on Eastern Europe,
which will almost certainly make East European regimes and publics the
point of greatest potential vulnerability to US economic and political
initiatives in the 1980s.
? The Soviet Union's already low capability to compete with the United
States in providing economic and technological aid to more than a
narrow group of Third World countries will decline further, and Soviet
unresponsiveness to requests for aid will increase pressures even in
Marxist-ruled LDCs to turn to the West for help.
Soviet arms decisions probably will continue to be driven by calculations of
political-strategic advantage and the dynamism of weapons technology.
The direct savings in hardware and manpower that could be gained
through the terms of any START, INF, or MBFR agreements the Soviets
would now be prepared to consider are probably not large enough to
influence significantly Moscow's policy. If it thought it had to, Moscow
could substantially accelerate military spending; this is a choice that faces
the leadership in 1984-85 as it sets priorities for the 1986-90 five-year plan.
But a steep increase would have painful consequences for economic growth
over the longer term and for consumer well-being even in the shorter term.
Thus, the slowdown should increase Moscow's interest in slowing the pace
of high-technology arms competition with the United States through
eventual renewal of arms negotiations.
The slowdown will give the Soviets a continuing incentive to obtain US
grain and state-of-the-art technology in such key areas as energy and
agricultural production, even as Moscow strains to avoid dependency and
to buy from US suppliers only as a last resort. But potential US prospects
for exerting trade-based political leverage on Moscow are, at best, highly
limited.
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Executive Summary The Economic Slowdown
The USSR is facing a continuing slowdown in economic growth. Average
annual growth in GNP (as measured by the CIA) dropped from 5.3 percent
in the period 1966-70 to 3.7 percent during 1971-75 to 2.7 percent in 1976-
80. We believe that growth in the current five-year plan (1981-85) will at
best remain at roughly the rate achieved in 1976-80.
Contrary to the pattern of most industrially developed countries-in which
increased productivity has been a key element in economic growth-Soviet
gains during the 1960s and the first half of the 1970s continued to be based
fundamentally on massive injections of labor and capital. Several impor-
tant external factors-good weather, easily accessible fuels and other raw
materials, and huge windfall increases during the early-to-middle 1970s in
hard currency earnings from sales of oil, gold, and raw materials-also
contributed to high growth.
The mid-1970s marked a turning point in the Soviet economy. Average
annual growth of GNP has been sharply lower since 1975 and, in fact, was
only about one-half the planned rate during the 10th Five-Year Plan
(1976-80). Industrial growth began to slow along a new, declining trend
line. The slower growth during this period was partly attributable to
unfavorable weather, which played a major role in agriculture's poor
performance and exacted its toll on the light and food industries. The 25X1
severity and wide-ranging nature of the growth slowdown, however,
reflected more fundamental problems related to the USSR's inability to
generate the necessary resource inputs and stem falling productivity.
A new strategy to increase efficiency, inaugurated in 1976 and pursued-
with some emendations-for the remainder of the Brezhnev period, not
only failed to raise the return on investment but also made the situation
worse by further delaying actions long overdue. It ignored the rising price
that had to be paid-in costly plan miscalculations, technological back-
wardness, and distorted managerial decisionmaking-for failing to change
the traditional system of command planning and management of the
economy. It also put off the need to modernize the stock of plant and
equipment, which manifested itself in a sudden drop in utilization rates and
productivity during the second half of the 1970s. Most important, it failed
to address key areas of underinvestment and thus failed to anticipate three
critical industrial bottlenecks that were to seriously retard the economy's
growth after 1975 (especially in the 1979-80 period). These were a growing
shortage of energy; shortages of several key industrial materials, especially
steel, nonferrous metals, and lumber; and inadequate rail transportation.
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The economic results of Andropov's only full year in office were improved.
GNP rose about 3 percent in 1983-over half a.percentage point above the
average rate of growth in 1981 and 1982. We are not fully certain how the
Soviets achieved this moderate improvement, and, as a result, the single
value projections presented in this paper should be viewed as having a
greater-than-usual range of uncertainty. However, we attribute 1983's
progress basically to better weather, Andropov's campaign to enforce labor
discipline, and an alleviation of railway bottlenecks. There has been no
improvement in the underlying determinants of decelerating growth-
including no significant movement on economic reform, which Chernenko
is likely to approach more conservatively than Andropov.
Moreover, powerful inertial tendencies guarantee that sustained progress
will come neither easily nor rapidly:
? Past neglect of investment or unbalanced investment in strategic and
heavily capital-intensive sectors such as transportation and ferrous
metallurgy cannot be quickly overcome.
? Many raw materials have become increasingly less accessible, and the
cost of exploiting and transporting them will continue to rise sharply
through the 1980s.
? The average annual rate of growth of the working-age population during
1981-90 will be only 0.4 percent-one-fourth of what it was in the
previous decade.
? Among workers there are long-established habits of casual discipline,
slack effort, and shoddy workmanship, as well as wage-leveling proclivi-
ties and a strong sense of the irrevocability of job tenure. Among
managers there is a deeply ingrained drive to meet quantitative output
goals-regardless of cost, quality, and efficiency criteria-and unwilling-
ness to innovate or take risks in the face of incentive systems that
discriminate against change
Policy Options
Moscow's hopes for ending the trend of declining growth depend critically
upon an improvement in the efficiency with which capital and labor are
used in production processes. The instruments available to achieve this goal
include economic structural reform and shifts in resource allocation among
major claimants-consumption, defense, and investment
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Because of the enormous inefficiency with which the Soviet economy
presently operates, major reform would stimulate economic growth more
than any feasible shift in resource allocation. We estimate, for example,
that, if Soviet industry were operating in the 1980s at the level of
productivity attained before 1975, growth of industrial output would be
almost twice its actual rate.
However, the chances of a radical reform being implemented in the 1980s
are small. In particular, we think the chances are slight that the Soviet
leadership will replace the command economy with significant. steps toward
a socialist market economy, given the challenge to political control and vast
uncertainties that would inevitably flow from such a revolutionary move.
The political elite strongly opposes full-scale marketization; most policy
advisers do not believe it would be the right solution even if it were
politically feasible; economic managers would resist its implementation;
and the working class would bridle at many of its consequences-especially
the loss of job security.
The "reform" Moscow is likely to pursue will probably combine attempts
to improve central planning and the performance of centralized mecha-
nisms for accelerating technological innovation with limited decentraliza-
tion of operational authority, a modest strengthening of financial levers,
and further experimentation with plan indicators intended to reward risk
taking, high-quality output, cost reduction, and efficiency. There will be
powerful bureaucratic resistance to such changes, and we doubt that
regime efforts along these lines will succeed in altering the downward trend
in productivity, despite a very slight upturn in 1983.
Thus, in practical terms Moscow's capacity to improve productivity will
hinge upon providing incentives to spur labor productivity and investment
to raise the efficiency of capital stock. The Kremlin's need to meet these
requirements, at a time of increasing pressure on resources, is the reason
that we believe-along with many Western analysts-that the Soviets'
room for maneuver in resource allocation in the 1980s among military and
civilian claimants is severely constrained.
Having examined the outcome of simulations of a range of resource
allocation scenarios that tilt toward consumption, or military spending, or
investment, we believe that the Soviet leadership will probably attempt to
pursue a carefully balanced policy of at least some growth in living
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standards and increasing allocations for new plant and equipment com-
bined with some increase in the growth of military procurement.'
Internal Affairs
Concern over possible political instability clearly exists within the party
elite. Both Andropov and Chernenko have warned in speeches that public
dissatisfaction, if unattended or mishandled, could assume "crisis" propor-
tions. Apprehension about the popular mood has probably significantly
influenced regime policy over the past several years. It accounts at least in
part for:
? The high priority assigned to the Food Program.
? Massive grain imports.
? Attempts to strengthen worker discipline.
? The higher profile assumed by the KGB.
? Attempts to curtail contacts between Soviet citizens and Westerners and
reduce the flow of information from the West.
? Attacks on more blatant forms of corruption and official abuse of power.
There will almost certainly be instances of unrest in the future whatever
economic strategy the leadership pursues. We by no means rule out the
possibility that spontaneous large-scale localized disturbances may occur.
Nevertheless, assuming that average annual growth of GNP during 1986-
90 runs at our projected rate of about 2 percent (or even a percentage point
' Under this scenario, for the balance of the decade growth in GNP and industry will
decline, averaging 2 percent a year; average annual growth in per capita consumption will
fall to less than 1 percent; average annual growth in new fixed investment will drop to a new
postwar low of around 2.5 percent-down from average annual growth of new fixed
investment during 1981-83 of 4 percent; and the defense burden will remain at about 14
percent of GNP through 1990.
This scenario assumes that, first, Soviet defense spending in the 1980s will increase at an
average rate of about 2 percent a year, with military hardware procurement showing no
growth through 1985 and then growth at 2 percent a year during 1986-90. Military
research, development, testing, and evaluation (RDT&E) growth falls slightly after 1985.
Second, the allocation of investment and labor among producing sectors through the decade
will mirror targets set in the 1981-85 five-year plan. Third, the shares going to the energy
sectors will increase (at the expense of some consumer sectors). The shares accorded to
heavy industry will remain relatively constant through 1990. Fourth, oil production will fall
short of the plan target of 12.6 million barrels a day in 1985, and decline to between 11 and
12 million b/d in 1990 (the current production level is 12.4 million b/d). Fifth, with
continued growth in domestic energy requirements, Moscow will have to choose between
maintaining oil exports and meeting domestic needs. Under this scenario, there will be a
substantial reduction in oil exports, but most of the energy shortfall will be absorbed
through slower growth in the domestic economy. And, sixth, average weather conditions
observed during the 1961-80 period will continue
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less than this), we believe that the chances are low that, by 1990, the
economic slowdown will:
? Precipitate sustained and widespread popular unrest in the USSR.
? Pave the way for either significant liberalization or a Polish-style
militarization of the regime.
? Bring to power a leadership group with significantly different foreign
policy aims.
New Soviet leaders will probably be less ideological and more pragmatic
than their predecessors, and some will probably be more willing to accept
change, but the sparse data available provide no persuasive evidence that
they show any unique generational policy orientation.
Military Power
Even if growth remains at about 2 percent, we project impressive force
gains in the 1980s. Important programs in development that could be
deployed through the early 1990s include several military space systems,
strategic cruise missiles, another generation of strategic ballistic missiles, a
strategic bomber, a large transport aircraft, and a large carrier for
conventional aircraft. If it chose to pay the heavy price, the leadership
could even increase-for a while at least-the growth of military spending
to a rate somewhat higher than the 4- to 5-percent annual average during
1965-75-the peak years of the Soviet military buildup. The leadership
faces this choice during 1984-85 as it sets priorities for the 1986-90 five-
year plan.
Nevertheless, with a projected boost in military procurement, from an
estimated zero growth at present to 2-percent annual growth over 1986-90,
we would expect that the flow of at least some weapons into the stock of
Soviet military equipment would not be as rapid as in previous decades.
The Soviets might:
? Curtail some weapon programs that are near the end of their production
run.
? Cut back or eliminate some support programs.
? Stretch out selected weapon procurement programs and slip the time
schedule for force modernization slightly.
? Extend the service life of some older weapon systems.
Yet, if they were to make these adjustments, we estimate that the Soviets
would not have to forgo any major weapon program or forsake any of their
force modernization goals.
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Foreign Policy
Overall, we believe that the economic slowdown will not result in major
changes in Soviet foreign policy. We do not see economic problems at home
motivating the leadership to undertake high-risk adventures abroad that
are designed to distract an unhappy public or produce economically
beneficial geostrategic breakthroughs. Nor is the economic slowdown likely
to significantly constrain continuing Soviet political and military activity in
the Third World
Eastern Europe. The economic slowdown will have its most serious
external impact on relations between the USSR and its client regimes in
Eastern Europe, which currently receive most of Soviet economic and
military aid. To achieve the levels of GNP growth and per capita
consumption we have projected by 1990, Moscow would have to impose
further cuts in oil deliveries to Eastern Europe beyond those already levied.
Additional reductions, if accompanied by price hikes and reductions in
other raw materials deliveries, and even if partially compensated for with
exports of additional gas, would create new political and economic strains
in Eastern Europe.
We believe, nevertheless, that the Soviets will risk aggravating popular
unrest in Eastern Europe by tightening the economic screws because they:
? Resent the East Europeans' higher standard of living.
? May believe there is enough waste in the East European economies to im-
pose additional costs without cutting consumption sharply.
? Appreciate the purely coercive power of the police in maintaining social
order.
? Count on the East Europeans' ability to help themselves somewhat
through selective economic links with Western Europe
Bilateral US-USSR Relations. The economic growth slowdown will give
the Soviets a continuing incentive to obtain US grain and state-of-the-art
technology in such key areas as energy and agricultural production, even as
they strain to avoid dependency and to buy from US suppliers only as a last
resort.
The robust outlook for global grain production over the next few years
suggests that the Soviets will have only a limited need for purchases from
the United States above the Long-Term Grain Agreement minimum
commitment of 8 to 9 million tons. Therefore, US grain-based political
leverage is likely to be quite limited. Nonetheless, Moscow still finds the
United States attractive as a supplier because of its unique year-round
capacity to deliver large volumes of grain quickly at short notice.
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Large-scale US assistance would be helpful to Moscow in maintaining oil
output and developing Arctic offshore resources. The United States
remains the sole supplier of certain oil and gas equipment, the need for
which should increase as Soviet oil production problems intensify-namely,
high-capacity submersible pumps, deep-well-drilling rigs, well- and mud-
logging equipment, and various items for offshore oil production. The
Soviets urgently need high-capacity submersible pumps, which can lift
increased volumes of fluid and thereby stabilize output in already produc-
ing fields where the ratio of water to oil being lifted is rising steeply. Over
the next 12 to 18 months, installation of $40 million worth of submersible
pumps now on order from a US supplier could play a substantial role in
holding up production. Soviet trade officials are also currently pushing for
a $10-11 billion Soviet venture with the United States and Canada to
manufacture drilling equipment and rig assemblies for oil development in
the Barents Sea and possibly elsewhere in the USSR. Only the United
States has the technical and financial resources needed for a project of this
magnitude
Whether this degree of technological dependence on a narrow range of US
equipment-particularly high-capacity submersible pumps and offshore
equipment-translates into much political leverage for the United States is
problematic. Any Soviet willingness to accommodate US political interests
in return for assistance in oil production would be highly limited in any
event and would depend greatly upon Moscow's assessment of the overall
state of US-USSR relations.
Soviet decisions on arms control are likely to continue to be driven by
calculations of political-strategic advantage and the dynamism of weapons
technology. The direct savings in hardware and manpower that could be
gained through the terms of any START, INF, or MBFR agreement
which the Soviets would now be prepared to consider are probably not
large enough to significantly influence Moscow's policy. But the Soviets
probably do believe that arms agreements can:
? Set quantitative and qualitative boundaries on procurement.
? Increase the calculability of future military outlays and channel competi-
tion into predictable areas.
? Help create a political environment that would contribute to a slowing of
the overall US defense effort, thereby easing military spending demands
on the USSR.
There is evidence that, in individual instances in recent years, demands of
the civilian economy have been given precedence over military require-
ments. Statements of Soviet leaders have suggested that the drain of
military spending on the civilian economy has probably become a matter of
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increased concern-if only because the economic slowdown threatens to
weaken the industrial base on which the growth of military power itself ul-
timately depends. A substantial increase in military spending-while
possible-would have painful consequences for Soviet economic growth
over the longer term and for consumer well-being even in the shorter term..
Thus we believe that the overall growth slowdown increases Moscow's
interest in slowing the pace of high-technology arms competition with the
United States-particularly in space-based strategic defense forces-
through eventual renewal of arms negotiations.
The Third World
The slowdown in growth is a factor affecting Soviet policy toward the
Third World, although it is less important than military and geopolitical
considerations. At the June 1983 Plenum of the Central Committee,
Andropov-replying bluntly to frequent LDC complaints of Soviet
tightfistedness in nonmilitary economic assistance-put the Third World
on notice not to expect much in the way of such aid from the USSR. In line
with this policy, Moscow has attempted to:
? Cut back on new economic assistance to non-Communist LDCs and
focus aid on allies in the Third World.
? Force Communist clients to be more frugal in their use of Soviet-supplied
resources.
? Insist on timely payment of debts.
? Counsel some regimes of a "socialist orientation"-for example-the
Nicaraguan-not to provoke a withdrawal of Western assistance by
engaging in economic radicalism.
Simultaneously, Moscow has sought to increase its involvement in the
Third World by expanding hard-currency-earning arms sales as much as
possible. Arms exports-mainly for hard currency-have been accelerat-
ing: in 1982, Soviet arms agreements climbed to $9 billion, 40 percent
higher than in 1981 and well above the average for the previous five years.
However, the exceptions are as important as the prescription of a hardline
Soviet economic posture toward the Third World. Toward Cuba, Vietnam,
and Afghanistan, where the USSR incurs its main Third World economic
costs, political and military-strategic factors have far outweighed economic
considerations in forming policy and will probably continue to do so.
Moscow has complained to both Cuba and Vietnam about inefficient use of
Soviet-supplied resources, taken a firm position on trade-related issues, and
pushed hard on debt repayment. Nevertheless, we believe that the Soviet
military and political interest in sustaining a Communist regime in Cuba
assures Havana of continued large-scale support (it is currently $4.5 billion
a year). Likewise, Vietnam's strategic importance in Asia makes any major
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reduction in Soviet aid to that nation equally unlikely. Nor do we estimate
that the USSR's behavior in Afghanistan is likely to be significantly
constrained by economic considerations.
Regimes of a "socialist orientation" have been unhappy about not receiving
aid they requested, and some have explored the possibility of more help
from the West. Nevertheless, the Kremlin has been supplying: some
increased assistance. In 1982, for example, Moscow provided new aid to
Angola, Ethiopia, and Mozambique, and major increases for Nicaragua.
Moscow has also responded to increased Western competition and the
worsened world trade climate by offering better military supply deals and
more sophisticated equipment to key non-Marxist client states, including
Iraq, Syria, and India. These deals have featured softer repayment terms
India in 1983 by 40 percent and maintain them at this level in 1984.
With or without the economic growth slowdown, the United States would
continue to be confronted by a strong Soviet challenge in the Middle East
in the 1980s. But economic needs will intensify Soviet efforts to expand
commercially profitable relations there and might tempt Moscow to
encourage a squeeze by others on deliveries of Middle East oil to the world
market to raise the price of its own oil and gas exports. Pursuit of such a
strategy would depend on Moscow's assessment of its probable impact on
the terms of East-West trade, on the Middle East arms market, and on the
likelihood of an expanded US military presence in the Persian Gulf.
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China 25X1
In promoting trade relations with China in 1983, Moscow's main objective
was to improve its position in the US-USSR-China triangular relationship.
There is no evidence that a desire to relieve internal economic pressures
motivated the Soviet leadership. Nor is it likely that Sino-Soviet trade will
significantly help to ease Soviet economic stringencies in the foreseeable
future
Because one-fourth of all Soviet Ground Forces personnel-nearly 500,000
troops in 52 active divisions-are stationed opposite China, there would in
principle seem to be both opportunity and incentive for significant savings
from a cutback. But:
? Even if 250,000 of these troops were released to the civilian manpower
pool by 1990, the impact on GNP growth and growth in per capita
income would be slight.
Moscow also agreed to increase Soviet soft currency oil deliveries to
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? A slowing of equipment modernization of the forces already in place
would have only marginal effects on the economy, although it would
lessen allocational strains within the Soviet military.
? Soviet security against China in the event of war appears to entail not a
holding action but a major invasion and occupation of at least northern
Manchuria, which mandates a continued strengthening of the USSR's
military power vis-a-vis China
Western Europe and Japan
To counter the economic slowdown, the Soviets will need to increase
imports of machinery and industrial materials from Western Europe and
Japan above present levels. But our projections suggest that, even allowing
for realistically possible increases in nonfuel exports and arms and gold
sales, the USSR will not have sufficient hard currency to pay for an
increase in imports from the West later in the 1980s-barring a sharp
increase in borrowing. Thus Moscow's capacity to expand hard currency
imports will depend significantly on its willingness to shift oil exports from
Eastern Europe to hard currency purchasers, sell more natural gas to
Western Europe, or overcome its reluctance-based on fear of being
subjected to political leverage-to increase substantially its long-term
indebtedness to the West.
The USSR has vast natural gas reserves and the ability to increase
deliveries rapidly beyond already-contracted-for volumes. Some surplus
transmission capacity exists even now. Beyond 1988 the Soviets will easily
be able on short notice to expand deliveries to meet foreseeable incremental
West European demand-and at extremely competitive prices. The main
constraints on expansion will be the level of West European demand and
the willingness (or lack thereof) of West Europeans to pay a "security
premium" for higher priced North Sea gas.
Impact of Alternative Economic Scenarios
Analysis of the results of alternative economic scenarios-which place
greater emphasis respectively on consumption, military spending, or invest-
ment-suggests that less "balanced" resource allocation strategies based
on realistically conceivable adjustments in these parameters would proba-
bly not significantly affect our basic conclusions. Nevertheless, there would
still be some effects.
If the Soviets decided to continue to hold military procurement levels flat
throughout the 1980s to increase growth of consumption, they probably
would spread the shortfalls among the military services, although making
them somewhat deeper in general purpose forces, especially ground forces.
Even with flat military procurement, the level of expenditures is so high
that Soviet military forces would continue to grow throughout the 1980s.
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Of all the scenarios, one oriented toward consumption would probably most
polarize the Soviet political elite-advocates of internal accommodation
and external relaxation ranged against advocates of a hard line both
internally and in foreign policy. Adoption of such a strategy might be
impossible without a major shakeup in the Politburo and formal proclama-
tion of a new general party line.
The defense-oriented strategy we examined involved an average annual
growth of total military spending of 5 percent, which in turn. generated a
small absolute decline in average annual per capita consumption. We
believe that during the plan period 1986-90 the regime could handle the
projected average annual decline of 0.3 percent in per capita. consumption
without seriously risking mass unrest among the population, although
growth in labor productivity would probably suffer further erosion. Such a
decline in consumption could not continue indefinitely, however, without
provoking a crisis in relations between the regime and Soviet society.
Externally, Eastern Europe would bear the brunt of the High Defense
strategy. Not only would pressures for higher defense spending and
deliveries of goods from Eastern Europe be stepped up, but Soviet oil
deliveries also would be severely cut back. This move would depress living
standards in the region and increase the likelihood of unrest and political
instability. Paradoxically, in view of its ultimate aim, the High Defense
strategy-which would necessarily require an internal intensification of
anti-Western propaganda-would also require an expansion of trade ties
with the West to acquire high technology. A higher share of Soviet oil ex-
ports would have to go to the West to pay for larger imports of machinery
and equipment.
A high investment strategy would have roughly the same internal and
external effects as a high military spending strategy. However, it might be
somewhat less likely to undercut the morale of the labor force. Because this
strategy would be publicized not by playing up the immediate Western
military/political threat but by stressing the strategic importance of
promoting general economic might, it would be compatible with a less
hostile propaganda posture toward the United States.
Challenges to the United States
Soviet responses to the economic slowdown are likely to accentuate already
existing challenges to US interests in several areas. The need:
? To rationalize stagnating living standards and justify sacrifice by the
population will probably lead Moscow to continue to saturate its media
with mendacious propaganda about the US threat to Soviet security-
with serious effects on Soviet public opinion.
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? For trade with Western Europe will probably lead Moscow to redouble
efforts rooted in political and military objectives to exploit and widen
existing differences between the United States and its allies over East-
West trade policies-which could involve renewal of the credit and
energy dependency issues.
? To increase hard currency earnings will provide an additional impetus to
Soviet efforts to sell arms and military assistance both in the Middle East
and elsewhere in the Third World.
Opportunities for the United States
But, the Soviet slowdown in growth should also broaden various potential
opportunities for US action:
? The Soviet population's support for the system should be vulnerable to in-
formation that reinforces the perception that living standards are not
what they ought to be, thanks to the regime's bungling and its waste of
resources abroad.
? There are limits to the extent to which Moscow can simultaneously cut
its costs in Eastern Europe and compel the East Europeans to reduce
trade with the West, without precipitating new crises in the Bloc. The So-
viet leadership may miscalculate these limits. Even if it does not, the East
European regimes do not see greater CEMA "integration" as the
solution to their critical economic problems, and they will intensify their
efforts to expand trade with the West to the extent that their economies
permit. As living standards stagnate or decline, anti-Soviet sentiment is
likely to increase among East Europeans, who will continue to look to the
West for information and support for their own national aspirations.
? The slowdown will further reduce the USSR's already low capability to
compete with the United States in providing economic and technological
aid to more than a narrow group of Third World countries. Soviet
unresponsiveness to requests for aid will increase pressures even in
Marxist-ruled LDCs to turn to the West for help-although there will
undoubtedly be far less readiness in these regimes to take corresponding
steps toward political liberalization.
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Contents
Key Judgments
The Economy During the Brezhnev Years
1
The Economy's Performance During the 10th Five-Year Plan
1
Initial Responses of the Andropov Regime
4
High Consumption
9
High Growth
10
Scenario Summary
11
Impact of the Economic Slowdown on Internal Affairs
12
The Political Regime
12
Impact of the
Economic Slowdown on Foreign Policy
16
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Impact of Alternative Economic Scenarios 25
High Consumption 25
High Defense 25
High Growth 26
Highly Unlikely Effects 26
Challenges to the United States 27
Opportunities for the United States 27
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Policy Implications
of the Slowdown in
Soviet Economic Growth
Average annual growth of Soviet GNP as measured
by the CIA has dropped from more than 5.3 percent
in 1966-70 to 3.7 percent in 1971-75 to 2.7 percent in
1976-83 (see figure 1). We believe that, despite some-
what improved economic performance in 1983, annual
growth during the balance of the 1980s is likely to be
about 2 percent.
Figure 1
USSR: GNP-Average Annual
Rates of Growth, 1966-83
The difficulties of the Soviet economy have suggested
to many observers that economic factors might influ-
ence Soviet policies in the 1980s in ways that could
significantly affect Western interests. Observers have
hypothesized that economic shortfalls might generate
serious internal tensions, constrain military spending,
and motivate Moscow to adopt more restrained-or
more adventurous-foreign policies. The purpose of
this paper is to address these important propositions,
proceeding from present CIA assessments of trends in
Soviet military procurement and spending, forecasts
of net energy balances in the 1980s, and econometric
projections of likely growth trends in the USSR's
economy during the 1980s.'
Growth Trends: 1966-75
During the first two five-year plans of Brezhnev's
incumbency (1966-75), the Soviet economy grew fast-
er than that of the United States-and the USSR
solidified its position as the world's second-largest
economic power.
this period continued to be based fundamentally on
massive injections of labor and capital. Several impor-
tant external factors-good weather, easily accessible
fuels and other raw materials, and huge windfall
increases during the early-to-middle 1970s in hard
currency earnings from sales of oil, gold, and raw
materials-also contributed to the boom. The coun-
try's economic successes enabled Soviet leaders at
that time to achieve military, foreign policy, and
Contrary to the pattern of most industrially developed
countries, in which increased productivity has been a
key element in economic growth, Soviet gains during
welfare goals simultaneously
The Economy's Performance During
the 10th Five-Year Plan
The mid-1970s marked a turning point in the Soviet
economy. Growth of GNP has been sharply lower
since 1975 and, in fact, was only about one-half the
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Figure 2
USSR: Growth in Outputs, Inputs,
and Productivity in Industry, 1971-82
I I I I I I I 1 1
-3 1971 73 75 77 79 81
a Inputs of manhours and capital are combined using weights of 52.4 percent
and 47.6 percent, respectively, in a Cobb-Douglas (linear homogeneous)
product function. These weights represent the distribution of labor costs
(wages and social insurance deductions) and capital costs (depreciation and
a capital charge) in 1970, the base year for all indexes underlying the
growth-rate calculations.
planned rate during the 10th Five-Year Plan (1976-
80). Industrial performance began to deteriorate along
a new, steeply declining trend line (see figure 2).
While Soviet leaders might well have consoled them-
selves with the thought that Western economies were
suffering equal or more severe difficulties in this
period, the comparison did not alter the fact that the
problems confronting Moscow were becoming increas-
ingly serious
Reasons for the Turnaround
The reasons for the Soviet slowdown were largely
different from those which retarded Western econom-
ic growth in the 1970s. The turnaround in the Soviet
economy during the 10th Five-Year Plan was partly
attributable to poor weather, which played a major
role in agriculture's decline and exacted its toll on the
light and food industries. The severity and wide-
ranging nature of the economic slowdown, however,
reflected more fundamental problems related to the
USSR's inability to generate the necessary resource
inputs and efficiently employ them.
By 1975, the Soviet leadership had evidently become
sufficiently worried by an accelerating decline in the
productivity of new investment in industry (meaning
that more and more investment was being required to
achieve a given increase in the level of output) and by
an awareness of the labor crunch coming early in the
1980s to approve a new economic strategy. The new
efficiency-oriented strategy-heralded as a shift from
extensive to intensive growth-was predicated upon
the achievement of large productivity gains. These
were to be attained by temporarily lowering growth in
industrial output, sharply cutting investment outside
of industry and agriculture, and changing the pattern
of industrial investment-thus, it was hoped, reducing
tautness in the economy, eliminating bottlenecks, and
raising the immediate payoffs from investment.
This strategy not only badly failed to raise the return
on investment but also made the situation worse by
further delaying actions long overdue. It ignored the
rising price that had to be paid in costly plan miscal-
culations, technological backwardness, and distorted
managerial decisionmaking for failing to change the
traditional system of command planning and manage-
ment of the economy. It also put off the need to
regenerate the stock of plant and equipment, which
manifested itself in a sudden drop in utilization rates
and capital productivity during the second half of the
1970s. Most important, it failed to address key areas
of underinvestment and thus failed to anticipate three
critical industrial bottlenecks that were to seriously
retard the economy's growth after 1975 (especially in
the 1979-80 period). These were a growing shortage of
energy; shortages of several key industrial materials,
especially steel, nonferrous metals, and lumber; and
inadequate rail transportation.
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The Leadership's Response
Responding to what was happening, the Brezhnev
leadership introduced new shifts in investment policy,
further expanded trade with the West, possibly made
adjustments in military spending, and took hesitant
steps toward altering planning and management pro-
cedures.
Investment Policy. Annual investment growth was
trimmed to an average of less than 5 percent during
1976-78, and increases were reduced further to an
average annual rate of growth of less than 1.5 percent
during the final two years of the 10th Five-Year Plan.
The latter decline-which was partially due to bottle-
necks in industries producing inputs for capital invest-
ment-represented a marked deviation from the origi-
nal plan which called for both output and investment
growth to rebound
Soviet leaders also reacted to their economic problems
by reallocating funds to key problem areas, especially
the energy sector. From 1978 to 1980, average annual
investment in primary energy was 22 percent above
the level of that in 1976 and 1977.
Expanded Trade. Benefiting from rising energy and
gold prices, as well as burgeoning arms sales, Soviet
hard currency earnings increased dramatically after
1975, reaching $30 billion by 1980. As a result,
Moscow was able to increase its purchases-particu-
larly of food and steel-from the West.
Defense Spending Trends. After increasing at an
annual average rate of roughly 4 to 5 percent during
the 1966-75 period, defense spending has increased at
only about 2 percent a year since 1976, largely as a
result of almost no growth in military procurement.'
We cannot judge the extent to which the leadership
intended from the outset to cut the growth of defense
spending, acquiesced in slower growth, or failed in an
attempt to overcome constraints.
Unforeseen economic and technical problems appear
to have been at least partly responsible for the
slowdown in the growth of defense spending. Deci-
sions to comply with SALT I and the unratified
SALT II treaty also may have slowed the pace of
procurement. The cancellation of new US weapon
systems (for example, the B-1 bomber) and the pros-
pect from the mid-1970s of limited growth in US
defense spending might have led the Soviets to con-
clude that they could safely reduce their own rate of
growth in military spending. Whether or not a formal
policy decision was made to stretch out procurement
and to slow overall defense spending, the leadership
may have recognized in midstream that technical
problems and industrial bottlenecks were hampering
procurement. If this was the case, the leadership
apparently chose not to reallocate the additional
resources required to offset the procurement slow-
down. Whatever the cause, the slowing of defense-
spending growth facilitated efforts to meet competing
demands in the rest of the economy.
Changes in Economic Management. Having avoided
the issue of reform for some years, the Brezhnev
leadership was finally induced to approve a decree in
July 1979 requiring a broad range of changes in
planning and management of the economy, and this
was followed over the next several years by more than
80 implementing resolutions. The decrees combined
measures aimed at achieving more effective central-
ized planning with some decentralization of operation-
al authority to large industrial associations and broad-
er employment of certain market-associated
mechanisms. They were implemented only haltingly,
and they did not significantly affect economic per-
formance during the rest of the 10th Five-Year Plan.
The 11th Five-Year Plan
The 1981-85 Plan reasserted the demonstrably flawed
strategy of setting a national income growth target
that could not be reached with projected inputs of
capital and labor unless unrealistic gains in productiv-
ity were achieved. This improvement in productivity
was to be obtained by reducing the backlog of uncom-
pleted construction, devoting most investment in in-
dustry to the renovation of existing enterprises, and
raising capacity utilization rates-the same tactic
pursued unsuccessfully in 1976-80.
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The results in 1981 and 1982 revealed the lack of
realism of the five-year plan. Growth in GNP aver-
aged about 2.5 percent, somewhat above that attained
during 1979 and 1980 (1 percent) but far below the 4-
percent annual rate of growth planned for 1981-85.
Average annual growth in industry was also roughly
2.5 percent, only half the rate called for in the plan.
The slowdown was evident in practically every indus-
trial branch, while productivity of labor and capital
employed in industry continued to fall dramatically.
Moreover, poor weather curtailed farm output in 1981
and 1982, putting most of the 11th Five-Year Plan's
agricultural goals beyond reach. Transportation bot-
tlenecks increased in severity; in 1982, total freight
turnover declined. According to our estimates, per
capita consumption showed almost no growth at all
during 1981 and 1982.
Initial Responses of the Andropov Regime
The economic results of Andropov's only full year in
office were pretty good. GNP rose about 3 percent in
1983-over half a percentage point above the average
rate of growth in 1981 and 1982. The main improve-
ment occurred in industry, where growth accelerated
by over a percentage point to about 3.5 percent.
We are not fully certain how the Soviets achieved this
moderate improvement, and, as a result, the single
value projections presented in this paper should be
viewed as having a greater-than-usual range of uncer-
tainty. However, we attribute 1983's progress basical-
ly to:
? Better weather, which not only helped boost farm
production but benefited nonagricultural sectors as
well.'
? Andropov's discipline campaign (see page 6, "Labor
Policy"), which appears to have extracted greater
effort from both labor and management.
? A high-priority effort to alleviate railway
bottlenecks.
' As a result of higher-than-normal temperatures in the USSR
during the winter of 1982-83, needs for fuel and fuel stockpiles
were reduced, in turn lowering needs for transportation of fuel.
Transportation difficulties related to long-lasting freezing were also
reduced. Because warmer winter weather means that less feed is
required per unit of output, monthly livestock product output was
well above trend. Good weather during the growing season and
harvest produced a second record forage crop, helping to raise meat
and egg output to new highs. Grain yields also improved over 1982.
If this pattern of weather, higher labor discipline, and
improved railway performance remained constant,
however, it would have little or no additional impact
on the rate of growth. To maintain the rate reached in
1983, in each succeeding year there would have to be
still better weather, still greater labor intensity, and
still greater railway capacity. Thus, we do not believe
that Moscow will be able to maintain for long the rate
of growth seen in 1983-especially when there has
been no significant improvement in the underlying
determinants of decelerating growth already noted.
Powerful inertial tendencies guarantee that sustained
progress will come neither easily nor rapidly:
? Because even large increments in annual growth of
investment could have only a delayed impact on
total stock of plant and equipment, which actually
drives economic growth, past neglect of investment
or unbalanced investment in strategic and heavily
capital-intensive sectors such as transportation and
ferrous metallurgy cannot be quickly overcome.
? Many raw materials have become increasingly less
accessible, and the cost of exploiting and transport-
ing them will continue to rise sharply throughout
the 1980s.
? The average annual rate of growth of the working-
age population during 1981-90 will be only 0.4
percent-one-quarter of what it was in the previous
decade (see figure 3). About 90 percent of the
increment will come from the republics of Central
Asia, whose population-which has been increasing
at a high rate-generally has less education, fewer
skills, and less capital than other ethnic groups.
? Among workers there are long-established habits of
casual discipline, slack effort, and shoddy workman-
ship, as well as wage-leveling proclivities and a
strong sense of the irrevocability of job tenure.
Among managers there is a deeply ingrained drive
to meet quantitative output goals-irrespective of
cost, quality, and efficiency criteria-and unwilling-
ness to innovate or take risks in the face of incentive
systems that discriminate against change.
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Figure 3
USSR: Increase in Size of the
Working-Age Population, 1971-908
The 1984 plan also does not indicate any major
change in the allocation of investment resources
among the major sectors of the economy. The target
for investment in energy is in line with rates originally
targeted in the 11th Five-Year Plan. But, consumer
goods production and chemicals may be receiving
slightly greater attention than previously.
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]decisions 2bA-I
0 1971-75 76-80 81-85 86-90
a Males 16-59 and females 16-54.
b Projected.
On the basis of information published on 1983 results
and the 1984 plan and of actions taken to date, we
think that the Kremlin-not surprisingly-is still
holding mainly to the course set by Brezhnev. Howev-
er, a shift of emphasis is detectable in trade and labor
policy, and new management initiatives are probably
being considered. Based on his past speeches, Cher-
nenko might be slightly more prepared than Andropov
was to stress consumer welfare and increased avail-
ability of consumer goods, while being less receptive
to serious change in planning and management of the
economy
Resource Allocation
The 1984 plan implies that consumption and invest-
ment are each slated to grow at about 4 percent. This
investment target is substantially higher than the 1.6-
percent average annual growth implied by the 11th
Five-Year Plan, and slightly higher than the rate
actually achieved in 1981 and 1982, but it is less than
the 5-percent growth reported by the Soviets for 1983.
Since investment growth has run well ahead of plan
each year since 1980, however, the actual increase in
1984 may well be greater.
offense resource allocation have been a fected by
concern for consumption. Foreign trade representa-
tives have stated-self-servingly-that certain fund-
ing intended for defense industry purposes has been
reallocated for additional imports of Western agricul-
tural equipment and technology. These officials cited
the Food Program as the cause.' Our information on
current and planned allocations of investment, howev-
er, is insufficient to tell whether this asserted realloca-
tion represents an isolated case or an indication of a 25X1
change in priorities or, for that matter., whether it is
even true.
The 4-percent growth targeted for consumption in
1984 can be compared with an achieved rise of
roughly 2.5 percent estimated for 1983. The regime's
interest in consumption is also suggested by the
continued large share of investment allocated to the
Food Program in the 1984 plan-about one-third of
total investment. Notwithstanding these signs, Mos-
cow appears to be taking a cautious approach on
consumer issues. In his June 1983 Central Committee
plenum speech, Andropov stressed that improvement
in the Soviet standard of living would be slow.
Increases in income, he maintained on several occa-
sions, must depend on increases in labor productivity.
' At the May 1982 Central Committee plenum the Soviet leader-
ship unveiled an agriculture-related Food Program for the 1980s
that (1) reorganized the management of food production from the
soil to the seller's counter, (2) redirected investment resources
between the farm sector and its supporting industries, (3) revised
incentives for farmworkers and managers, and (4) listed new targets
for output of key agricultural commodities and for allocations of
inputs. The program reflects the leadership's concern over lagging
farm output and represents a renewed political commitment to
improve the Soviet diet. A key goal of the program is to reduce
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This line was reaffirmed in December 1983 at the
Central Committee plenum and Supreme Soviet ses-
sion. While Chernenko has supported the Food Pro-
gram in the past and made efforts to cultivate the
image of a leader attuned to popular aspirations, both
political and economic constraints would probably
prevent him from attempting to sharply accelerate
consumption if this were his desire
Foreign Trade Policy
Since 1983 the Soviets have publicly espoused an even
more cautious line on East-West trade than they did
previously and have called-in Andropov's words-
for a "qualitatively new level of economic integration"
among the CEMA economies. US linkage of bilateral
trade with Jewish emigration from the USSR in the
mid-1970s, the exposure of overindebted East Europe-
an regimes to Western leverage attempts (notably
Poland), and Western sanctions following the invasion
of Afghanistan and imposition of martial law in
Poland clearly motivated the Soviet leadership to seek
to reduce the USSR's potential vulnerability to politi-
cally motivated Western economic pressure. At the
same time, doubts may have increased about the
capacity of the Soviet economy to effectively assimi-
late large amounts of imported Western technology.
A major theme of Andropov's unpublished speech at
the Warsaw Pact summit in January 1983 was the
vital importance of reducing the dependence of
CEMA countries on Western technology and credits.
Indeed, the Soviets have urged the development of an
overall coordinated CEMA foreign trade plan, which
would increase Soviet control over CEMA economic
ties to the West. In December 1983, Gosplan Chair-
man Baybakov said that trade with Socialist countries
would increase 10 percent in 1984-more than double
the annual rate of the past three years-and he
implied that trade with capitalist countries would
drop about 10 percent. This is an even more ambitious
plan for reducing trade with the West than that of
1983.
Moscow also has indicated its intention of reducing
the East European burden on the USSR. The Soviets
have:
? Appealed for a uniform CEMA food plan and an
increase in East European food and consumer goods
deliveries to the USSR, some at the expense of hard
currency sales to the West.
? Reduced credit to the East Germans.
? Adopted more stringent lending practices in dealing
with other CEMA countries.
? Warned CEMA countries that further reductions in
deliveries of oil and other raw materials may be
necessary.
? Pressed the East Europeans to provide more aid for
Cuba, Vietnam, and other Soviet clients in the
Third World.
Labor Policy
The sharpest break with practices of the Brezhnev era
has been the labor discipline campaign, with which
Andropov personally identified himself. Although the
regime has fired some allegedly corrupt or incompe-
tent officials, the campaign appears to have been
directed primarily against blue-collar workers. In the
winter of 1983 internal security forces and militia
teams were used to search for workers absent from
their jobs without permission.
A second phase in the campaign was introduced in
August 1983. A new decree introduced sanctions (loss
of vacation, loss of pay, and even dismissal) against
workers absent without permission or drunk on the job
and offered financial rewards to more productive
laborers. The sanctions are carefully limited, however,
so their impact may be less than expected. Judging
from leadership statements, we think additional disci-
plinary measures to reinforce labor's commitment to
better job performance are likely to be forthcoming,
although Chernenko may not adopt as tough a posture
as did Andropov.
What the post-Brezhnev leadership has not done in
the field of labor policy has been to remove the safety
net of virtually guaranteed employment in their pres-
ent workplaces for all in the labor force whose
performances meet minimal requirements. Dismissal
remains fundamentally a punitive measure, not an
option available to management for cutting costs and
raising the productivity of an enterprise)
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Economic Reform
Because of the enormous inefficiency with which the
Soviet economy presently operates, successful reform
would stimulate economic growth even more than
would an acceleration of investment. We estimate, for
example, that if Soviet industry were operating in the
1980s at the level of productivity attained before
1975-a means of indirectly assessing with our econo-
metric model the potential impact of effective re-
form 6-growth of industrial output would be almost
twice its actual rate.6
How the succession to Andropov evolves will undoubt-
edly affect the course of economic change in impor-
tant ways. Nevertheless, there appears to be agree-
ment within the present leadership on certain key
aspects of economic reform. Substantial continuity is
likely with the Brezhnev legacy of seeking to combine
more market-associated practices-for example, stiff-
er enforcement of contracts-with better planning,
more decentralization of authority with more central-
ization of strategic decisionmaking, and more appro-
priately structured material incentives with more
effective employment of the state's power to com-
mand. All members of the leadership are committed
to centralized planning as the organizing principle of
the Soviet economy and almost certainly would not
tolerate market socialism of the Yugoslav variety. At
most, they would probably be prepared to accept only
limited borrowing from East European experimenta-
tion with marketization-perhaps a few elements of
the "Hungarian model."
The steps taken by the regime since Brezhnev's death
indicate that the present agenda for change appears to
include:
? The placement in key posts of officials with a strong
technocratic background and exposure to manage-
ment practices in the military-industrial sector.
' In the projections described in this paper, our model's computa-
tions of industrial output are based on the estimated historical
relationship that has existed among capital, labor, and output in the
branches of industry since the mid-1970s, which appears to have
been a pivotal time for factor productivity in most of industry.
Industrial factor productivity had increased during the first half of
6 This growth would slow down considerably in the last half of the
decade but would remain well above the growth rates we now
project for industry. As a result, in 1990 machinery output would
be 10 to 15 percent higher, total investment almost 10 percent
greater, and consumption about 7 percent more than we now
? Improvement in the performance of centralized
mechanisms for accelerating scientific and techno-
logical innovation throughout the economy.
? Organizational changes in the Central Committee
apparatus and Council of Ministers intended to
improve the center's capacity to undertake and
implement effective strategic economic planning.
? Decentralization of some operational authority to
large production associations.
? Modest strengthening of the role of self-financing,
contractual relations and economic levers in indus-
try, agriculture, and other sectors of the economy.
? Further experimentation with indicators employed
to measure managerial success and intended to
reward risk-taking, high-quality output, cost reduc-
tion and efficiency.
? Greater wage differentiation.
We believe that such a program of modest change,
even if implemented in good faith, would probably not
succeed in turning around current negative growth in
productivity and restoring pre-1975 rates of produc-
tivity growth.
Outlook for Economic Growth: Some
Policy-Conditioned Projections
Mounting resource shortages and competition among
claimants, the alarming costs of declining productivi-
ty, and the opportunity for policy shifts provided by
the need to formulate the five-year plan for 1986-90
are all likely to induce the Soviet leadership to review
its policy options-if it has not already begun to do so.
To examine the prospects for economic growth in the
USSR between 1986 and 1990 and to see what
difference various policy choices might make, we have
made four estimates-each tied to a particular eco-
nomic policy that allocates different shares of re-
sources to consumption, military production, and in-
vestment-the very areas where there is the greatest
uncertainty concerning the future (see box, page 8).
We call these the High Consumption, High Defense,
High Growth, and Cost Avoidance scenarios. The last
of these scenarios assumes a regime policy of "down
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Uncertainties in Economic Projections
All econometric models require two types of data.
Historical time series are used to estimate the nature
of behavioral relations between variables, such as
how capital and labor have combined to produce
output. Such relationships are projected into the
future through the behavioral equations in the model.
All models also require information on how certain
future events will play out.
There are differing degrees in the certainty that can
be attached to these data on the future. Our estimates
of growth of the labor force are relatively firm, for
example, because participation rates for the working-
age population are near the ceiling, all the people who
will start working during the projection period can
already be identified in existingpopulation'data, and
we have good information on mortality rates. At the
other end of the certainty spectrum is the distribution
of GNP among primary uses-consumption, invest-
ment, defense, and exports. Although there are obvi-
ous rigidities, this distribution is ultimately subject
to the policy choices of Soviet leaders. Therefore, the
values for the allocations to defense spending, invest-
ment, and exports that we must develop and put into
the model are analytic assumptions on our part,
which may be subject to substantial revision as events
unfold.
the middle"-an attempt to make progress in con-
sumption, military production, and growth without
discriminating markedly against any one of the prin-
cipal claimants. Indeed, for reasons discussed below,
we believe this to be the most likely scenario.
These projections of growth were developed using
SOVSIM, the large-scale econometric model of the
Soviet economy that has been developed and refined
by the CIA over the past five years.' The projections
that have been calculated fall within a range of
growth considered to be realistic by a broad consensus
among Western academic and government specialists
on the Soviet economy. Difficult trade-offs involved in
resource allocation suggest that there are fairly severe
limits on the options available to policymakers. Our
scenarios attempt to reflect these limits. Nevertheless,
For example, we assume certain growth rates for
overall defense expenditures and for military hard-
ware procurement through the 1980s on the basis of
our analysis of observable current and historical
trends. Similarly, although the total value of invest-
ment is calculated in the model, the estimated flows
of investment goods to producing sectors depend on
this total and on an assumed pattern of investment
distribution. Exports, necessary for our projection of
the trade balance, are also estimated outside the
model. The actual growth rates of these variables in
the future can be influenced by decisions of the
leadership in ways that the size of the labor force in
the 1980s (to a large extent already determined by
demographic factors) can not.
In general, we are more certain about input values
that are subject to little, if any, manipulation through
policy or are clearly reflections of long-term trends
that are not likely to be reversed quickly. We are less
certain about the assumed values of input variables
that can be strongly influenced by such factors as
policy decisions and international market forces. One
reason for looking at alternative GNP projections is
to gauge how sensitive the values generated by the
modeling process are to some of the more important
uncertainties in the input variables.
in addition to the scenarios described in this paper, we
have examined cases with more extreme assumptions
(for example, defense growth at rates considerably
above any noted in the past, or sudden improvement
in factor productivity). None of these extreme cases
resulted in rates of economic growth during the 1980s
that were dramatically different from the growth
rates in the projections described below, either by
showing growth of the economy coming to a halt or by
indicating a return to the growth rates.of the 1960s
and early 1970s.
view the growth rates projected by the model as reasonable orders
of magnitude, not precise forecasts.
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Table 1
New Fixed Investment:
Distribution in 1985 and 1990,
by Scenario a
e Note that the figures in this table represent assumed percentages
of investment distributed under the various scenarios. The estimat-
ed flows of investment goods to producing sectors and housing
depend on this allocation pattern and the total value of new fixed
investment calculated by the model. Therefore, although percent-
ages shown for the High Defense and High Growth scenarios are
the same, actual investment will be higher in the latter.
1990 1985 1990 1985 1990
b The share shown for agriculture refers only to investment on
farms for production. The larger share (one-third) referred to in the
text embraces a much broader array including, in addition, invest-
ment in industries providing goods and services to farms, in food
processing, transportation and storage, and in on-farm housing and
municipal services.
High Consumption
The rationale for a high consumption policy would be
the need to provide the material incentives needed
to spur productivity. Politically, this policy would
have to be justified as a move to preempt likely
popular unrest under international conditions benign
enough to permit such a step. The scenario would
involve relatively greater shares of investment than in
other scenarios for housing, trade and services, and
agriculture (see table 1). Total defense spending after
1985 would be held constant-at a zero growth rate
through the rest of the 1980s-to increase total
investment, and the volume of food and other consum-
er goods imports from the West would increase.
The gain to consumers of such a policy would essen-
tially be that growth in per capita consumption-
within the 1986-90 timespan-would decline only
slightly and would still be well over 1 percent by 1990
(see table 2).
The principal cost of such a policy in terms of
economic growth would be slightly lower growth in
GNP than in the other scenarios during the last half
of the decade. Resources would be shifted away from
the sectors that produce investment goods-machin-
ery and construction-and from the sectors providing
industrial materials and services, which would in
consequence tend to depress industrial output. Howev-
er, the supply of consumer durables would be in-
creased, as would the output of consumer services and
retail trade. We do not know what the effect of these
consumer benefits would be for labor effort and
productivity. Given the notoriously poor quality of
available consumer goods, increasing the supply of
goods without improvement in variety and quality
might not in fact provide incentives for greater effort
in the workplace. Additional costs of this policy would
be that, with lower economic growth :in the 1980s, 25X1
there could be less opportunity in the 1990s to
accelerate technological modernization-with effect
on both civilian and defense industry--and growth of
consumption would continue to decline.
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Table 2
GNP Uses: Average Annual Growth
by Scenario, 1986-90
Scenario GNP Per New Defense
Capita Fixed
Consump- Invest-
tion ment
-0.3
0.5
2.6
3.7
5.0
0
High Defense
The rationale for an increase in military spending
would be a perceived Western challenge to the
USSR's security interests. This scenario assumes
military spending would grow at 5 percent a year-a
rate slightly higher than the 4- to 5-percent rate of the
1966-76 period. To accommodate this shift, invest-
ment would be stepped up in energy, industrial mate-
rials, and the investment goods sectors (see table 1).
More repressive domestic measures would be likely,
and we assume a mandatory return to a longer work-
week, which increases the labor input to the economy.
The Soviets would increase machinery imports from
the West to meet the greater need for investment
goods, and to pay for these imports they would
maintain oil sales to the West while reducing oil sales
to Eastern Europe.
The social and economic costs of supporting an accel-
erated arms buildup would be high but not, in our
view, prohibitive. With an acceleration of investment
in fuels and heavy industry, average annual growth of
total industry and of GNP would be higher than
under the other scenarios except for High Growth. At
the same time, growth in output of consumer goods,
including agriculture, would appear to be only mod-
estly retarded
As the share of GNP devoted to military spending
rose from 15 percent in 1985 to 18 percent by 1990,
however, growth in per capita consumption would
become negative, dropping by about three-tenths of a
percentage point a year (see table 2). Furthermore, the
combination of higher take-home pay (resulting from
a longer workweek) and fewer consumer goods could
increase repressed inflation and aggravate popular
discontent. Equally important, the prospects for fu-
ture growth of the economy as a whole would be
diminished by the higher share of output of the
machine-building, and other industries being allocated
to military production
High Growth
The rationale for concentrating more heavily on in-
vestment would be the need to accelerate the modern-
ization of capital stock and infrastructure, counter the
secular decline of growth of GNP, and lay the
groundwork for steady progress in guns and butter in
the 1990s. It would involve the same general pattern
of resource allocation as the High Defense scenario,
but with zero growth in 1986-90 in total defense
spending and higher imports of Western machinery.
The economic cost of the High Growth strategy would
be less than that of High Defense. Over the 1986-90
plan period, there would be a small growth of about
0.5 percent in average annual per capita consumption,
compared with declining per capita consumption un-
der the latter scenario. Average annual GNP growth
for this period would be at the same relatively high
level (about 1.8 percent). But a still higher average
annual growth of new fixed investment of 3.7 percent
would be achieved, which would generate a substan-
tially higher level of new fixed investment by 1990.8
This volume of investment, in turn, would provide the
best base for a simultaneous acceleration of military
output and consumption in the 1990s. Lags in bring-
ing new capacity onstream and the effect of an energy
' It should be noted that new fixed capital investment has been
growing at an annual rate of about 4 percent thus far in the 11th
Five-Year Plan (1981-85), and it is possible that the regime will
strive to maintain that rate of increase in the next five-year plan
(1986-90).
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constraint on capital utilization of plant and equip-
ment prevent more rapid growth of the economy
before 1990 under this scenario.9
Cost Avoidance
Each of the strategies outlined entails key costs that
the leadership would probably wish to avoid: the High
Consumption and High Growth strategies sacrifice
enhanced military power; the High Consumption and
High Defense strategies-in different ways-impair
the prospects for economic growth. in the 1990s; and
the High Defense and High Growth strategies run the
risk of further depressing labor productivity or even
kindling active public discontent. Thus we believe that
the most likely course of action that the Soviets will
pursue-provided there is no pronounced worsening of
the international situation, no serious internal political
instability, and no sudden sharp deterioration of the
economic situation-will be an attempt to make some
progress along all three fronts at once (consumption,
military production, and growth) while avoiding a
marked swing in any one direction. The relatively
good results for 1983 may provide additional impetus
to choosing such a strategy. Over the decade, this
strategy would provide growth sufficient to support a
range of policy initiatives, especially in the areas of
defense and investment, and still keep living standards
from declining.
Having both guns and butter, a strategy we call the
Cost Avoidance approach, could be viewed as an
extension of certain trends observable already in
' We estimate that primary energy production will grow by about
1.6 percent per year on average for the rest of the decade, down
from 4.6 percent in the 1970s. Expected gains in gas prcduction will
be somewhat offset by declining oil production and continued
stagnation of coal output. The planners must hold domestic energy
consumption growth to a little below 2 percent a year if critical
exports to Eastern Europe and exports to the West for hard
currency are to be met. At the same time, our projections indicate
that domestic requirements for primary energy-which are largely
determined by the size, age, and composition of the capital stock-
will continue to rise at an average of about 2.7 percent annually.
The implication of these trends is that the economy may be
operating under an energy constraint-with domestic energy re-
quirements (defined in terms of full utilization of capital stock)
greater than the energy available for consumption-especially as
the end of the decade approaches. At the macroeconomic level of
our analysis, the impact of an energy constraint is to prevent full
1983.10 It foresees quite low growth with nearly
stagnating living standards, a moderate upturn in
military procurement, and no productivity break-
through as the most likely course of development
through 1990 (see box, page 12).
Scenario Summary
The most striking feature of the outcomes of all the
scenarios-including High Growth-is the limited
degree to which the new leadership can affect GNP
growth during the 1980s.11 The policy options dis-
cussed do not alter the estimate of GNP growth by
more than about half of a percentage point per year
during the rest of this decade."
In contrast with its limited ability to influence the
rate of GNP growth for the 1980s, the regime can to a
significant degree determine how GNP is distributed.
Within the scenarios we have examined., our analysis
indicates that by 1990:
? The lowest level of per capita consumption in the
scenarios could be 10 to 15 percent below that of the
highest.
? The share of GNP going for defense could vary
from 12 to 18 percent.
? Industry's share of new fixed investment could vary
by about 10 percentage points.
These differentials would have serious implications
for economic growth in the 1990s.
The next two sections of this paper assess the effects
of the economic slowdown if we assume that the
Soviet leadership pursues the Cost Avoidance strate-
gy-although most of the assessment here holds true
productivity levels of the late 1960s and early 1970s would offer the
possibility of substantial improvement in growth prospects by 1990.
As the present paper argues, the reforms needed to achieve such a
turnaround are not likely to be implemented soon
11 Moreover, to the extent that higher growth stems from the
reallocation of resources from consumption to investment, high-
growth scenarios may overstate the actual results because of the
adverse impact lower consumption could have on productivity
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The Cost Avoidance scenario assumes, in particular,
that Soviet defense spending in the 1980s will in-
crease at an average rate of about 2 percent a year,
with hardware procurement showing no growth
through 1985 and growth at 2 percent a year in 1986-
90. Research, development, testing, and evaluation
(RDT&E) growth willfall slightly after 1985. (In the
High Growth and High Consumption scenarios, de-
fense spending is held at zero growth after 1985. In
the High Defense scenario, it is assumed to grow at 5
percent per year.)
The allocation of investment and labor among pro-
ducing sectors through the decade mirrors targets set
in the 1981-85 plan. The shares going to the energy
sectors will increase (at the expense of some consum-
er sectors). The shares accorded to heavy industry
will remain relatively constant through 1990. (In the
High Growth and High Defense scenarios, investment
shares to industrial materials and investment goods
sectors are increased and shares to consumer goods
and services sectors are reduced compared with this
scenario. In the High Consumption scenario, this
incremental pattern is reversed.)
Oil production will nearly reach the plan target of
12.6 million barrels a day in 1985 and then begin a
slow decline to 11.5 million b/d in 1990 (the current
production level is 12.4 million b/d). (This assump-
tion is the same for all scenarios except High Growth,
where production declines to 12 million b/d by 1990.)
With continued growth of domestic energy require-
ments, Moscow will have to choose between main-
taining oil exports and meeting domestic needs. We
for all scenarios. The subsequent section sets forth
deviations from the basic findings, assuming the
leadership were to pursue other strategies. F__1
The Political Regime
Regardless of which policy-determined scenario is
chosen, Moscow's economic problems, while serious
assume that there will be a substantial reduction in
oil exports but that most of the energy shortfall will
be absorbed through slower growth in the domestic
economy. (In the High Investment and High Defense
scenarios, oil exports to the West are higher than in
this scenario, and, in the High Defense scenario, oil
exports to Eastern Europe are lower.)
Given these assumptions, our best assessment of
Soviet economic growth through 1990 is that:
? Growth will continue to decline in the 1980s.
Average annual GNP growth will be about 2 per-
cent a year-a bit higher in 1981-85 and a bit lower
in 1986-90.
? Average annual growth of industrial output in the
1980s will fall to slightly over 2 percent.
? Observations of average weather conditions during
the 1962-80 period suggest that average annual
growth of agriculture output is likely to vary
around a trend of less than 2 percent, although
agriculture will remain the most volatile sector of
the economy.
? Average annual growth in per capita consumption
will fall to less than 1 percent.
? Average annual growth in new fixed investment will
drop to a new postwar low of around 2.5 percent.
? The defense burden will remain at about 14 percent
of GNP through 1990.
and intractable, do not threaten the continued exist-
ence of the Communist political system. Economic
growth, according to our projections, will remain
positive during the 1980s. The regime is cushioned
from conceivably adverse reactions among the popula-
tion to the growth slowdown by an enormous parasitic
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stratum of political controllers and economic bureau-
crats who have the strongest vested interest in mainte-
nance of the existing system of Communist Party rule.
Change, however, may occur in the institutions of the
regime, the types of people representing it, and the
propaganda line employed to manipulate the popu-
lace. Many factors will influence such change, not the
least of which will be probable factional struggle
within the Politburo. But the requirements of coping
with consequences of the growth slowdown should
bring two partially incompatible functions even more
to the fore than in recent decades: maintenance of
political control and promotion of technological inno-
vation and more efficient management
Institutions. Neither of these functional imperatives
is likely to produce major changes in the institutional
structure of the Soviet party-state regime in the
1980s. In particular, we think the chances are ex-
tremely slight that the technological imperative would
lead the leadership to replace the command economy
with a socialist market economy-with the challenge
to political control and vast uncertainties that would
inevitably flow from such a revolutionary move. The
political elite is strongly opposed to full-scale marketi-
zation, most policy advisers do not believe it would be
the right solution even if it were politically feasible,
economic managers would resist its implementation,
and the working class would bridle at many of the
consequences of such a move-especially the loss of
job security.
What is most likely to occur institutionally are shifts
in the balance of power among the bureaucratic
empires that underpin the regime. For example, there
has already been a rise in the KGB's overall influence,
and we might see it acquire greater enforcement
responsibilities in the economy going beyond the
attack on corruption-although the expansion of its
role under Andropov probably created anxiety in
other power centers. Shortly after his accession as
General Secretary, Chernenko emphasized the desir-
ability of reducing the burden of day-to-day supervi-
sion by the party apparatus of governmental organs,
to enhance the strategic leading role of the party. If
there is not a vigorous reassertion of the dominance of
the party apparatus-which has not occurred so far
following Brezhnev's death-the role of the military
could grow. But party and police controls at all levels
within the military establishment will remain strong
enough to prevent any military takeover, in the highly
unlikely event that elements within the military dis-
satisfied with the party's management of the economy
might seek to assume power. We might see further
attempts to upgrade the central economic planning
apparatus while reducing the role of middle echelons
of the economic ministries. The Academy of Sciences
and State Committee for Science and Technology
might be elevated in the planning process. And large
industrial associations might be given more power.
Leaders. The political control and technocratic func-
tions highlighted by the slowdown in economic growth
will probably also influence selection of the types of
people likely to rise to high office in the regime. Top-
level changes made soon after Brezhnev's death could
be a harbinger of future recruitment atterns. On the
one hand, there were promotions of people like Andro-
pov and Geydar Aliyev (the former KGB professional
and chief of Azerbaijan)-both long experienced in
intelligence and police work, but lacking in economic
training or economic managerial experience. And, on
the other hand, there have been promotions of people
like Nikolay Ryzhkov, a new Central Committee
secretary; Nikolay Slyunkov, the new first secretary
of Belorussia; and Lev Zaykov, the new first secretary
of Leningrad-all clearly technocrats with modest
political credentials. The losers here appear to be the
generalist political cadres who have traditionally
manned the top party posts in the provinces and in the
Central Committee Secretariat. The new appointees
are probably less ideological and more pragmatic than
their predecessors, and some are probably more will-
ing to accept change, but the sparse data available
provide no persuasive evidence that they differ signifi-
cantly in their policy objectives-nor indeed that they
share any unique policy orientation, internal or exter-
nal.
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Propaganda Line. The dual demands of greater politi-
cal control and technological progress are likely to
lead to an intensification of propaganda themes that
were evident under Andropov's rule. Thus, the need to
justify or obscure greater consumer deprivation will
almost certainly generate a high level of scapegoating
throughout the 1980s. The media will continue to
place heavy stress on the purported US military and
subversive threat, combined with chauvinist appeals
to "Soviet patriotism." Word-of-mouth propaganda
probably will highlight Soviet sacrifices to ungrateful
allies and cultivate nationalist sentiments more open-
ly. And, within the framework of an updated Marxist-
Leninist doctrine (perhaps codified in a new party
program), we are likely to find an emphasis on
technocratic pragmatism-a theme already voiced by
Andropov.
Society
The growth slowdown of the 1980s could in principle
confront the leadership with two quite distinct societal
problems: active unrest, and poor morale/low labor
productivity. Each has its own threshold of depriva-
tion, above which people give vent to their discontent
(in the former case) or cease to exert themselves on the
job (in the latter). Although there are objective condi-
tions (for example, the disappearance of meat and
vodka from the stores) that, if they came to pass,
might trigger either response, the populace's subjec-
tive assessment of its well-being in comparison with
its current sense of what this ought to be will probably
determine its mood.
Unrest? Approximately 280 cases of civil unrest-
that is, incidents involving demonstrations, strikes, or
occasionally even violence
since 1970. Most frequently these
have been cause by complaints about working condi-
tions and pay or by unhappiness over chronic short-
ages of meat and dairy products. There will almost
certainly be more instances of such unrest in the
future, whichever economic strategy the leadership
pursues
Reported cases of unrest bunch heavily in the non-
Russian Baltic, Ukrainian, and Caucasian republics,
where economic discontent has blended with simmer-
ing resentment of the Russian presence and Moscow's
repressive nationality policy. Because we know more
about what happens in the borderlands, this reporting
may understate the incidence of unrest in the Russian
heartland itself-especially in the large industrial
cities whose stability is probably of paramount con-
cern to the Kremlin.
Concern over possible political instability clearly ex-
ists within the party elite. Both Andropov and Cher-
nenko have warned in speeches that public dissatisfac-
tion, if unattended or mishandled, could assume
"crisis" proportions. Debate in the press about the
implications of failure to deal adequately with con-
sumer demands and public discontent has intensified.
This debate-cast in terms of dealing with "contra-
dictions" in Socialist countries-may become more
significant as Soviet leaders prepare the next five-year
economic plan and a new comprehensive party
program.
Apprehension about the popular mood has probably
significantly influenced regime policy over the past
several years. It accounts at least in part for:
? The high priority assigned to the Food Program.
? Massive grain imports.
? Attempts to strengthen worker discipline.
? The higher profile assumed by the KGB.
? Attempts to curtail contacts between Soviet citizens
and Westerners and reduce the flow of information
from the West.
? Attacks on more blatant forms of corruption and
official abuse of power
We believe, nevertheless, that the regime will be able
to suppress those disturbances that do occur and to
prevent any chaining of them together. Concerned by
what it has seen in Poland, the leadership has already
moved to strengthen controls over the labor force.
And, in contrast with Poland's experience, Moscow
has been highly successful in containing unrest.
Where food shortages have caused demonstrations, as
in Tallin in 1980, it has effectively employed firefight-
ing tactics, such as rushing food in from surrounding
areas and maintaining supplies for a time, while
targeting demonstration leaders for repression. Even
when force has been used to quell disturbances that
have occurred, the unrest has not spread.
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In contrast with Poland in 1980 and 1981-where
there was a traditionally strong Catholic Church, a
powerful newly formed national labor union created
by the workers, and mutually supportive ties between
workers and intelligentsia-there are no institutional-
ized channels for effectively transmitting appeals for
mass action to the public at large across the vast
territory of the USSR. Strikes over working condi-
tions in Gor'kiy and Tol'yatti in 1980, for example,
were not even mentioned in the Soviet press for over a
year (and then denied), and most of the population
seems to be still unaware that they occurred.
Soviet workers lack the organization, discipline, and
recent historical experience to follow the Polish exam-
ple-at least in the 1980s. They live in an environ-
ment saturated with police informers who work for a
regime that has not lost its nerve and is intent on
crushing dissent. And they cannot count on effective
assistance from disaffected elements within the intel-
ligentsia or bureaucracy. We by no means rule out the
possibility of spontaneous large-scale localized
disturbances of the type that occurred, for example, in
Novocherkask in 1962. But we do not believe that the
threshold of sustained and widespread mass unrest
will be crossed in the 1980s.
Morale and Labor Productivity. Much open-source
commentar
suggest that a perceptible decline in worker morale
and growing social malaise have occurred in recent
years. Alcoholism has probably risen, as have disor-
ders associated with it-crime, family breakup, in-
creased adult and infant mortality (see figure 4),
absenteeism, industrial accidents, and spoilage. Sav-
ings have involuntarily increased, thanks to the ab-
sence in the marketplace of many high-quality con-
sumer goods and services. Worktime is lost while
employees spend hours shopping for food and other
consumer goods and services. Corruption has probably
increased, and enormous human effort is being chan-
neled into unsanctioned or illegal Second Economy
activities. None of these trends can be turned around
easily.
The extent to which such phenomena have affected
productivity already and the extent to which their
amelioration would improve it are a subject of contro-
versy among Western specialists. According to what
they themselves say, Soviet leaders believe that public
dissatisfaction with the availability of consumer goods
is an integral cause of low labor productivity and that
progress in raising consumption levels is a necessary-
if not sufficient-condition for sharply improving
productivity. Although they will continue the disci-
pline campaign and continue to appeal to patriotism
by citing the "imperialist danger" as a stimulus to
labor effort, they probably expect only modest pro-
ductivity gains from such gambits. They must also
recognize that the policy of increasing wage differen-
tials to stimulate productivity can work only if it is 25X1
progressively backed by an increased supply of quality
goods that the more ambitious workers can hope to
acquire.
Military Power in the 1980s
Slow Growth Likely. We believe that the Soviet
leadership will seek to continue its policy of the past
20 years of balanced and large-scale force develop- 25X1
ment. This assessment is based on our reading of
Soviet objectives, knowledge of Soviet military needs,
and physical evidence about weapon systems.
Deployment of these systems will encounter obstacles.
We think that these obstacles can be overcome only if
the leadership-in reaching a decision in 1984 and
1985 on resources to be allocated for weapons devel-
opment and production in the 1986-91) plan-chooses
to increase spending on military procurement slightly,
while reducing growth somewhat in other components
of military spending. Thus, our Cost Avoidance sce-
nario postulates a rise of average annual procurement
from zero growth in 1981-85 to 2 percent in 1986-90.
Such a decision would be presented privately to elite
audiences as a response to a growing threat posed by
increased US defense spending.
Implications for Force Modernization. Even with this
boost, we expect that the flow of at least some new
weapons into the stock of Soviet military equipment
will not be as rapid as in previous decades. The
Soviets might:
? Curtail some weapon programs that are near the 25X1
end of their production run. This would permit the
transfer of resources to civilian production or to
follow-on military programs.
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Figure 4
USSR: Death Rate, Life Expectancy, and Infant Mortalitya
Crude Death Rate Life Expectancy
Deaths per 1,000 population Expectancy of life at birth
Infant Mortality
Deaths per 1,000 live births
7.0 1960 65 70 75 80 60 1960 65 70 75 80 24 1960 65 70 75
a The cutoff points in these graphs reflect the most recent Soviet
publication of data.
? Cut back or eliminate some support programs, such
as those for naval auxiliary ships and transport
aircraft, increasing the use of merchant ships or civil
aircraft to support military operations.
? Stretch out some weapon procurement programs
and slip the time schedule for force modernization,
slightly.
? Extend the service life of some older weapon sys-
tems to reduce the requirement for new equipment
in selected areas.
Yet, if they were to make these adjustments, we
estimate that the Soviets would not have to forgo any
major weapons program or forsake any of their force
modernization goals. Indeed, we project impressive
force gains for the Soviets in the 1980s. Important
programs in development that could be deployed with
military forces through the early 1990s include sever-
al military space systems, strategic cruise missiles,
another generation of strategic ballistic missiles, a
strategic bomber, a large transport aircraft, and a
large carrier for conventional aircraft.
Impact of the Economic Slowdown on Foreign Policy
An Overview
Overall, we believe that the slowdown in growth will
not result in major changes in Soviet foreign policy.
We do not see economic problems at home motivating
the leadership to undertake high-risk adventures
abroad that are designed to distract an unhappy
public or produce economically beneficial geostrategic
breakthroughs.
Moscow, however, will continue to exploit opportuni-
ties that might arise to increase economic pressures on
the West and divide the United States from West
European or other friends while gaining economic
advantage itself. Sensitivity to economic problems will
almost certainly lead Moscow to seek to avoid major
new commitments of economic aid in the Third
World. Moscow is also aware that pursuit of its
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objectives there through force and subversion could
negatively affect the USSR's trade relations with the
West. Nevertheless, awareness of this possible price-
which the Kremlin probably discounts-is unlikely in
any event to significantly constrain the Soviets' con-
tinuing political and military activity in the Third
World.
Eastern Europe
The slowdown in economic growth will have its most
serious external impact on relations between the
USSR and its client regimes in Eastern Europe,
which currently receive most of Soviet economic and
military assistance. From the Soviet standpoint, the
cost of subsidized oil and other raw material deliveries
to Eastern Europe has been extremely high in oppor-
tunities forgone for relieving domestic energy short-
ages or earning hard currency. Overall, of total oil
exports-Moscow's leading hard currency earner-
over half goes to East European and other Communist
countries. Because of slowing oil production and rising
internal demand, as well as continued need for im-
ports of foodstuffs and plant and equipment from the
West, the opportunity cost to the USSR of oil deliver-
ies to Eastern Europe is likely to remain high. Thus
the question is not whether the Soviets will squeeze
Eastern Europe for the rest of the decade, but how
they will do so and how hard-in CEMA integration,
Warsaw Pact force modernization, and trade.
We believe that there is little more that the problem-
plagued East European countries can provide that will
help the USSR economically and that cutting back on
Soviet oil deliveries to Eastern Europe would be risky.
Yet to achieve the levels of GNP growth and per
capita consumption stipulated in our Cost Avoidance
scenario, by 1990 Moscow would have to impose
further cuts in oil deliveries to Eastern Europe beyond
those already levied. Additional reductions, if accom-
panied by price hikes and cuts in other raw materials,
and even if partially compensated for with exports of
additional gas, would create new political and eco-
? May believe there is enough waste in the East
European economies to impose additional costs
without cutting consumption sharply.
? Appreciate the purely coercive power of the police in
maintaining social order.
There is also the safety valve of East/West European
trade. Although suspicious of such relations as a
threat to Soviet political hegemony and economic
interests, Moscow will probably continue to tolerate
selective East European economic links with Western
Europe that could relieve the burden on the USSR
and are unlikely to be used by trading; partners for
political leverage.
The United States
Potentially, the growth slowdown could most affect
the Soviet posture toward the United States in trade
and arms control.
Bilateral Trade. Moscow is committed under the
recently negotiated US-USSR Long-Term Grain
Agreement (LTA) to purchase a minimum of 8-9
million tons of grain in each of the next five years.
The USSR, however, also has LTAs with Canada,
Argentina; and several smaller suppliers, which com-
mit Moscow to buy in the aggregate a minimum of 10
million tons annually through 1985. In addition, a
protocol signed with France last year reportedly guar-
antees the USSR another 1-3 million tons of grain. A
poor domestic grain harvest could push Soviet grain
import requirements considerably higher than the 20-
30 million tons a year we estimate they may need in
the longer term. The robust outlook for global grain
production over the next few years, however, suggests
that the Soviets' need soon for purchases from the
United States above the LTA commitment and poten-
tial US leverage are likely to be quite limited. Mos-
cow still finds the United States attractive as a
supplier because of its unique year-round capacity to
deliver large volumes of grain quickly at short notice.
nomic strains in Eastern Europe.
We believe, nevertheless, that the Soviets will risk
aggravating popular unrest in Eastern Europe by
tightening the economic screws because they:
? Resent the East Europeans' higher standard of
living and feel that deprivations should be shared
equally within the "fraternal commonwealth."
Our analysis of Soviet equipment manufacturing ca-
pabilities and the continuing problems in the oil
industry indicate that requirements in the 1980s for
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imports will center on Western equipment and tech-
nology for deeper drilling, fluid lift, well completion,
and servicing. In addition, the Soviets will need
sophisticated exploration equipment, offshore drilling
platforms, and secondary oil-refining technology. Be-
cause gas is critical to maintaining total Soviet energy
production growth in this decade, continued imports
of pipelayers, turbines and compressors, and other
gas-exploitation equipment will be necessary. Western
equipment and technology will be especially crucial
for exploiting sour gas deposits, such as those at
Astrakhan and Tenghiz: The Soviets will also need
Western help if they are to intensively exploit Siberi-
an coal resources during the 1980s.
Although the United States is the preferred supplier
of most types of oil and gas equipment throughout the
world, in recent years its share of the world market
has decreased, even before the embargo on sales to the
USSR. The Soviets have been able to purchase almost
all of what they have needed from non-US suppliers,
and termination of the embargo has not fundamental-
ly affected their policy of buying from the United
States only as a last resort.
Nevertheless, large-scale US assistance would help
Moscow in maintaining oil output and developing
Arctic offshore resources. The United States remains
the sole supplier of certain oil and gas equipment, the
need for which should increase as Soviet oil produc-
tion problems intensify-namely, high-capacity sub-
mersible pumps, deep-well-drilling rigs, well- and
mud-logging equipment, and various items for off-
shore oil production.
The Soviets urgently need high-capacity submersible
pumps, which can lift increased volumes of fluid and
thereby stabilize output in already producing fields-
where the ratio of water to oil being lifted is rising
steeply. The Soviets recognize that this equipment is
necessary and-following termination of the US em-
bargo and approval in early 1984 of an export li-
cense-have placed an order for
submersible pumps with a manu acturer. A fol-
low-on order is possible. Delivery and installation of
the first order will take 12 to 18 months. We estimate
that this move could play a substantial role in holding
up oil production
Soviet trade officials are currently pushing for a
Soviet venture with the United States and Canada to
manufacture drilling equipment and assemblies for oil
development in the Barents Sea and possibly else-
where in the USSR. Such a consortium reportedly
would be incorporated in Western Europe, complex
components would be produced in the. United States,
and simple components would be manufactured and
final assembly carried out in the USSR. The USSR
has to develop offshore oil deposits to maintain future
oil supplies. The Soviets presumably recognize that
they need US and Canadian participation. Only the
United States has the technical and financial re-
sources needed for a project of this magnitude. A
figure of $10-11 billion has been mentioned for the
cost of the project alone, with total Barents Sea
development costs running up to $25 billion.
Whether this degree of technological dependence on a
narrow range of US equipment, particularly high-
capacity submersible pumps and offshore equipment,
translates into much political leverage for the United
States is problematic. We believe that any Soviet
willingness to accommodate US political interests in
return for aid in oil equipment would be limited and
would depend upon Moscow's assessment of the over-
all state of bilateral relations. The Kremlin conceiv-
ably might show some political flexibility if leverage
were exercised quietly in a more favorable diplomatic
environment. But if Soviet leaders felt that they really
had to openly choose between significant US-dictated
political concessions and lower oil production, they
would probably opt for the latter to avoid what would
be regarded both inside the regime and abroad as a
humiliating display of weakness. At the moment they
obviously prefer to buy the submersible pumps and
cross the leverage bridge when and if circumstances
require.
Heavy official emphasis on the Food Program indi-
cates that large investments will continue to be made
through the mid-1980s in agriculture and the food
industry. Ministry of Agriculture and foreign trade
officials have indicated that imports will play an
important role in this food-related investment. They
have expressed interest in acquiring Western farm
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machinery, road construction equipment, food-proc-
essing and packaging installations, and storage facili-
ties for perishable products. In addition, Moscow has
shown renewed interest in completing farm machinery
plants that were proposed or started in the 1970s with
Western technology and equipment
Soviet trade officials have indicated that, despite poor
bilateral relations, the United States might be a
principal source of imports of agricultural and food
industry equipment because it is the acknowledged
world leader in the field. Whether the Soviets will
pursue these overtures is unclear.
Incentives for Arms Limitations. Despite their walk-
out from INF and suspension of the START talks, the
Soviets will probably engage in arms control negotia-
tions that could provide opportunities to restrain the
growth of military spending. There is evidence that, in
individual instances in recent years, demands of the
civilian economy have been given precedence over
military requirements." During 1983, statements by
Soviet leaders suggested that the drain of military
spending on the civilian economy has probably be-
come a matter of increased concern-if only because
the slowdown in economic growth threatens to weaken
the industrial base on which the growth of military
power itself ultimately depends. Because of the slow-
ing of growth, the potential long-term cost savings
associated with arms control will probably be given
greater weight in the leadership's calculations as the
decade passes.
The direct savings in hardware and manpower that
could be gained through the terms of any agreements
the Soviets would now be prepared to consider are
probably not large enough to significantly influence
policy. Strategic force requirements absorb fewer
materials and are less labor intensive than those of
other military services, and the high-technology pro-
duction resources devoted to strategic nuclear systems
are also less easily transferable to civilian purposes. If
all the difference in expenditures resulting from a
strategic arms limitation agreement were transferred
to civilian investment, the short-term effect on GNP
would still be small even though the cumulative
savings over five to 10 years might be considerable.F_
The effect of an MBFR agreement on Soviet defense
spending also would be small. Its most probable
outcome would entail the redeployment of Soviet
Ground Forces units from Eastern Europe to the
western USSR or the Far East. If some personnel
were demobilized in the process, the redeployment 25X1
would permit a reduction of a few tenths of a percent
in total defense spending projected through 1985. If
the units were maintained at full strength, the poten-
tial savings would be smaller; if their redeployment
required the construction of new bases, it could bring
no savings at all.
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2bAl
Soviet arms and arms control decisions are likely to
continue to be driven by calculations of political-
strategic advantage and the dynamism of weapons
technology. The Soviets nevertheless probably believe
that arms agreements can:
? Set quantitative and qualitative boundaries on
procurement.
? Increase the calculability of future military outlays
and channel competition into predictable (and thus
limited) areas.
? Help create a political environment. that would
contribute to a slowing of the overall US defense
effort, thereby easing military spending demands on
the USSR.
As Soviet leaders assess the escalating costs of pro-
spective open-ended high-technology arms competi-
tion with the United States, particularly in space-
based strategic defense forces, economic gains
associated with these three considerations could loom 25X1
increasingly large in their thinking. Thus, the slow-
down in economic growth should increase Moscow's
interest in slowing the pace of such competition
through eventual renewal of arms negotiations.
Internal political jockeying, of course, could also
affect Politburo calculations and interest individual
leaders in relatively small defense savings that do not
have an immediately measurable impact on macro-
economic growth. As in other countries, conflict over
marginal shifts in resource allocation may be magni-
fied through political struggle in the USSR. The
growth slowdown may have intensified a general sense
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among some leaders that even small steps should be
taken to satisfy urgent demands for materials and
equipment in other programs by lightening military
outlays. These leaders might therefore be willing to
adopt a more moderate posture in arms negotiations
without any precise reckoning of ruble benefits that
could accrue-provided they could secure their politi-
cal flanks against the charge of undercutting national
defense.
The Third World
If the slowdown in economic growth were to become a
key factor shaping Soviet policy toward the Third
World during the rest of the 1980s, we would proba-
bly expect Moscow to:
? Cut back on already low levels of economic aid to
non-Communist less developed countries (LDCs)
and focus aid on allies in the Third World.
? Insist that Communist clients be more frugal in
their use of Soviet-supplied resources.
? Insist on timely payment of debts.
? Increase hard-currency-earning arms sales as much
as possible and provide less concessionary financing.
? Avoid provocative and nonremunerative military
assistance to regimes like Nicaragua, which do not
contribute significantly to Soviet security.
In fact, changes in the domestic economy have only a
secondary impact on Soviet behavior in the Third
World in comparison with the impact of military and
geopolitical factors, and thus Moscow is likely to
pursue these objectives only in part.
At the June 1983 Plenum of the Central Committee,
Andropov-replying bluntly to frequent LDC com-
plaints of Soviet tightfistedness in nonmilitary eco-
nomic assistance-put the Third World on notice not
to expect much in the way of such aid from the
USSR. This posture, of course, was not intended to
signal less Soviet involvement in the Third World.
Arms exports-mainly for hard currency-have been
accelerating: in 1982, Soviet arms agreements
climbed to $9 billion, 40 percent higher than in 1981
and well above the average for the previous five years.
But, economic assistance is being channeled even
more than before to the USSR's Communist allies
and leftist client states. In 1976-80, they received 85
percent of Soviet aid disbursements; in 1981 and 1982
they received 92 percent.
Toward Cuba, Vietnam, and Afghanistan, where the
USSR incurs its main Third World economic costs,
political and military-strategic factors have far out-
weighed economic considerations and will probably
continue to do so
Cuba. Soviet aid of $4.5 billion a year keeps Cuba's
economy afloat and helps to bankroll Cuban adven-
tures in Africa and Central America. Moscow has
already stepped up its complaints regarding Cuba's
expect that, although Moscow will maintain the pres-
ent volume of its oil deliveries to Cuba through 1985,
the oil price subsidy will fall sharply as oil prices
charged to CEMA countries approach the world
price. Moscow has also been pressing Havana to fulfill
its soft currency sugar contracts with the USSR, even
at the expense of hard currency sales. Soviet pressure
is likely to become most acute during 1985 as bilater-
al negotiations for the 1986-90 trade protocol get
under way and as January 1986-the date when
Cuba must begin repaying its long postponed debt to
the USSR-approaches
Nevertheless, Soviet interest in sustaining a Commu-
nist regime there assures Havana of continued large-
scale support. Cuba remains Moscow's key beachhead
in Latin America; it has been a highly valuable
resource in achieving Soviet objectives in the Third
World; and it provides an important channel for
Soviet aid to leftists. There are some 60,000 Cuban
military and civilian advisers in Third World coun-
tries where a large-scale Soviet presence might be
viewed with alarm by the locals or by the West. Cuba
also offers the Soviets important intelligence collec-
tion facilities, serves as a staging base for Soviet
military reconnaissance aircraft, and provides servic-
ing facilities for periodic Soviet naval deployments.
To exercise influence over Castro without undermin-
ing him, the Kremlin must exert some economic
pressure-but not too much.
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Vietnam. Vietnam's strategic importance in Asia
makes any major reduction in Soviet aid to that
nation similarly unlikely. Vietnam provides Moscow
with a fulcrum for exerting leverage against China
from the south, and use of Cam Ranh Bay allows it to
increase its naval presence between Japan and the
Indian Ocean, maintain aerial reconnaissance, and-
recently-even deploy limited attack forces. As with
Cuba, recent Soviet public statements suggest that
requests for further increases in subsidized shipments
of oil and food to Vietnam may have been turned
down to persuade the Vietnamese to make better use
of aid already available. The Soviets have pressed the
Vietnamese hard on debt repayment. Although they
almost certainly will provide the assistance they be-
lieve necessary to sustain the regime, Hanoi's percep-
tion of its needs will undoubtedly differ from Mos-
cow's.
Afghanistan. Finally, the USSR's behavior in Af-
ghanistan is not likely to be determined by economic
considerations, because its commitment there results
from security and geopolitical factors. Although the
cumulative economic costs of the war-estimated at
more than $12 billion for operations, maintenance,
construction, equipment repair and replacement, and
subsidizing the Afghan armed forces-are not too
large, they nonetheless are undoubtedly higher than
originally expected. A small fraction of these expendi-
tures is offset by Soviet exploitation of Afghan natu-
ral gas. Cost calculations conceivably could be one
among other factors now deterring a major expansion
of the Soviet military presence in Afghanistan. We
believe, however, that, if a change in policy in Af-
ghanistan were dictated by strategic considerations,
economic calculations would not constrain Moscow's
actions.
Other Marxist Regimes. Moscow has not given re-
gimes of a "socialist orientation" all the assistance
they have been requesting, and they have not been
happy about this. Indeed, the Soviets on occasion have
counseled some of these regimes-for example, the
Nicaraguan-not to provoke a withdrawal of Western
assistance by implementing a policy of economic
radicalism. Some of these states have explored the
possibility of greater help from the West. Neverthe-
less, the Kremlin has been supplying increased aid.
The overall rise in Soviet economic assistance to
LDCs in 1982 was accounted for primarily by new aid
to Marxist client regimes-including Angola, Ethio-
pia, and Mozambique. Nicaragua scored major gains
in Soviet aid in 1982, including $160 million in new
agreements to finance development projects. Soviet
military deliveries to Nicaragua jumped from $6
million in 1981 to $50 million in 1982, with an
expansion in the number of military advisers. More-
over, departing somewhat from its earlier practice of
concealing Soviet aid by largely funneling it through
surrogates, Moscow has recently been increasing the
direct delivery of nonlethal military equipment to
Managua.
Important Non-Marxist Client States. Moscow has
also responded to increased Western competition and
the current world trade climate by offering better
military supply deals and more sophisticated equip-
ment to key non-Marxist client states. The military
resupply accords signed with Iraq and Syria, for
example, underscored Moscow's desire to recoup lost
influence and prestige and, in the case of Iraq,
Moscow's inability to improve ties with Tehran and its
intention of preventing further erosion of its arms
market to France and other Western suppliers. The
inclusion of softer repayment terms, new model T-72
tanks, high-performance aircraft, and air defense
missile systems in the latest Iraqi and Syrian agree-
ments represents a significant change of course for
Moscow in dealing with its major Arab clients.
Particularly alarmed by India's overtures toward
Western arms suppliers, Moscow took unprecedented
steps in 1982 and 1983 to revitalize the military
the USSR and India signed a trade memorandum
which increased Soviet soft currency oil deliveries to
India in 1983 by 40 percent. Commerce Minister
Singh's visit to Moscow in September 1983 produced
an agreement to maintain 1984 Soviet oil deliveries to
India at 1983 levels.
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Spinoff Effects of Soviet Behavior. In addition to the
direct gains and losses entailed in Moscow's bilateral
relations with Third World regimes, the Soviets expe-
rience indirect or spinoff gains and losses. Afghani-
stan, for example, has sensitized Moscow to the
possibility that aggressive actions in the Third World
can provoke Western responses that impede efforts to
improve the USSR's economic performance. But it
has almost certainly not convinced the Kremlin that
the link between Soviet action and Western reaction is
absolute or enduring; indeed, it has shown that nega-
tive economic consequences can be somewhat offset
by political gains from splits within the Western
alliance over how to react.
Soviet military assistance to Nicaragua demonstrates
that-even where there are economic costs from a
relationship with an LDC within the US sphere of
influence and where the USSR's security is not at all
at stake-the Kremlin is still prepared to take actions
that risk worsening the environment for arms agree-
ments and trade relations with the United States.
Where one or more of these constraints does not
obtain-for example, in Afghanistan or Aipgola-it is
even more unlikely that concern over US or Western-
inspired economic costs will evoke major Soviet re-
straint, much less retreat, in the foreseeable future. If
they can also expect positive economic gains from
assertive behavior in the Third World, the Soviets are
that much more likely to discount Western trade-
related responses. Given their urgent hard currency
needs, for instance, they are likely to value cash in
hand from arms sales and military assistance far more
than the intangible benefit of Western good will
attributable to any eschewing of such sales.
Another development in the Third World that might
conceivably be seen by Moscow as likely to measur-
ably improve the USSR's economic prospects would
be a significant reduction in oil available on the world
market. Such an occurrence might be perceived as
once again dramatically inflating Moscow's hard cur-
rency earnings from its own oil exports, permitting it
either to increase imports from the West that would
stimulate economic growth or to retain more oil and
gain in energy production. Higher world oil prices,
while likely to affect the price of Soviet imports,
might make additional purchases of Soviet natural
gas and participation in compensation deals more
attractive to Western Europe. And such prices, with-
out ruining East European economies (which import
only a small fraction of their oil from the West),
would further enhance the Soviets' leverage to extract
more goods from their CEMA partners by raising
energy prices in intra-CEMA trade.
In contrast to obviously high-risk scenarios of forcible
acquisition of oil by the USSR, Moscow might believe
that it could benefit without major risk of military
confrontation with the United States from reductions
in oil deliveries to the world market caused by local
rivalries in the Persian Gulf to which it contributed
only diplomatically or as an arms supplier. Or, Mos-
cow might assess the risks of supporting surrogate or
third-party-activated attempts to reduce the flow of
oil from the Gulf to be relatively low. A decision to
back such attempts covertly would not preclude the
simultaneous pursuit of alternative policies in the
region, such as greater coordination with OPEC and
expanded military sales to regimes presently in power.
However, Moscow would have to weigh the likelihood
that any forcible restraints on oil deliveries from the
Persian Gulf would precipitate a stronger US military
presence in the Gulf-a highly undesirable develop-
ment for strategic and political reasons from the
Soviet standpoint.
China
Economic calculations are subordinated to broad geo-
political and military-strategic concerns in Soviet
relations with China, whose ambitions-Moscow be-
lieves-pose a fundamental and implacable long-term
threat. The Soviets seek to build Soviet military power
in Asia and isolate China diplomatically, while at the
same time bringing about a limited detente between
China and the USSR that would stimulate reluctance
in Washington to help China modernize its economy
and military.
Trade Relations. In March 1983 Moscow signed a
new trade agreement with Beijing, and a month later
a cross-border trade protocol was initialed. While the
agreement projected a 175-percent increase in trade
in 1983, this level-if achieved-would still amount
to only 2 percent of China's total trade and about 0.5
percent of the USSR's. In pushing ahead with these
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moves, Moscow's main objective was to improve its
position in the US-USSR-China triangular relation-
ship by repairing at least part of the damage inflicted
on Sino-Soviet relations during the 1950s and 1960s.
There is no evidence that a desire to relieve internal
economic pressures motivated the Soviet leadership.
Nor is it likely that Sino-Soviet trade will help
significantly to ease Soviet economic stringencies in
the foreseeable future.
Military Posture. Because one-fourth of all Soviet
Ground Forces personnel-nearly 500,000 troops in
52 active divisions-are stationed opposite China,
there would in principle seem to be both opportunity
and incentive for significant savings from a cutback.
The most important contribution such a reduction
could make would be in manpower released for the
civilian economy. But even if 250,000 troops were
released to the civilian manpower pool by 1990, the
impact on GNP growth and growth in per capita
income would be slight. By the same token, slowing of
equipment modernization of the forces already in
place would have only marginal effects on the econo-
my, although it would lessen allocational strains
within the Soviet military.
We believe that military considerations would over-
ride whatever savings might be derived through a
reduction of forces. Changes in the disposition of
Soviet forces along the border and in Mongolia over
the past five years strongly suggest that Soviet securi-
ty against China is based on an offensive military
strategy. In the event of conflict the battle plan
appears to entail not a holding action but a major
invasion and occupation of at least northern Manchu-
ria. If this is Soviet strategy, it mandates a continued
strengthening of the USSR's military power vis-a-vis
China, with the slowdown of general economic growth
at best restraining the pace of modernization of Soviet
forces.
Western Europe and Japan
Requirements for countering the growth slowdown
point to a need at least to maintain and, if possible,
increase hard currency imports of machinery. Pur-
chases of Western steel and other industrial inputs
will have high priority. Imports of large-diameter
steel pipe will remain critical for the construction of
gas pipelines until the later 1980s, and the Soviets
Table 3
USSR: Hard Currency
Purchasing Power
Total
35.0
32.9
33.4
Merchandise exports a
26.2
22.8
22.9
Additional arms sales b
5.9
4.5
4.5
Gold sales c
1.1
3.6
3.6
Invisibles d
1.8
2.0
2.4
a Assumes that (1) the volume of hard currency oil exports is
roughly halved, which would require additional cuts in deliveries to
Eastern Europe and to other soft currency customers; (2) hard
currency gas exports nearly double by 1990; and (3) real hard
currency nonoil, nongas exports grow by 1 percent a year.
b Sales not included in reported exports to hard currency countries.
c Assumes sales of 300 tons a year during 1983-90.
d Includes interest receipts.
probably will continue to buy-at least for the next
few years-large amounts of cold rolled sheet steel,
tin plate, and specialty steels, although import vol- 25X1
umes should decline as new pipe and cold rolled sheet
steel production capacity comes on stream in the
second half of the decade. Meanwhile, we expect that
Moscow will emphasize equipment purchases for de-
veloping energy resources. Finally, the stepped-up
investment allocations for industries supporting the
Food Program-agricultural machinery production,
chemicals, and food processing-are likely to give
these industries a larger share in imports of Western
machinery
The USSR is unlikely to be able to finance a signifi-
cant increase in imports from the West without
generating new sources of hard currency (see table 3).
The Soviet debt position is currently easily manage-
able-with a ratio of debt service to hard currency
earnings of under 20 percent-and probably will
remain so for at least the next several years. Moscow
could, if it wished, increase the debt service ratio
substantially before it reached troublesome levels (see
table 4).
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Table 4
USSR: Hard Currency Financing Requirements
Under Alternative Scenarios a
Real Imports Constant
Real Import Growth
(2 percent a year)
1985
1990
1985
1990
26.2
27.4
38.6
27.4
38.6
27.4
33.1
46.4
36.3
54.1
Net debt
10.1
14.2
20.8
19.4
51.8
Debt service ratio (percent)
16.0
18.5
21.5
21.0
38.2
a The overall annual inflation rate applied to all trade except oil and
gas is 5 percent in 1983 and 7 percent during 1984-90. Nominal oil
prices dropped from an average of $32.25 a barrel for the mix of
crude oil and petroleum products exported to hard currency
countries in 1982 to $29.50 in 1983-84 and then rose with the rate
of inflation. Nominal gas prices fall from $145.80 per thousand
cubic meters in 1982 to $137.13 in 1983, then rise at .a rate slightly
higher than that of inflation. Sales of gold rise from 100 tons in
1982 to 200 tons a year during 1983-90 where real imports are held
constant and to 300 tons where real imports grow at 2 percent a
year.
Yet-barring future extraordinary difficulties in the
Soviet economy-we believe it is unlikely that the
leadership would accept a large increase in the debt
service ratio, even if Western lenders were willing to
permit this. Moscow seeks a lessening of economic
dependence on the West over the longer term; it is
painfully aware of the troubles that could arise from
overextended borrowing (Poland looms large in the
Soviet mind); and it probably is mindful of the
example it must set for other CEMA regimes that
might be less concerned than it is over financial
entanglement with the capitalist West. Moscow,
therefore, will probably seek to finance those pur-
chases as much as possible by increasing its hard
currency earnings.
Through the 1980s, the Soviets' ability to accelerate
hard currency earnings depends significantly on cut-
ting oil supplies to Eastern Europe while extracting
greater export commitments from hard-pressed Bloc
regimes. But the possibilities for expanding Soviet
hard currency exports late in the decade and into the
1990s are greater. Apart from the chance that oil
prices will again rise, the main question concerns
West European imports of Soviet natural gas.F_~
The USSR has vast natural gas reserves and the
capability to increase deliveries rapidly beyond al-
ready contracted-for volumes. Some surplus transmis-
sion capacity exists even now. Beyond 1988 the
Soviets will easily be able on very short notice to
expand deliveries to meet foreseeable incremental
West European demand-and at extremely competi-
tive prices. The main constraints on expansion will be
the level of the West Europeans' demand and their
willingness (or lack thereof) to pay a "security premi-
um" for high-priced North Sea gas.
We believe it is unlikely that the Soviets would
need-or be willing-to take a significantly more
conciliatory position on military-political issues in the
hope of landing large new orders for gas later in the
1980s. If such purchases made commercial sense to
the West Europeans, it is highly doubtful that they
would attempt to impose such preconditions. In deal-
ing with Western Europe, the Soviets would be loath
to give the impression of being willing to make
political concessions out of economic need.
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Moscow has long sought expanded Japanese partici-
pation in Siberian energy and resource development.
The Soviets clearly could also use more Japanese
technology (for example, robotics), steel products, and
heavy equipment. For various political and economic
reasons, including unwillingness to agree to further
compensation deals, the Japanese have shown dimin-
ishing interest in recent years in a large-scale expan-
sion of trade with the USSR. We believe that if
Moscow were to offer major concessions on the
Northern Territories issue, Tokyo would reassess its
economic relations with the Soviet Union. However,
there is no evidence whatever to suggest that growing
economic pressures might lead Moscow to set aside
the military and political calculations that have long
hypothesized economic objective-namely, to bring
about an upturn in productivity by 1990. A policy that
did not produce results perceived by Soviet consumers
as true improvements could simply exacerbate present
dilemmas of resource allocation and growth
Internationally, High Consumption could imply a
relatively more moderate policy. There might not
need to be quite as much pressure applied to Eastern
Europe to allocate resources for military purposes or
to trade on disadvantageous terms with the USSR.
Thus the prospects for noncoercive stabilization in this
critical region might be enhanced. The attempt to
increase imports of foodstuffs and consumer goods
from the West might be accompanied by somewhat
inspired its intransigence on this key issue.
Impact of Alternative Economic Scenarios
We have assumed so far that the Soviet leadership
would pursue a balanced Cost Avoidance strategy.
However, if it chose to follow one of the other
scenarios, what might the effects be?
High Consumption
If the Soviets decided to continue to hold military
procurement levels flat throughout the 1980s, they
probably would spread the shortfalls among the mili-
tary services, although making them somewhat deeper
in general purpose forces, especially ground forces.
Outlays for general purpose forces are currently
larger than those for strategic forces, and they take up
more of the defense budget and more of the energy,
manpower, and key material resources needed by the
civilian economy. Unlike strategic weapons produc-
tion, production of general purpose weapon systems
competes much more directly with production of
equipment for sectors scheduled for further boosts in
investment-transportation, agriculture, and manu-
facturing. Even with flat military procurement, the
level of expenditures is so high that Soviet military
forces would continue to grow throughout the 1980s.
It is not clear that under present conditions increased
production of consumer goods would lead to higher
labor productivity. Therefore, we cannot tell whether
the High Consumption scenario would achieve its
less assertive behavior in the Third World.
Of all the scenarios, High Consumption would proba-
bly most polarize the Soviet political elite-advocates
of internal accommodation and external relaxation
ranged against advocates of a hard line: both internal-
ly and in foreign policy. Adoption of a High Con-
sumption strategy might be impossible without a
major shakeup in the Politburo and formal proclama-
tion of a new general party line.
High Defense
A High Defense strategy, on the contrary, would
entail more coercive pressure on the Soviet population
but probably less tension within the political elite. We
believe that during the plan period 1986-90, the
regime could handle the projected average annual
decline of 0.3 percent in per capita consumption
without seriously risking mass unrest among the
population, although growth in labor productivity
would probably suffer further erosion. Such a decline
in consumption could not continue indefinitely, how-
ever, without provoking a crisis in relations between
the regime and Soviet society.
Externally, Eastern Europe would bear the brunt of
the High Defense strategy. Not only would pressures
for higher defense spending and deliveries of goods
from Eastern Europe be stepped up, but Soviet oil
deliveries would be severely cut back. This move
would depress living standards in the region and
increase the likelihood of unrest and political
instability.
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Paradoxically, in view of its ultimate aim, the High
Defense strategy-which would necessarily require an
internal intensification of anti-Western propaganda-
would also require an expansion of trade ties with the
West to acquire high technology. A higher share of
Soviet oil exports would have to go to the West to pay
for larger imports of machinery and equipment. In
keeping with the rationale for High Defense, however,
this drive to expand trade would probably be accom-
panied by still more active efforts to split the Atlantic
Alliance. Whether Western Europe and Japan would
accommodate such an expansion of trade in the face
of a sudden acceleration in Soviet military spending
would probably depend greatly on circumstances-
including Western awareness that this acceleration
was occurring. The search for hard currency would
also give Moscow an even greater interest in exploit-
ing conflicts in the Third World so that it could
promote arms sales.
The High Defense strategy would not involve any
radically new alignment of forces within the Soviet
political elite and could be justified persuasively in
terms of "State interests." Of these three alternative
scenarios, it would therefore probably be least likely
to provoke deep splits within the leadership.
High Growth
The High Growth strategy would have roughly the
same internal and external effects as the High De-
fense strategy. However, it might be somewhat less
likely to undercut the morale of the labor force.
Because this strategy would be publicized not by
playing up the immediate Western military/political
threat but by stressing the strategic importance of
promoting general economic might, it would be com-
patible with a less hostile propaganda posture toward
the United States.
From a political standpoint, the High Growth strategy
would combine the political deficiencies of both of the
other two alternative scenarios-zero growth in allo-
cation for the military and heavy pressure on the
consumer-without appealing fundamentally to any
major alternate constituency. Its main attraction for
the military-the prospect of an economic-technologi-
cal base for force expansion in the 1990s-would,
perhaps, be sufficiently compelling to preclude the
profound divisions within the leadership that we
would expect under the High Consumption scenario.
Highly Unlikely Effects
Under any of the scenarios that we have described, we
believe that the chances are extremely slight that, by
1990, the economic slowdown will:
? Precipitate widespread popular unrest in the USSR.
? Pave the way for either significant liberalization or
a Polish-style militarization of the regime.
? Bring to power a leadership stratum with signifi-
cantly different foreign policy aims.
? Compel the Soviet leadership to introduce major
elements of a decentralized socialist market econo-
my like that of Yugoslavia or even Hungary-with
all the possibilities for political unraveling or reallo-
cation of power this might entail.
? Force an absolute reduction in military spending or
a major change in the disposition of military forces
(for example, reversal of the buildup against China).
? Render the USSR substantially more vulnerable to
Western economically based political leverage than
it is today.
? Drive the leadership to accept arms control agree-
ments it would find basically unacceptable on mili-
tary or political grounds.
? Motivate the Kremlin to undertake high-risk adven-
tures abroad that are designed to distract an unhap-
py public or produce economically beneficial geo-
strategic breakthroughs.
? Lead Moscow to seriously reduce assistance to
Communist states (Cuba, Vietnam, Afghanistan) or
other Marxist clients (Angola, Mozambique, Ethio-
pia, Nicaragua) in the Third World.
? Constrain Moscow to reject all requests for econom-
ic assistance from strategically situated old or new
LDC clients.
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But if the growth slowdown is unlikely to induce such
profound changes in Soviet behavior, it will neverthe-
less shape Soviet affairs in ways that do bear signifi-
cantly upon US concerns.
Challenges to the United States
Soviet responses to the slowdown of economic growth
are likely to accentuate already existing challenges to
US interests in three areas: maintenance of the
Western alliance, stabilization of the Middle East,
and arms competition among LDCs.
The need to significantly increase trade with the West
under all scenarios except High Consumption will
lead Moscow to redouble efforts rooted in political
and military objectives to split Western Europe and
Japan from the United States. Its first aim will be to
undercut any united Western trade policy that re-
stricts Western exports or credit to the USSR. The
Soviets will work hard to exploit and widen existing
differences between the United States and its allies
over East-West trade policy.
If world energy supplies were to worsen appreciably or
Western economic growth accelerate, Western Eu-
rope might become more interested than it presently is
in expanded Soviet natural gas deliveries. This situa-
tion would create a new dilemma for the United
States in the second half of the 1980s. A second
dilemma might result from a possible gradual expan-
sion of Western lending to the USSR, following a
Kremlin decision to allow at least a moderate rise in
the USSR's debt-service ratio.
With or without the slowdown in economic growth,
the United States would continue to be confronted by
a strong Soviet challenge in the Middle East in the
1980s. But economic needs will intensify Soviet ef-
forts to expand commercially profitable relations
there. Moscow will seek to extend trade relations with
the region's more conservative states and may attempt
to use talks with OPEC as a means for broadening its
contacts. While doing so, Moscow might be tempted
by economic motives to covertly encourage a reduc-
tion in deliveries of Middle East oil to the world
market to raise the price of oil and increase Soviet
hard currency earnings-provided this did not seri-
ously affect the USSR's capacity to earn hard curren-
cy from arms sales to customers dependent on Middle
East oil money, nor obviously threaten to drive West-
ern supply prices of Soviet imports above acceptable
levels. Moscow might attempt to reduce deliveries by
fanning interstate conflicts within the region, backing
subversion, or supporting expanded terrorist activities.
Although we believe that the chances are greater that
military and political calculations would lead the
Kremlin to eschew such a strategy, its risk neverthe-
less would be far less than that of an attempted
forcible acquisition of oil
The Soviets' main lever for maintaining: or increasing
its influence in the Third World is its role as an arms
supplier. The need to increase hard currency earnings
provides an additional impetus to Moscow's efforts to
exploit tensions and to sell arms and other military
assistance to LDCs-not only in the Middle East, but
in Africa and Latin America, too.
Opportunities for the United States
The Soviet slowdown in economic growth, however,
should also broaden various potential opportunities for
US action-in information policy, trade, arms negoti-
ations, Eastern Europe, and the Third 'World.
More so than in the past three decades, Soviet
economic progress in the 1980s-depending as it does
on improved labor productivity-will be peculiarly
sensitive to the state of public morale. At the same
time, Moscow will be less able to satisfy aspirations
for a rise in living standards and more driven to justify
the need for sacrifice with mendacious propaganda
about the US military threat. Thus, the regime will be
vulnerable to information that:
? Reinforces the perception that growth in living
standards has slipped in comparison with what it
"ought" to be, as measured not by Western criteria
but by the yardsticks Soviet citizens themselves
privately employ.
? Strengthens awareness of liberalizing solutions to
Soviet economic problems that are rejected by the
regime for narrow political reasons.
? Counters the regime's efforts to blame the West for
high Soviet military spending.
? Provides a detailed appreciation of the cost of Soviet
involvement in the Third World.
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In bilateral trade relations, the growth slowdown will
not offer the United States fundamental opportunities
to exercise political leverage against Moscow during
the rest of the 1980s. Neither the carrots nor the
sticks available to Washington are likely to be that
potent. But the slowdown will lead the Soviets to seek
to continue to obtain US state-of-the-art technology
in such key areas as food production and energy.
Under conditions of improved relations between the
United States and the USSR, Soviet dependence on a
narrow range of oil production equipment-especially
high-capacity submersible pumps-conceivably could
be translated into a limited degree of political lever-
age.
In military spending, what the Soviets have reason to
most fear is an accelerated high-technology arms race
with the United States. If the Soviets had to substan-
tially increase military spending, the consequences for
economic growth over the longer term and for con-
sumer well-being even in the shorter term would be
painful. Soviet leaders assert at every opportunity
that, if they have no alternative, they will compete
with the United States whatever the cost. But arms
agreements that appeared at least tolerable militarily
would give Moscow such an alternative. We believe
that the slowdown in economic growth increases
Moscow's interest-in principle-in stabilizing and
capping open-ended high-technology arms competi-
tion with the United States, particularly in space-
based strategic defensive forces.
Moscow's response to the growth slowdown will al-
most certainly make Eastern Europe the locus of
greatest potential vulnerability to US economic and
political initiatives in the 1980s. There are limits to
the extent to which Moscow can simultaneously cut
its costs in Eastern Europe and compel the East
Europeans to reduce trade with the West, without
precipitating violent new crises in the Bloc. The Soviet
leadership may miscalculate these limits. Even if it
does not, the East European regimes do not see
greater CEMA "integration" as the solution to their
critical economic problems and will intensify their
efforts to expand trade with the West as much as their
economies permit. As living standards stagnate or
decline, anti-Russian sentiment is likely to increase
among the peoples of the region, who will continue to
look to the West for information and support for their
own national aspirations.
Finally, the impact of the growth slowdown on re-
sources available for foreign economic assistance will
also strengthen certain opportunities for US action in
the Third World. Moscow will be even less able than
it already is to compete with the United States in
rendering economic and technological aid to many
Third World countries, although it will continue to
play the game with a limited number of clients like
India. From the Soviet standpoint, the most worri-
some targets are probably Marxist states in which
Communism has not yet been irreversibly institution-
alized, which are under internal pressure, and which
have flirted with the idea of Western economic aid-
such as Angola, Mozambique, Ethiopia, and South
Yemen. As these countries' needs for assistance
mount, their leaders will probably grow still more
dissatisfied with the Soviet failure to provide mean-
ingful aid and more tempted to turn to the West for
help-even at the risk of having to make political
concessions, which they will stoutly resist. To a lesser
extent, and over a longer term, the same kinds of
pressures are likely to intensify in the Communist
regimes of Cuba and Vietnam.
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