FINANCING SOVIET IMPORTS FROM THE DEVELOPED WEST

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700050011-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 19
• Document Creation Date: December 20, 2016
• Document Release Date: March 10, 2006
• Sequence Number: 11
• Publication Date: February 1, 1973
• Content Type: IM

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Secret
DIRECTORATE OF
INTELLIGENCE
Intelligence l~ilemorandum
Financing Soviet Imports from the Developed Vest
Secret
ER IM 73-13
February 1973
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
February 1973
INTELLIGENCE MEMORANDUM
FINANCING SOVIET IMPORTS
FROM THE DEVELOPED WEST
1. The Soviet decision to import record quantities of grain in
1972-73 has again focused attention on the USSR's ability to finance these
purchases and to continue to increase its imports of advanced Western
machinery and equipment, as well as to service its steadily growing debt
to the West. This memorandum examines the means available to the USSR
to finance its hard currency deficit in trade with the West and includes
a discussion on the role of gold and a review of the availability and terms
of Western credits.
2. Massive imports of Western grain and other goods during 1973
are likely to result in a record Soviet hard currency deficit estimated at
roughly US $1.8 billion, which will be financed by a combination of Soviet
gold sales and Western credits. The USSR will be importing about
$1.6 billion in grain -about $1 billion more than in 1972 -and most
of the 1973 deliveries will take place in the first half of the year. In addition,
lazge quantities of sugar and a record volume of Western plant and
equipment will be imported in 1973. To cover the deficit, the USSR will
use at least $400 million in Commodity Credit Corporation (CCC) credits
to finance its grain imports and roughly $500 million in Western
government-guaranteed credits to help finance imports of machinery and
equipment, and it may sell about $400 million in gold. Moscow should
Note: This memorandum was prepared by the Office of Economic
Reseazch.
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have no difficulty financing the remaining deficit -about $500 million -
by other means, chiefly short-and medium-term non-guaranteed credits. Also
available to the USSR are some unused credits of the International Bank
for Economic Cooperation (IBEC) of the Council for Mutual Economic
Assistance (CEMA), which during 1972 borrowed or received commitments
for medium-term Eurodollar funds of at least $200 million.
3. The United States has emerged as an important creditor of the
USSR, extending loans of more than $800 million in 1972, compared with
the less than $10 million in earlier years. The $500 million CCC line of
credit will finance some 30% of 1972-73 Soviet grain imports from the
West. Moreover, many US banks and finance houses are exploring ways
in which they can increase their role and perhaps take the lead in financing
Soviet imports from the West, especially in the expected dramatic increase
in Soviet imports from the United States itself.
4. The USSR attaches special significance to trade with the industrial
Western countries because of its needs for Western equipment and
technology and other goods that are in short supply. Among the latter,
grain has become particularly important. The USSR is again importing large
quantities of Western grain to offset harvest shortfalls, as it did in 1963-65.
5. The USSR's failure to generate sufficient hard currency earnings
from exports has led to persistent deficits in the Soviet hard currency
balance of trade (see Table 1). The deficit appazently rose in 1972 anal
will increase sharply in 1973 because of the large quantities of Western
grain contracted for in 1972. Imports of 28 million tons of grain, worth
$1.8 billion, have been contracted for and were scheduled for delivery in
1972-73, with the bulk of the deliveries occurring in 1973. The USSR rr~ay
contract for additional grain in 1973 and also is expected to import about
$150 million in sugar. Soviet imports of machinery and equipment are also
expected to rise above the 1972 level. Tlie USSR will thus be faced ~~vith
a bard currency deficit in 1973 much greater than in any previous year -
perhaps $1.8 billion.
6. Until 1966 the USSR relied primarily on gold sales to fir-ance
its hard currency deficits. During 1960-65, for example, the USSR, sold
more than $2 billion worth of gold to finance its trade deficit with the
West. Dwindling Soviet gold reserves and the greater availability of Western
credit resulted in increased Soviet use of Western government-guaranteed
medium-and long-term credits; which replaced gold sales as the chief element
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Table 1
Soviet Httrd Currency Trade Balance
Milllo~r US $
Exports
Imports
Balance
1960
739
1,018
-279
1961
86G
1,059
-193
1962
912
I ,179
-267
1963
969
1,279
-310
1964
1,011
1,544
-533
1965
1,331
1,546
-215
1966
1,479
1,746
-267
1967
1,688
1,604
+84
1968
1,896
2,004
-108
1969
2,109
2,422
-313
1970
2,182
2,6J8
-516
1971
2,646
2,955
-309
1972a
2,900
3,500
-600
1973b
3,200
5,000
-1,800
a. Preliminary estimate.
b. Projected.
in financing the Soviet deficit with the West (see the chart). During 1966-71
the USSR drew down about $3.1 billion in such credits, most with an
average maturity of about eight years. As a result, Soviet medium -and
long-term indebtedness increased from less than $400 million at the end
of 1965 to more than $2 billion by the end of 1971. Most of the drawings
have been in support of imports of plant and equipment. The USSR also
has increasingly used short-term credit facilities available in Western money
markets.
7. Beginning in 1972 the USSR resumed large-scale gold sales -
estimated at $250 million to $300 million - to help finance a~, deficit that
is estimated to have reached at least $600 million. Government-guaranteed
credits also were an important means of financing the deficit ~- as they
were in earlier years -and amounted to more than $300 million (net).
Ir. addition, the USSR was active in Eurocurrency markets, especially
seeking medium-term non-guaranteed credits.
8. Last year's large Soviet gold sales are reminiscent of those in
1963-65, when the USSR also had to import massive quantities of grain
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Financing the Soviet Deficit in Trade
trade ` Estimated mediurtr and
danrit f long-term net credits
67
'Sales for 1960.68 are based on a value of S35 per troy ounce;
for 1969.72, sales are based on the prevailing market rates.
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from the West. During those three years, Soviet gold sales averaged
$511 million per year and Soviet gold reserves fell sharply (see Table 2).
Impact of Deficit Financing on Soviet Gold Reserves
Havd G~arency
7Yade Deficit
Cold Sales .
Gold Reserves
(MlUton US $J
Million U5 ~
Metric Tonsa
(Metric Tons)
1960
279
149
132
2,200
1961
193
310
275
2,020
1962
267
239
212
1,905
1963
310
523
465
i,550
1964
533
520
462
1,205
1965
215
49C
435
895
1966
267
45
40
990
1967
... b
10
9
1,125
1968
108
10
9
1,265
1969
313
....
....
1,420
1970
516
4
3
1,585
1971
309
22
19
1,750
1972c
600
250-300
150
1,830
a. Calculated at the rata of S35 per troy ounce for sales in 196au8 and at prevailing market rates
during 1969-72.
b. The USSR had a trade surplus of S84 mllllon in 1967.
c. Preliminary estimate.
Then during 1966-71, Soviet gold sales averaged $15 million per year. By
relying mainly on credit to finance its deficits with the West, the USSR
was able to double the size of its gold reserves from its 19661eve1 to about
1,750 tons at the end of 1971, and now produces gold (nat of domestic
consumption) at the rate of about 200 tons per year. In 1972, however,
the USSR may have sold as much as 150 tons of gold, and possibly more.
The USSR first entered th~~ market in March 1972 in a manner calculated
to avoid depressing the price; sales averaged only about 1 ton per day
through May. Sales resumed in July at roughly the same rate so that by
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the end of September about 1 ~+0 tons wer? sold. Reduced supplies of
South African gold and careful selling practices enabled the USSR to dispose
of its gold at high free market prices, averaging about $52-$62 per troy
ounce, which yielded about $250 million to $300 million in revenue.
It can be said with some certainty that East West trade has
not been hindered for the want of adequate tnance. It
therefore stands to the credit of those people, on both sides,
who so ably organized the appropriate machinery to provide
the necessary finance. As you know, a great part of the business
is financed in convertible currency; and here, I would like to
pay a special tribute to Western money markets, which have
shown considerable flexibility in adapting to the situation.
~ w> 7tir A. Drovossenkov
Director, Moscow Narodny Bank
From an address given to the
American Management Association
in N~tw York on 11 March 1969
9. Since the mid-i960s, Western medium-, and long-term
government-guaranteed credits have been the chief element in financing the
Soviet deficit with the West, and they a,~e lik?Iy to remain so in spite of
the recent large-scale gold sales by the U~'SR. There is no indication that
the recent grain crisis has had any impact on Soviet policy toward long-term
borrowing. In the early 1960s, Western credit facilities were limited to the
short term and medium term and served generally to augment earnings from
gold sales. Now, however, earnings from gold sales a*.z used to augment
Western credit facilities. Most of the present iinan.c:ing comes from the large
commercial banks in Western Europe, which ira turn genera'~y obtain
political and economic risk insurance from their respective governmental
export credit and insurance institutions.t For example, banks in rrance,
Italy, West Germany, and the United Kingdom together are estimated to
finance about three-fourths of the USSR's total hard currency indebtedness.
In recent years, Japan also 'tas emerged as an important supplier of credit
and, together with the United States, is likely to become an increasingly
important source of credit ?.o the USSR. The United States played a very
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minor role in financing Soviet imports, until 1972, when Export-Import Bank
and CCC facilities were made available to the USSR.
10. Until 1964 the USSR was unable to get anything better than
medium-term credits (i.e., up to five years) from the West. The breakthrough
came in 1964 when the United Kingdom. breached the Berne Union
guidelines calling for afive-year ceiling on export credits to Communist
countries and provided the USSR with a $2P0 million line of credit with
a repayment period of up to 15 years. (In practice, however, most long-term
credits extended to the USSR mature within eight years.) France and Italy
quickly met the British challenge and provided credit facilities with similar
provisions. Not only did competition for Soviet business lead to the general
abando~lment of the old Berne Union guidelines, but it also brought on
a series o~f agreements providing interest rates below the market rate, usually
subsidized by the Western governments. Table 3 shows the extent to which
interest rates are subsidized in France, Italy, and the United Kingdom.2
Selected International In!erest Rates
Commercial Rate
as of 15 Nov 72
Rate Applicable
to the l1SSR
France
7.10 - 7.70
6.25a
Italy
7.00 - 7.75
6.00
- 6.S~b
Japan
4.50 - 7.00
5.50
- 6.OOe
United Kingdom
8.C0 - 11.00
6.OOd
United States
5.75 -6.75
6.OOe
West Germany
8.75 - 9.25
6.00E
a. For projects more than $63 million, an interest rate of 6.059'o is applicable
to the USSR. tin 15 September 1972, France reduced its general talcs or sellers'
credits with seven or mono years duration from 6.67% to 6.35~Y, and fcr buyers'
credits with seven years or more duration from 6.8386 to 6.5~. 'the buyers'
credit rates made available to the USSR in 1970 and rcaft`umed in June 1972 -
6.05%-6.25% -are still more favorable.
b. Applicable rate for the $129 million line of credit for purchases for the
Kama truck plant.
c. Applicable rates for S29 million in credits extended t:, cover presslines for
Knma.
d Export Credit Guarantee Department rate for government-guaranteed credits.
e. Export-Import Bank rate.
f. Involving an "interest subsidy device," the subsidy paid by the manufacturer
rather than by the government. See paragraph 24.
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11. Western nations have varied their methods of subsidizing credits
to the USSR as well as to other Communist countries. The governments
of Italy and France accomplish this by direct subsidization of the interest
rate and by rediscounting at low rates the commercial loans advanced by
the private sector. The United Kingdom indirectly subsidizes interest fates
by allowing private banks to include some of their guaranteed export paper
as a certain percentage of their statutory reserves. Since these funds
ordinarily are sterile - i.e., cannot earn any interest -the private banks
are able to offer lower than market rates for a certain percentage of their
government-guaranteed loans. The West German government plays no role
in financing credits, but it can affeci the ability of the commercial banks
to rediscount their loans on the commercial market because rediscounting
at favorable rates requires a government guarantee on the credit.
Nevertheless, many German banks and businesses have extended and
continue to extend short-term and sometimes medium-term unguaranteed
credits to the USSR. Japan dces not subsidize export credits through
rediscounting of commercial bank financing but, like the United States,
uses low-interest Export-Import Bank financing for a portion of export
credits.
12. The USSR has made extensive use since 1965 of Western
government-guaranteed credits to finance its imports of capital equipment
from *.he West. For example, during 1960-65, drawings on Western credits
averaged roughly 13% of the USSR's imports from hard currency countries.
During 1966-72, however, the average increased to about 24%. The level
of indebtedness also leas risen substantially, reaching more than $2.4 billion
at the end of 1972 (see Table 4).
13. Except for the recent three-year CCC credits in support of US
grain sales to the USSR, Soviet drawings on Western government-guaranteed
medium- and long-term credits generally are linked to deliveries of capital
goods. The continuing increase in Soviet orders for Western machinery and
equipment is a clear indication that Western credit facilities will be used.
Soviet orders for Western plant and equipment placed in 1972, for example,
totaled about $1.7 billion, compared with $841 million in 1971 and
$514 million in 1970.
Self-Liquidating Credits
i~:. The debt service has grown (see Table 5) as a result of the
increased use of Western credits. Because the USSR has found it difficult
to expand exports to pay for increasing imports from the West, it has pressed
for and concluded several contracts calling fnr repayment of Western credits
(usually government-guaranteed) with the products of the installation built
with these credits. Such contracts now number ahalf-dozen, with several
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Table 4
Estimated Soviet Drawings and Scheduled Repayments
on Western Govennment~uaranteed Medium Term and Long-Term Credits
Estimated
Scheduled
Net
Outstanding
Debt at the End
Drawings
Repayments
Interest
Credits
of the Year
1959
60
12
0
48
48
1960
125
37
2
86
136
1961
165
70
6
89
231
1962
180
106
10
64
305
1963
140
130
14
-4
315
1964
170
147
IS
8
338
1965
190
149
~17
24 ~
379
1966
275
149
20
106
505
1967
.305
152
29
124
65II
1968
510
215
38
257
953
1969
630
270
57
303
1,313
1970
700
319
79
302
1,694
1971
700
387
96
217
2,007
1972a
900
457
106
337
2,450
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972b
Hard Currency
Exports Debt Services
(Million US $J (Million US $J
Debt Service
as a Percent
of Hard Currency
Exports
739
39
5
866
76
9
912
116
13
969
144
IS
1,011
162
16
1,331
166
12
1,479
169
11
1,688
181
11
1,896
253
13
2,109
327
16
2,182
398 ~ ,
18
2,646
483
18
2,900
563
19
a. Payments of principal and interest.
b. Preliminary estimate.
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more under discussion.3 The gas-for-pipe deals with West Germany, Austria,
and Italy are examples of this type of financing.
15. The proposed US-Soviet liquefied natural gas project and the
Japanese-Soviet projects for developing natural gas and oil resources in
Siberia and the Soviet Far East exemplify the potential size and scope of
such projects, the financing of which will run into the billions of dollars.
West Germany, for example, just concluded in principle another
self-liquidating credit arrangement with the USSR that may allow for the
exchange of as much as $625 million worth of machiner;~ and equipment
for an iron and steel complex in exchange for eventual Soviet deliveries
of iron pellets. A consortium of West German banks reportedly will provide
the long-term financing required for this project. From ttre Soviet point
of view, the chief attractiveness of this type of arrangement is that
repayment is assured by deliveries. Moreover, significant foreign exchange
earnings will accrue from exports of the commodity continuing beyond
the amortization period. Also, self-liquidating credits find favor with the
Soviet planners because they eliminate so much of the uncertainty associated
with attracting finance and searching for and developing export markets.
There also is the possibility that the USSR may eventually receive
self-liquidating credits with longer term financing (e.g., up to 20 years) that
it has pressed for in connection with its projects for natural resource
development. Such longer-term financing would allow the USSR to enlarge
significantly its credit purchases from the West -and hence its debt -
without aggravating its short-run payments position. In 1969, Soviet
drawings on self-liquidating credits accounted for 13% of total Soviet
drawings on Western credits, and in 1970-71 they accounted for about
one-third.
Short-Term and Medium-Term Credits
16. Aside from government-guaranteed loans, the USSR has been
making greater use of short- and medium-term non-guaranteed credits to
meet its financing requirements. The USSR is estimated to have rolled over
$300 million to $500 million in such credits in the past year and is likely
to tap the short-term and particularly the medium-term non-guaranteed
market for about $500 million in 1973 to help finance its projected record
deficit. The availability of the CCC line of credit makes it unnecessary for
the USSR to seek Bach credits beyond tlus amount. The Soviet banks in
Western Europe, especially the Moscow Narodny Bank (MNB) in London,
have been particularly active in attracting such funds for the US5R. Over
the last few years, for example, the Soviet-owned banks have been
instrumental in arranging medium-term and even long-term Eurodollar and
Eurocurrency credits for the USSR through their correspondent banks,
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which include just about every m~,ior bank in Europe, the United States,
?and Japan. Some of them, who are recognized leaders in financing East-West
trade, include the Dresdener Bank and the Deutsche Bank in West Germany;
Credit Lyonnais and Societe Generale in France; Banca Commerciale Italiana
in Italy; and Union Ban>_ of Switzerland and Swiss Credit Bank in
Switzerland. In the United States, ranking correspondent banks, which are
becoming increasingly active in financing East-West trade, include the Bank
of America and Chase Manhattan (both of which have set up branches in
Vienna to promote their own efforts in East-West trade) and the First
National City Bank of New York. Among their correspondent banks in
Japan are Mitsui Bank, Mitsubishi Bank, and Nippon Kangyo Bank. The
Soviet-owned banks also finance directly some Soviet imports from the West,
although the USSR is usually a net creditor to its banks in the West. iFor
a discussion of the Soviet-awned banks in the West, see paragraphs 18-19.)
17. Tlie USSR also is able to attract short and medium-term funds
through its own correspondent relations with Western banks. In 1972, for
example, the Foreign Trade Bank of the USSR (Vneshtorgbank) was al;le
to attract unusually long time deposits from a number of Western bankc_
The S'~viet-Owned Banks in the West
18. The USSR owns banks in four major European financial centers:
MNB in London; Banque Commerciale pour 1'Europe du Nord (BCEN) in
Paris; Wozchod Handelsbank in Zurich; and Ost-West Handelsbank in
Frankfurt. The combined assets of these banks exceed $2 billion, about
95% of whic}i is concentrated in the Paris and London banks. The London
bank also has branches in Beirut and Singapore. These banks ~ ~ an
important factor in financing Soviet as well as East European trade with
the West. They are a major source of funds for the USSR, although the
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USSR often is a net creditor to the banks. They have established excellent
reputations in Western currency markets, which enable them to attract
Eurocurrency deposits at prime rates and tap other outside sUUrces of funds.
19. The financinb cf Soviet imports by these banks is similar to that
offered by any large Western bank handling international payments. Quite
often they participate with other Western banks in financing Soviet imports
or, among themselves, will jointly finance Soviet imports.
20. Because of their limited resources, the Soviet-owned banks
generally restrict themselves to short-term financing. MNB, for example,
handles a .large volume of documentar credits for the USSR erha s on
the order of $100 million a year.
The Emerging Role of the United States
21. Until 1972 the United States played a very minor role in financing
Soviet trade. Prior to 1972, US financing of Soviet imports -reflected
in reported claims of US banks and other businesses against the USSR -
was $10 million or less, all on a short-term basis. In sharp contrast, during
1972, more than $800 million in US short-, medium-, and long-term credit
facilities were made available to the USSR.
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22. CCC credits, committed in mid-1972 in support of US grain sales
'to the USSR, account for more than Half of the US credit facilities made
available to the USSR in 1972. The $500 million CCC line of credit is
a medium-term facility which may be drawn upon for afive-year period
but which calls for repayment of principle in three equal annual installments
plus accrued interest of 6.125% per year. This compares favorably with
the 7% interest being charged by MNB and BCEN for their financing of
Soviet wheat purchases from Australia.
23. In October 19'72 the President authorized the Export- Import
Bank of the United States to participate in the financing of Soviet imports
of US plant and equipment. Shortly thereafter, it was announced that the
Export-Import Bank made a preliminary commitment to provide long-term
credits worth some $200 million in support of US exports for the Kama
truck plant and a plant to manufacture tableware. In addition to the US
Government guarantee that the Export-Import Bank provides -which in
itself is valuable because it allows the banks to rediscount then notes at
more favorable rates -the Export-Import Bank also participates directly
in the financing. For example, the Export-Import Bank will finance up to
45% of value of the US export at a fixed rate of 6%. This is important
for US balks because, in spite of the generally higher market rates that
they must charge for their end of the financing, the resulting effective
composite rate (about x.15% to 6.25% under current market conditions)
makes their credit offers fully competitive with offers by other developed
Western nations. Moreover, the Export-Import Bank holds in its own
portfolio notes which mature toward the end of the financing period, thus
allowing the private banks to be repaid first.
24. Having whetted their appetites for increased sales to the USSR,
US businesses and banks have gone ahead and provided long-term export
credits to the USSR without Export-Import Bank participation. To ensure
a reasonable rate of return, they have resorted to the time-honored West
European device of a "variable interest subsidy" paid by the e uipment
supplier to the bank financing the deal.
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Problems and Prospects
26. The USSR faces a record hard currency deficit in 1973 as a result
of the grain purchases and an expected i~;crease in imports of Western
machinery and equipment. To finance this expected deficit, the USSR will
use a combination of gold sales and Western credit facilities. Even though
South African gold sales will increase, the USSR should be able to sell
up to an estimated 200 tons of gold in 1973 at prices near $60 a:t ounce.
Stich sales would earn the USSR roughly $400 million. Because South
African gold sales are not expected to increase substantially until the second
half of 1973, the USSR should be in a better position to market its gold -
perhaps at higher prices -during the first half of the year, when payment
for most of the grain shipments will fall due. But, if grain deliveries are
delayed because of US and Soviet transportation bottlenecks, the Soviet
payments may be stretched out over a longer period of time. The USSR
also has available some $400 million in CCC credits that it can use in 1973
(about $100 million of the $S00 million provided had already been used
in 1972). The USSR probably will seek to finance some of its grain
purchases by refinancing short-term letters of credit through bank loans
(i.e., roll over the short-term credits), by borrowing for the medium or
long term in the Eurocurrency market, and possibly by drawing on IBEC's
facilities.
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29. Despite the current need for short-term and medium-term finance,
the USSR is exploring other avenues more basic to its long-term financial
needs. The USSR reportedly is interested in the possibility of floating bond
issues. At present, however, US investors are precluded from investing in
Soviet bond issues by provisions of the Johnson Act. Some West European
investors also appear to be wary of getting involved, for fear of getting
an unfavorable precedent because of the unsettled Tsarist-government debts.
15
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