INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88-00798R000300070006-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 60
• Document Creation Date: December 22, 2016
• Document Release Date: July 14, 2011
• Sequence Number: 6
• Publication Date: March 14, 1986
• Content Type: REPORT

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Intelligence 25X1
Weekly
International
Economic & Energy
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14 March 1986
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International
Economic & Energy Weekly
iii Synopsis
1 Perspective-Issues for the Tokyo Summit 25X1
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3 Summit Issues: Exchange Rates, Trade, and Growth 25X1
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9 Libya: Reaction to US Sanctions
13 South Africa: Black Unrest Clouds Economic Prospects
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17 The Soviet Consumer Goods and Services Program 25X1
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21 Soviet-East European Trade Plans for 1986-90 25X1
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Energy
International Finance
International Trade
Global and Regional Developments
National Developments
Comments and queries regarding this publication are welcome. They may be
directed to Directorate of Intelligence,
Secret
DI IEEW 86-011
14 March 1986
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International
Economic & Energy Weekly 25X1
Synopsis
1 Perspective-Issues for the Tokyo Summit
The focus of the agenda for the Tokyo Economic Summit, on 4-6 May, has not
yet emerged clearly. Much will depend on the participants' responses to
positive US signals on international monetary reform, bilateral trade disputes,
interest and exchange rates, oil prices, and the global debt situation.
3 Summit Issues: Exchange Rates, Trade, and Growth
We estimate that a continuation in the fall of the dollar during 1986-87 would
dampen the relatively strong domestic economic expansion now taking place in
the Big Six economies. Most Big Six governments do not want the dollar to de-
preciate further and will probably urge at the Tokyo Summit that action be
taken to stabilize currencies at or near current exchange rates.
There is a growing political debate in Mexico over suspending payments on the
country's $98 billion foreign debt. President de la Madrid for the time being is
resisting a radical approach advocated by leftist opposition parties and
independent labor unions.
9 Libya: Reaction to US Sanctions
US sanctions have disrupted some Libyan oil exports by increasing marketing
difficulties and have had some adverse impact on agriculture and selected
development projects. Nonetheless, US actions probably have bought Qadhafi
some respite from antiregime activity that had spread to his security forces and
his inner circle of advisers by the end of last year.
13 South Africa: Black Unrest Clouds Economic Prospects
The violence that has plagued South Africa's black townships for the past 18
months and resulted in over 1,200 deaths has undermined investor confidence
in the country and delayed economic recovery. Long-term economic prospects
appear poor so long as continued unrest, combined with the impact of likely fu-
ture economic sanctions, progressively isolates South Africa from international
investment and credit.
iii Secret
DI JEEW 86-011
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17 The Soviet Consumer Goods and Services Program
The long-awaited Consumer Goods and Services Program for 1986-2000 lays
down ambitious goals but promises more than it can deliver
21 Soviet-East European Trade Plans for 1986-90
Plans call for trade between the Soviet Union and Eastern Europe to grow
more slowly in the next five years than at any time since the 1960s. The
slowdown in trade projected through 1990 reflects, in part, partners' expecta-
tions of slower price increases than in the early 1980s.
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International
Economic & Energy Weekly
Perspective Issues for the Tokyo Summi;
The third preparatory meeting for this year's Economic Summit was held last
weekend, but the focus of the agenda for the sessions in Tokyo, on 4-6 May,
has not yet emerged clearly. Part of the reason is that the expectations of the
participants may be somewhat lower than for previous summits. In addition,
several meetings, involving many of the same countries and agenda items, will
precede the Tokyo gathering, including an IMF interim meeting, an OECD
Ministerial, and a preparatory meeting on the new trade round.
More important in shaping the summit will be developments over the next six
weeks in areas such as responses to positive US signals on international
monetary reform, bilateral trade disputes, interest and exchange rates, oil
prices, and the global debt situation. Terrorism, narcotics, SDI, or Gorba-
chev's latest arms control proposals could also become major themes.
Paris and Rome applauded President Reagan's request that Treasury Secre-
tary Baker explore once again the usefulness of a conference to consider
improvements to the international monetary system-looking in particular for
greater exchange rate stability. Most discussion focuses on some kind of
reference or target zone system-which, President Mitterrand pointed out, he
has been advocating since 1981. Rome also favors an attempt to create a
European Monetary System-type arrangement encompassing the yen and the
dollar. Bonn and Ottawa have often expressed unhappiness with exchange rate
volatility but, along with London, are extremely skeptical that summit
governments will be able to control exchange rates unless they become much
more willing than at present to subordinate domestic economic policies to
foreign exchange rate or other international economic trends. Tokyo, particu-
larly the Ministry of Finance, argues that such policy coordination is an
absolute prerequisite to exchange rate stability.
The new trade round has been endorsed in principle by all the summit
participants, but some of the endorsements have been less than ringing. Little
more than a restatement of support is likely in Tokyo-in particular because of
French and EC reluctance to move very far or fast on setting agendas or
timetables. Protectionism, unfair subsidies, and market opening will be
discussed, with all three points of the trade triangle-the United States, Japan,
and the EC-taking potshots at the other two. The most serious problems,
however, probably will be papered over in Tokyo-perhaps helped by another
Japanese import promotion package just before the summit.
Economic growth, deficits, and interest rates will once again be on the agenda.
Japan and France had been pushing for a coordinated lowering of interest
rates-coordinated to prevent inordinate downward pressure on their curren-
cies-and they have expressed satisfaction with the nearly simultaneous
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central bank discount rate cuts last week. The French and Italians have also
recommended putting the "locomotive theory" back on the track, focusing it
on West German and Japanese expansionary measures. Bonn, however, has
been reluctant to implement any measures that might retrigger inflation.
Tokyo is putting together a small stimulus package in hopes of forestalling
criticism at the summit. Both Tokyo and Bonn will oppose any suggestion at
the summit that they act in any coordinated way as locomotives
The impact of falling oil prices undoubtedly will be a key point of discussion.
As long as the British and other non-OPEC producers refuse to cooperate with
OPEC by cutting output to hold up prices, however, the issue is unlikely to be-
come contentious. The Japanese are worrying about the negative effects-
fewer incentives for conservation (and thus the possibility of a resurgence of
demand in the future), payments problems for oil exporters, some bank
difficulties, and instability and uncertainty generally. Most other summit
participants, however, appear to want to stress the positive results of the
decline. Of the summit countries, only the United Kingdom is unlikely to
benefit quickly and directly from lower oil prices. Even in Britain's case, gains
will probably outweigh losses relatively soon as its manufactures exports to
other industrial countries pick up and as inflation slows. Canada, a net oil
exporter, but whose exports center on the United States, will almost certainly
ride on US coattails and enjoy a net boost immediately.
The North-South agenda is likely to focus on Secretary Baker's initiative to in-
crease lending to 15 major debtor countries, provided they move toward more
market-oriented economic policies. The other summit participants have ex-
pressed various degrees of cautious support. Obtaining firm agreement to
implement the program, however-particularly given rapidly changing interest
rate and oil market conditions-is likely to be difficult. France, for one, has
criticized the list of potential recipients as skewed toward Latin America-
whose debt is largely owed to the United States-to the detriment, for
example, of African countries with which France is more involved. The LDCs
will try to find a standard bearer (France is the leading candidate) to push for
concessions to ease their debt service burden. Several leading LDCs are also
strongly opposed to including trade in services and investment in the new trade
round; France again is the best candidate to represent LDC interests. In
addition, Tokyo has announced the visit of a special envoy to several Asian
LDCs just prior to the summit, promising that Asian views will be reflected
there. Italy and Canada (although the latter less so under Mulroney) also will
claim some share of the role of LDC spokesman.
As noted, the important themes, or headline grabbers at least, may not yet
have emerged. However, with several thousand journalists looking for head-
lines in Tokyo, it can be virtually guaranteed that they will find them.
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Summit Issues: Exchange Rates,
Trade, and Growth
There are increasing signs that the near 20-percent
trade-weighted decline in the dollar between Feb-
ruary 1985 and March 1986 has begun to hurt
exporters in most Big Six countries. On the basis of
our Linked Policy Impact Model (LPIM), we esti-
mate that a continuation in the fall of the dollar
during 1986-87 would dampen the relatively strong
domestic economic expansion now taking place in
those economies. In addition, a falling dollar would
increase protectionist pressures in Western Europe
and Japan and make preparations for the new
GATT round more difficult. Most Big Six govern-
ments do not want the dollar to depreciate further
and will probably urge at the Tokyo Summit that
action be taken to stabilize currencies at or near
current exchange rates. We expect France, Italy,
and possibly Japan to urge more formal arrange-
ments among the major countries to coordinate
exchange market intervention.
Impact of the Strong Dollar
The Big Six economies, as well as others, enjoyed
substantial economic benefits from US growth and
an appreciating dollar following the end of the
recession in 1982. About half the economic growth
in the Big Six during 1983-84 was attributable to
the dollar's rise-16 percent over the yearend 1982
level and 31 percent over the yearend 1981 level-
and to the strong US recovery. Big Six exports to
the United States jumped 43 percent in dollar
terms over the two-year period. At the same time,
the Big Six also benefited from improved export
competitiveness in third-country markets vis-a-vis
US firms hurt by the strong dollar.
Methodology
We used our Linked Policy Impact Model (LPIM)
to estimate the impact on OECD exports and
economic growth of the expansion in US import
demand during 1983-85 and, similarly, the impact
of a 10 percent annual depreciation of the dollar
during 1986 and 1987.
We determined the difference between actual trade
and GNP growth for 1983-85 and the simulated
results for the same variables, assuming no growth
in US imports. For the March-December 1985
period in which the dollar depreciated, we com-
pared the results of a model simulation in which
the dollar remained at its March 1985 level
against the baseline case, which reflected exchange
rate movements through December.
To estimate the impact of a falling dollar over
1986 and 1987, we constructed a baseline forecast
of OECD economic performance, assuming rough-
ly constant exchange rates at January 1986 levels.
Against this forecast we compared the results of a
model simulation in which the dollar fell 10
percent each year for three years against all of the
other OECD countries except Canada. We as-
sumed that the dollar fell of its own accord: no
policy change or other explicit factor led to the
fall. We also assumed that the US-Canadian ex-
change rate remained constant, and that Canadian
export prices did not change. In addition, we
assumed that Japanese exporters cut prices by the
equivalent of 40 percent of the appreciation in the
yen.
The direct effects of US import demand on the Big
Six began to fade in 1985. Although about one-
third of Big Six growth was still attributable to US
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US Dollar: Changes in Trade-
Weighted Value, 1980-86
100
90 1980 81 82 83 84 85 86-
a 1986 data through 4 March.
import demand, our model indicates that the dol-
lar's 13-percent decline from March to December
cut potential Big Six growth by 0.3 percentage
point. Foreign governments are concerned that the
dollar may continue its decline and are prepared to
take action to ease the impact on exporters:
? Tokyo has decided to extend low-interest loans to
small- and medium-sized firms but is leaving
larger companies to decide if they want to cut
profits or market share.
? Bonn views 2.2 deutsche marks to the dollar as a
threshold below which German competitiveness
would be severely hurt
around that rate to prevent further appreciation
of its currency. (The rate moved to 2.27 DM/dol-
lar in early March.)
and probably would consider intervention
? Paris and Rome now would generally like to see
exchange rates stabilized: Paris has a plan it will
push at the summit to introduce confidential
target zones for the major currencies; Rome
considers 1,400 lire to the dollar as the point
where Italian export competitiveness would be
severely eroded-the lira/dollar rate was 1,542 in
early March.
? London's outlook has been influenced more by
falling oil prices than by the drop in the dollar.
In contrast, Ottawa's concern is that the Canadian
dollar has actually fallen further than the US
dollar.
Impact of a Continued Drop
We simulated for this year and the next a 10-
percent annual decline in the dollar from its Janu-
ary 1986 level. The resulting impact on the Big Six
appears significant enough to draw policy responses
from most of the governments.
Japan experiences the largest loss among the Big
Six in real exports and GNP. This would occur
despite our model assumption that Japanese export-
ers partly offset the dollar's depreciation by cutting
prices to maintain market share.
We expect exports from politically important
small and medium-sized firms will suffer the big-
gest drop in volume.
West Germany fares slightly better than Japan
from a declining dollar because its main export to
the United States is luxury autos, whose demand is
relatively unaffected by price changes. The effect
of the dollar would be equally felt across the rest of
West German industry.
The United Kingdom's exports of petroleum and
petroleum products account for about 21 percent of
total exports, and, although oil is denominated in
dollars and would not be directly affected by
changes in the value of the dollar, government
revenues from oil-dollars converted to pounds-
would be cut. Next week, in fact, London will
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Big Six: Impact of a 10-Percent Nominal
Depreciation of US Dollar, 1986-87
decide whether to scale down or possibly shelve the
proposed tax cut for this year, and, because of the
decline in the price of oil, may even increase taxes
on cigarettes, alcohol, and petroleum. Elsewhere in
the economy, British manufacturers would bear
most of the loss and are already complaining that
price competitiveness is restraining export growth.
Nonetheless, according to US Embassy reporting,
British Treasury officials are arguing the benefits
of a stronger pound: lower inflation and import
costs.
France and Italy both suffer significant impacts
from the falling dollar. This would be tempered,
however, by a likely realignment of their currencies
within the European Monetary System (EMS) that
would improve their export competitiveness in West
European markets.
Canada is the only country in the Big Six where
economic growth improves. We assume a fixed US-
Canadian exchange rate during the dollar's depre-
ciation, causing the Canadian dollar to depreciate
vis-a-vis the European and Japanese currencies,
Real GNP Export Volume Unemployment
(percentage point) (percent) (percentage point)
1986 1987 1986 1987 1986 1987
making Canada a more effective competitor in the
world as well as in the US market. Canadian auto
exports would probably benefit the most because of
both increased US demand and the relatively high-
er price of Japanese autos.
Implications for the United States
The deterioration in five of the Big Six countries'
export sectors would be reflected in a gradual
reduction in the US trade deficit. Under our sce-
nario, the US trade balance would improve by $15
billion in 1986, $17 billion next year, and, if
extended to 1988, another $19 billion, for a three-
year total reduction of $51 billion.
A declining dollar probably would create new
bilateral trade tensions, particularly with the Euro-
pean Community. Irritated by disputes with the
United States over citrus and steel, EC Commis-
sioner for External Relations de Clerq has ex-
pressed his concern over the "aggressiveness" of
US trade policy. Furthermore, a declining dollar
would probably encourage West European govern-
ments to strengthen their export promotion pro-
grams. This might include better deals for the
Airbus, higher export subsidies for agricultural
goods-especially grains-and undercutting the
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OECD consensus on subsidizing interest rates on
official export credits. West European protection-
ism would almost certainly increase and Japanese
promises to open domestic markets would likely
remain mostly rhetoric, casting a shadow over the
upcoming GATT round.
A Push for Exchange Rate Stability
We believe that the summit participants will seek
efforts to stabilize current exchange rates. None-
theless, the Big Six countries differ widely in their
approaches. Although another 5-percent decline in
the dollar would not markedly hurt the Japanese
and West Europeans, they now appear more con-
cerned with preventing a major and rapid decline in
the dollar resulting from a loss of market confi-
dence. France has already proposed the idea of
confidential target zones for the major countries,
which Italy at least might support. Although Prime
Minister Nakasone has expressed support for ar-
rangements to stabilize exchange rates and some
industry spokesmen are prodding him to support
target zones, Japan's powerful Ministry of Finance
strongly opposes fixed reference zones. Both West
Germany and the United Kingdom dislike the idea
of fixing exchange rates, and Bonn, for one, has
publicly ruled out the idea of explicit target zones.
West German officials, instead, will probably only
argue for closer coordination of economic policies.
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International Financial
Situation: Mexican
Politics and the Debt
There is a growing political debate in Mexico over
suspending payments on the country's $98 billion
foreign debt. Leftist opposition parties and inde-
pendent labor unions are calling for a debt morato-
rium, as are several influential cabinet members.
President de la Madrid, consistent with his own
preferences and the advice of Finance Minister
Silva Herzog, for the time being is resisting a
radical approach. He will, however, probably use
the threat as a bargaining chip with creditors.
Nonetheless, should Mexico City be unable to
reach an accommodation with creditors on a new
debt relief package in coming weeks or should
government retrenchment policies lead to signifi-
cant social unrest, de la Madrid almost certainly
would cite domestic considerations as an excuse for
charting a more confrontational course.
Domestic Pressures for Debt Relief
Despite the administration's generally moderate
stance on the debt issue, a number of domestic
forces are urging a more confrontational policy.
Programing and Budget Minister Salinas, Foreign
Minister Sepulveda, and Energy Minister Labas-
tida favor a moratorium on interest payments and
oppose deeper spending cuts-maintaining that
more stringent austerity will lead to greater unem-
ployment and heighten the potential for social
unrest. In contrast, Finance Minister Silva Herzog
has advised against confronting creditors and urged
that government outlays be further cut-particu-
larly through the sale of government-owned enter-
prises-to reduce the public-sector deficit and need
for debt relief.
Leftist political parties, independent labor unions,
and a number of intellectuals have taken a militant
stand, in some cases calling upon the government to
repudiate the foreign debt either unilaterally or
jointly with other debtors. Pressures for a more
radical stance on the debt issue also have come
from influential sectors within the ruling Institu-
tional Revolutionary Party. Nationalists within the
party argue that Mexico City's current debt strate-
gy enables outside forces to dictate the country's
internal policies. While not going so far as to
endorse a moratorium, Fidel Velazquez, head of
the powerful Mexican Confederation of Workers,
has asserted that present debt arrangements impose
an unbearable burden on Mexicans and that the
"sacrifice of the Mexican worker cannot last
forever."
Business groups and the conservative National
Action Party, the country's strongest opposition
force, have avoided extremist positions on the debt
issue. Business leaders generally favor renegotia- 25X1
tion of the debt, believing a default would seriously
damage the economy by drying up future sources of
credit for the public and private sectors alike.
Political conservatives ascribe Mexico's present fi-
nancial predicament to what they view as the
misguided and inconsistent policies of de la Madrid
and his predecessor, Lopez Portillo
Although de la Madrid, for his part, has taken a
moderate stance on the debt issue in the past, his
stance could shift with prevailing political currents.
Because de la Madrid has not provided firm direc-
tion to Mexican debt policy, the influence of his
advisers and the general public is greater than
normally would be the case.
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Capitalizing on the Debt Issue
Mexico City is attempting to use domestic support
for a moratorium to increase its leverage with
Washington and the banks
For this reason, it has encour-
aged some media coverage of the issue, tolerated
political demonstrations in support of a moratori-
um, and participated in Cartagena Group meet-
ings. Nonetheless, Mexico City's assertion that it
must adopt a tough stance in debt negotiations is
more than simply a bargaining posture. In our
judgment, the de la Madrid administration is seri-
ously concerned about the prospect of social unrest
if the debt burden is not eased.
The view of de la Madrid and other
Mexican leaders that major unrest could occur in
1986 unless Mexico receives substantial debt relief
almost certainly will condition the decisions they
make on the debt issue in the future.
In the months ahead, de la Madrid will attempt to
avoid a radical solution to the debt issue, in our
judgment, and is unlikely to repudiate Mexico's
foreign debt or to join with other debtors in a
regional moratorium. The longer negotiations drag
on, however, the more likely he will be to sharpen
his rhetoric and take actions to dramatize the
seriousness of Mexico's plight. We believe there is a
better-than-even chance that Mexico City, even
while pursuing a settlement with creditors, will
suspend some interest payments. Even so, de la
Madrid probably would assert that the interrup-
tions in payments are temporary and due to cir-
cumstances beyond Mexico City's control.
To obtain a combination of new money and other
debt concessions, Mexico City will commit itself to
additional cuts in public spending and structural
reforms. The administration will promise more
than it will deliver, however, because it is unlikely
to permit the standard of living to fall much below
present levels. Moreover, most of the reforms Mexi-
co City adopts will be implemented in the next 12
to 18 months. After that time, the government is
likely to restimulate the economy in advance of
1988 presidential elections and to postpone politi-
cally unpopular measures.
In the less likely event de la Madrid chooses more
radical action on the debt, he may cite domestic
imperatives as necessitating such a move. In our
judgment, he would be most likely to do so if
creditors failed to grant adequate debt relief; if the
country experienced significant new oil price or
other external shocks; or if government retrench-
ment measures led to major social unrest. Under
such circumstances, Mexico City probably would
pursue more populist and nationalistic policies,
some of which, while proving popular domestically,
would strain relations with Washington and Mexi-
co's creditors.
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Libya: Reaction to
US Sanctions
US sanctions have disrupted some Libyan oil ex-
ports by increasing marketing difficulties and have
had some adverse impact on agriculture and select-
ed development projects. Moreover, the current
drop in oil prices will limit the Libyan leader's
ability to redress domestic grievances and provide a
focal point for his opponents to gain popular sup-
port. Nonetheless, US actions probably have
bought Qadhafi some respite from antiregime ac-
tivity that had spread to his security forces and his
inner circle of advisers by the end of last year.
Qadhafi can be expected to be aggressive in looking
for ways to circumvent US economic measures and
strike out at US or Western interests, including
possible terrorist operations targeting Saudi Arabi-
? Other West European states and Japan have
either taken no action or only advised domestic
firms not to fill in for US companies. In many
cases, this advice is having little impact. The
Confederation of British Industries last month
reaffirmed its longstanding policy that trade
should be carried out on the basis of commercial
considerations.
Filling the Gap
Qadhafi may be going on the economic offensive to
circumvent US sanctions.
an oil facilities.
Allied Response to US Sanctions
None of our allies have implemented broad sanc-
tions-many countries have publicly refused to do
so-although most have expressed some sympathy
for US sanctions against Libya and have agreed to
stop exports of arms. Only Canada, Italy, France,
and West Germany have taken some positive steps
to limit relations with Libya:
? Italy has prohibited public firms from filling in
and is pressuring private firms to go along. All
military trade with Tripoli is suspended until
further notice. Rome admits, however, that it has
little control over smaller Italian firms who may
be eager to do business with Libya.
? Canada canceled export insurance for firms doing
business with Libya and is banning the sale of
some petroleum-related equipment.
? West Germany will not provide export credit
guarantees to firms that are filling in for US
firms.
? France apparently has stopped shipments of spare
parts for civilian aircraft, but did so because of
recent Libyan military activity in Chad.
Tripoli will continue to pres-
sure wealthy Arab states for financial assistance if
cash flow difficulties become acute; so far, Qadha-
fi's requests for Arab economic support have fallen
While available evidence suggests that some for-
eign firms are filling in for US companies, it is
often difficult to determine whether a specific
company's activity is an effort to undercut US
sanctions, or part of an ongoing business
relationship
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the Great Manmade River project.
We believe that declining business opportunities
worldwide, especially for oil service companies,
probably will lead more foreign firms to pursue
openings left by US companies. Foreign firms,
including several from South Korea, Spain, and
Japan, have expressed interest in-or have actually
taken over-previous US contracts for civil engi-
neering and construction projects in Libya such as
Impact on the Oil Industry
US companies in
sold in December.
the US restrictions have delayed some petroleum-
related projects but caused no serious disruption in
oilfield operations. We believe most US citizens
have left Libya-an estimated 200 remain. The
freeze on Libyan financial assets has prevented
Tripoli from collecting some $150 million for oil
all liftings.
Libya are complying with the law and have stopped
unrelated to US sanctions.
We have no evidence that other countries are
cutting back oil purchases in response to US sanc-
tions. In several instances European firms have
recently initiated new petroleum contracts with
Tripoli. French officials claim they will press their
oil companies to reduce imports of Libyan oil, and
Spain has discontinued government-to-government
oil purchases from Libya-in both cases for reasons
Libya is experiencing some difficulty marketing its
oil because of the soft oil market as well as the US
sanctions. Libyan oil
production may have fallen by as much as 200,000
b/d in the last month, to about 1 million b/d.
Tripoli is attempting to negotiate netback pricing
deals, primarily with Mediterranean refiners, to
sell oil previously lifted by US companies. A fur-
ther drop in exports is possible in the current
glutted oil market, however, without sharp price
discounts. By midyear Tripoli may be able to make
up for most sales lost because of US sanctions by
increasing crude product exports from the Ra's al
Unuf refinery and by distributing more products in
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25X1
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Italy from Libya's recently purchased TAMOIL
Potential 25X1
coup plotters probably will lie low for the time
being to avoid being identified as US puppets. At
the same time, Qadhafi has been unable to use the
current tensions with Washington to expand his
refinery.
An increasingly tough posture toward the US
producing companies probably indicates that Trip-
oli now realizes they must be replaced. F_
Firms from several countries, including Argentina,
Austria, Italy, and Hungary, are interested in
taking over US oil concessions in Libya. With US
producing companies unable to sell their assets to
foreign firms or subsidiaries, however, Libya will
try to buy out the US concessions on attractive
terms. Forced nationalization probably would be a
last resort because it would further damage Tripo-
li's reputation and might hamper resale of US
concessions to foreign interests.
The Domestic Impact of US Sanctions
US sanctions have contributed to growing popular
grievances by reducing Qadhafi's room to maneu-
ver domestically. The assets freeze caught the
regime off guard, denying it access to at least $750
million-13 percent-of total financial reserves
The confrontation with the United States, however,
has provided Qadhafi with a brief respite from the
deterioration of his internal position.
dwindling domestic support.
25X1
25X1
In a recent speech to the Libyan General People's
Congress, Qadhafi declared that Libya had "won"
its confrontation with the United States and reiter-
ated his determination to defend the Gulf of Sidra.
The congress also issued resolutions calling for
economic sanctions against the United States and
continued support for "liberation movements."
While many of Qadhafi's comments seem defen-
sive, the lack of US military action against Libya
almost certainly has bolstered Qadhafi's conviction
that he has once again weathered the crisis with
Washington. Qadhafi may well choose to pursue a
more aggressive policy-including terrorist activi-
ties-against US and Western interests, especially 25X1
if he can conceal his hand by operating through
anti-Arafat Palestinians or groups.
remain in power.
Soft oil market conditions pose the greatest threat
to the economy and probably the regime. While a
$20 per barrel oil price this year probably would
have little impact on the economy, given current
export levels, an average price of $15 per barrel
would force Tripoli to make difficult and politically
risky choices. The oil glut will make it even harder
for Tripoli to maintain oil barter arrangements
with the Soviets, the Italians, and others, who are
owed some $4 billion. Mandatory import reductions
under the $15 per barrel scenario almost certainly
would cause domestic discontent to reach regime-
threatening levels and force Qadhafi to rely even
more heavily on repression and security forces to
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South Africa: Black Unrest
Clouds Economic Prospects
The violence that has plagued South Africa's black
townships for the past 18 months and resulted in
more than 1,200 deaths has undermined investor
confidence in the country and delayed economic
recovery. Pretoria has responded in the short run by
shelving some key aspects of its economic liberal-
ization program and by introducing measures in-
tended to stimulate the economy. Over the long
haul, the government requires a sustained economic
recovery to support its gradualist program of limit-
ed economic and political concessions intended to
co-opt urban blacks. Long-term economic pros-
pects, however, appear poor so long as continued
unrest, combined with the impact of likely future
economic sanctions, progressively isolates South
Africa from international investment and credit.
Shifting Economic Priorities
The slow pace of racial reform and Pretoria's often
heavyhanded response to unrest have heightened
investor concerns about South Africa's political and
economic future. This crisis of confidence has
delayed economic recovery much more than the
direct impact of the violence, which has been
largely confined to nonwhite areas. Moreover, an
accelerated withdrawal of foreign credit lines and
some disinvestment have depressed the exchange
value of the South African rand-now at 50
cents-and pushed the inflation rate above 20
percent by January as the cost of imports has
soared. Economic and political uncertainties also
have combined to encourage white emigration,
which, though a minute fraction of the white
population, has resulted in the loss of skilled labor
and some savings.
The loss of investor confidence has led Pretoria to
slow its economic liberalization efforts. Abandon-
ing its reliance on market forces to stem the capital
outflow, Pretoria suspended on 1 September princi-
pal repayments on $14 billion of South Africa's
$24 billion foreign debt. At the same time, foreign
exchange controls on nonresidents were reinstated
to penalize disinvestment, and plans to relax ex-
change controls on residents and emigrants were
postponed. In addition, a 10-percent customs sur-
charge was imposed on many types of imports.
Although the government has continued to stress
privatization of some of its assets as a lauditory
goal, political and economic uncertainties probably
have delayed significant action by depressing their
market value.
Pretoria also has shifted away from previous anti-
inflationary policies in spite of the rising inflation
rate. Government officials publicly have justified
this shift by citing a need to spur economic recovery
to restore local business confidence and to quiet
black unrest, but, in our view, a more important
consideration probably has been to blunt criticism
of government economic management by opposi-
tion political parties. In any case, Pretoria has cut
the prime commercial lending rate from a high of
25 percent as recently as May 1985 to the prevail-
ing 15.5 percent. Pretoria also commited funds to
create jobs and relaxed some credit restrictions on
consumer borrowing.
Although the Botha government, in our view, re-
mains committed to improving the living conditions
of urban blacks in an attempt to co-opt them into
accepting limited racial reforms, Pretoria is loath
to jeopardize white support by massively redistrib-
uting income in a weak economy. Pretoria thus has
only provided limited new opportunities for black
advancement:
? Nonwhites working in white areas as executives,
managers, or technical employees are no longer
subject to the legislative "color bars" that re-
stricted them to jobs where they worked under
the full-time supervision and control of whites.
Secret
DI IEEW 86-011
14 March 1986
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Pretoria's Economic Liberalization Efforts
The South African economy has been buffeted in
recent years by falling world gold prices-gold ac-
counts for nearly one-half of export revenues-and a
severe drought. Real GDP growth averaged less than
1 percent per year during 1981-85-far short of the
2.3 percent needed to keep per capita income from
declining. The brunt of this mediocre economic per-
formance, in our view, has fallen on blacks and has
contributed significantly to the violence in black
townships. Overall, black unemployment exceeds 25
percent and probably
is over 50 percent in some riot-torn areas. Moreover,
a recent government study suggests that, without new
foreign investment, long-term growth prospects are
likely to fall considerably short of the 5 -percent real
average annual rate needed to prevent black unem-
ployment from rising further.
We believe concern over the country's long-term
growth prospects has been reflected in Pretoria's
effort since 1979 to liberalize its economic policies in
order to promote manufactured exports, attract new
foreign investment, and boost domestic savings. A key
element has been the removal of selected import and
foreign currency controls that protected high-cost
? Pretoria has announced that it will promote the
development of small businesses by reducing gov-
ernment redtape, providing low-cost loans, and
opening parts of some central business districts to
all races; cumbersome licensing procedures, legal
impediments and limited access to finance cur-
rently stifle black business initiative.
? Proposed multiracial councils for urban areas
would channel additional revenues to black local
authorities, according to government officials.
Although these measures will help some blacks in
the short run, Pretoria probably recognizes that
over the long haul only higher GDP growth rates
will create the larger economic pie necessary to
make income redistribution more palatable to
whites)
domestic industry from foreign competition. In addi-
tion to allowing the rand to float against foreign
currencies, the monetary reforms eliminated ceilings
on domestic interest rates. Some selective promotion
of exports also is envisaged, but, as a GATT member,
South Africa is limited in the types of export subsi-
dies that it can use.
Another important element of economic liberalization
plans has been the gradual reduction of government
involvement in agriculture and industry. According to
South African data, some 70 percent of farm output
is sold to 29 agricultural marketing boards. State-
owned companies dominate several industries and
hold some 15 percent of the country's physical capi-
tal. Approximately one-third of the consumer price
index consists of prices controlled by the government
or its companies. The government is the sole purchas-
ing agent for petroleum imports, and markets gold for
the mining companies. Overall, the government and
its companies sell more than half of the country's
exports, and buy more than one-third of its imports.
Pretoria has promised to review these activities with
the objective of selling some state-owned companies
and deregulating markets.
Vulnerability to Sanctions
Black unrest in South Africa has amplified the
international clamor for tough economic sanctions.
Despite years of policies to promote economic
independence, the country is far from invulnerable
to widespread bans on foreign investment or trade
boycotts that cut export earnings. On the basis of
our economic model of South Africa, we estimate
that each $1 billion of withdrawn foreign capital or
forgone export earnings would trim GDP growth
potential by about 1 percentage point per year. In
our judgment, South Africa's poor recent economic
performance is due in part to a relatively small net
capital inflow, and the resulting need to fund
industrial development largely through domestic
savings from export revenues. Net foreign capital
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Secret
South Africa: Selected Economic
Indicators
GDP Growth Consumer Price Inflation
Percent Percent
South Africa:
Balance of Payments, 1981-86
Billion US $
Current account
balance
-4.6
-3.0
0.2
-0.7
2.7
2.0
Merchandise trade
balance
- 9.8
- 7.3
- 5.1
- 5.7
-1.7
- 2.7
Merchandise
exports, f.o.b.
11.0
9.4
9.3
9.1
9.6
9.7
Merchandise
imports, f.o.b.
20.8
16.6
14.4
14.8
11.3
12.4
Net services and
transfers
-43
-37
-36
-31
-30
-35
Capital account 1.0
balance
2.9
-0.9
1.3
-2.6
2.0
a Estimated.
b Projected.
c Including errors and omissions.
d Total reserves are not the sum of changes in reserves and the
previous year's total reserves because of year-to-year changes in
exchange rates and the value of gold reserves.
ill
0 10
Gold Prices
US $ per ounce
0 1979
Exchange Rate
US $ per rand
imo.s
85 0 1979 85
z Estimated.
b Projected.
investment since 1977.
inflows, including loans and investment, have ac-
counted for only 12 percent of gross domestic
South Africa is poised for a modest economic
recovery this year. A tentative consensus reached
during a meeting between South African officials
and major creditors last month potentially repre-
sents a major step toward normalization of the
country's international financial relations. Our
model indicates that the economy can generate the
$2 billion current account surplus that Pretoria
believes it will need for debt repayment this year
under the tacit agreement, and still afford 3- to 4-
percent real GDP growth. Key assumptions that
underlie the forecast include an average gold price
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Secret
of about $350 per ounce, a corn harvest of at least
8-9 million metric tons, and no more than a modest
tightening of economic sanctions.
The recovery, however, is likely to be export- and
consumption-led, with domestic investment remain-
ing depressed and black unemployment rising
slightly. The budget that will be introduced in
Parliament next week and take effect 1 April
probably will be mildly expansionary, and may
include a modest increase in social spending for
nonwhites. Past business cycle behavior and current
negative real interest rates suggest some risk that
Pretoria will overstimulate the economy, cutting
into needed current account surpluses and forcing
new austerity measures to rescue the debt resched-
uling plan.
Over the longer term, South Africa's economic
isolation is likely to increase with the failure to
achieve an internationally acceptable resolution of
the country's political dilemma. Continued unrest,
in our judgment, is likely to spark new calls for
tough Western economic sanctions. Sanctions that
are being considered by several countries include
bans on new investment, more extensive boycotts of
South African coal and agricultural exports, dives-
titure of equity in South African companies, and
selective embargoes on sales of capital equipment.
Combined with the psychological impact of the
unrest on investor confidence, additional sanctions
would undermine the country's ability to repay
debt without further contracting the domestic econ-
omy, and thus push average GDP growth below 3
percent in 1987 and beyond. Black unemployment
and economic grievances probably will continue to
grow in spite of a modest increase in social spend-
ing, with some 200,000 new job market entrants
each year failing to find modern-sector employ-
Secret 16
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The Soviet Consumer Goods
and Services Program
The long-awaited Consumer Goods and Services
Program for 1986-2000 lays down ambitious goals
but promises more than it can deliver. It fails to
provide for the needed investment, relying instead
on increases in labor productivity and efficiency to
achieve the goals. Although some gains are possi-
ble, major increases in output are not likely to be
sustainable over the next five years, calling into
question the leadership's ability to follow through
on its commitment to the consumer.
Goals of the Program
Chronic shortages of goods and services as well as
poor quality and an undesirable product mix proba-
bly have contributed to lackluster worker perfor-
mance in recent years. General Secretary Gorba-
chev is hoping to boost labor productivity and, like
his predecessors, has stressed the need for improv-
ing the lot of the Soviet consumer as a key element
USSR: Growth of Per Capita
Consumption, 1950-85
in this effort. d
The consumer program, which has been in the
making for almost three years, lays out highly
ambitious production targets that in almost all
cases call for growth rates not achieved since the
late 1960s or earlier. Production of soft goods
(primarily textiles and clothing) is planned to grow
in 1986-90 at an average annual rate more than
double that achieved in 1981-85. In addition to
stepped-up growth of consumer durables output in
1986-90, the program also calls for:
? More household appliances in order to reduce the
time Soviet working women spend on housework.
? Better quality and product mix to meet consumer
demand, including increased output of video cas-
sette recorders from currently minuscule levels.
? Production of more spare parts to improve the
servicing of consumer durables-demand for
automobile spare parts is supposed to be fully met
by 1990.
75 80
No goal, however, is presented for the durable good
most sought by the Soviet consumer-the automo-
bile-suggesting that increases in future produc-
tion will be minimal at best. Currently, Soviet auto
production is running at about 1.3 million units per
year compared to US production in 1984 of 7.6
million units.
The new program also calls for increases in the
quality as well as the availability of a wide range of
consumer services.' The program also calls for
' In the USSR, health and education services are largely free.
Consumers pay for other services such as personal transportation,
communication, recreation, and personal care and repair services,
as well as some financial services, hence the category "paid
services." The Consumer Goods and Services Program is aimed at
Secret
DI IEEW 86-011
14 March 1986
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Secret
USSR: Trends in Key Consumer Goods and Services
and Consumer Program Goals
1971-75
1976-80
1981-858
1986-90
Plan b
1986-2000
Plan b
Nonfood goods c
8.2
5.1
4.0
2.8
5.4
4.2
Soft goods
7.2
2.7
2.6
1.7
3.9
3.5
Textiles
3.4
2.4
0.7
1.4
3.7
2.9
11.7
8.6
16.7
12.8
19.8
6.2
1.2
0
2.9
2.4
11.8
-0.6
-0.5
4.2
9.9
5.4
8.8
-6.5
3.0
6.1
3.4
1.8
7.4
2.5
Communications
8.8
Housing and communal f
3.1
Of which:
Number of places in hotels
9.8
3.8
5.6
5.8
6.3
Sanatoria, health resorts
4.8
13.4
4.9
2.7
5.0
6.0
Preliminary estimate for 1985.
b Where a goal is expressed as a range, we have used the midpoint
for the purpose of this table.
Includes soft goods and consumer durables.
d Volume of paid services. Excludes such free services as health and
education. Includes personal care and repair, personal transport,
personal communications, housing and communal, tourism, sports,
legal and personal financial services and services performed by
consumer cooperatives.
retail stores to adopt more convenient operating
hours, and more eating facilities are to be set up at
places of employment
Major Resource Constraints
The prospects for success of Gorbachev's ambitious
program are not bright, at least in the next five
e Includes laundry and dry cleaning as well as automobile, housing,
and other repair services and rentals of durables.
r Includes maintenance of state housing and utilities.
years, primarily because we see no indications that
a major shift of investment in favor of the consum-
er is in the offing. On the contrary, the sectors of
the economy producing consumer goods and ser-
vices are likely to face increased competition for
scarce investment resources because of Gorbachev's
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ambitious plans to modernize heavy industry. Pre-
mier Ryzhkov's speech at the recent Party Con-
gress reemphasized that top priority will be given to
machine building-the sector most critical to mod-
ernization. The energy sector is scheduled to re-
ceive a sharp boost in investment resources as well,
while the share of investment devoted to agricul-
ture and its supporting industries will remain sta-
ble.
With total investment growth planned to average
3.5 to 4.0 percent per year, the sectors responsible
for nonfood consumer goods and services are almost
certain to be squeezed.
support Gorbachev's modernization program will
limit the ability of this sector to supply consumer
goods.
According to the consumer program, all factories
and places of employment also will be assigned
goals for providing various personal care and repair
services to the general public. Earlier resolutions
have called for an expansion of such activity, but
this is the first time that the requirement has been
made mandatory for all enterprises. Most enter-
prises, however, are simply not equipped to provide
any but the most basic services.
Furthermore, a Gosplan official told the
US Embassy that there would be little, if any,
increase in resources for the consumer in the 1986-
90 period. Judging by past performance, a reduced
or constant increment in investment resources will
not support the production increases called for in
the program.
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25X1
The consumer service experiment begun in July
1984 in some areas is to be expanded throughout
the country, according to the Soviet press. This
involves:
? A reduction in the number of targets that partici-
pating service enterprises must meet.
? Greater freedom for these enterprises to use their
profits.
? Increased use of labor brigades-small groups of
workers paid according to their performance.
It appears that the leadership plans to meet the
consumer program targets on the cheap by better
utilizing existing productive capacity and resources.
For example, the program continues a campaign
initiated under Brezhnev to increase consumer
goods production in heavy industry by using "hid-
den reserves"-leftover raw materials and idle
capacity. But, with the heavy emphasis in the
1986-90 plan on conserving raw materials, fewer
"leftovers" are likely.
Soviet press comment indicates that the experiment
has had some success in increasing quality and
output of services, but that shortages of resources
continue to hamper fundamental progress in devel-
oping the services sector. A Pravda article said that
although the experiment could be termed a success
"there still remain enterprises where the plan is not
being fulfilled and service quality has not impro-
ved ... the work of consumer service enterprises
under the new conditions is not yielding the antici-
pated results."
According to a resolution adopted shortly before
the Politburo approved the program, enterprises in
heavy industry will be tasked with producing a
specified amount of consumer goods. Such an
approach has not been effective in the past because
it does not relieve enterprises of their obligation to
meet primary output targets. Future demands on
heavy industry to meet high output targets to
Other measures called for in the program are
aimed at boosting the labor supply. These prescrip-
tions include:
? Increased use of pensioners and part-time labor in
service establishments.
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Secret
? A larger role for at-home production of consumer
goods by pensioners and others not readily em-
ployable in factories.
? Greater use of workers on collective and state
farms to produce consumer items during slack
seasons.
Such initiatives could provide some relief for the
consumer sector, especially in the area of labor-
intensive services. Pensioners are already widely
employed in producing services: some 18 percent of
all employees of personal care and repair enter-
prises in Moscow are retirees.
Reduced restrictions on private activity in the
services sphere-already a major source of ser-
vices-could significantly improve output and en-
hance prospects of meeting the services goals.
According to the Soviet press, one-half of all shoe
repairs, 45 percent of apartment renovations, and
40 percent of all car repairs are done by private
entrepreneurs. The new consumer program, howev-
er, contains no indication that the leadership plans
to significantly enlarge private-sector activity. In
fact, a Gosplan official has publicly stated that the
private sector would not be the source of an
increase in services because the new consumer
program ensured the state's ability to boost output
of services.
We cannot rule out, however, the possibility of
future movement in this area. Gorbachev hinted in
May that he favors a policy of allowing a greater
role for private initiative in services, and at the
recent Party Congress he hinted at some willing-
ness to consider a limited role for private activity.
No new initiatives were announced at the Party
Congress, however.
The regime could also boost living standards by
stepping up imports of consumer goods.
Eastern Europe will be hard pressed to meet Soviet
expectations for soft goods as production prospects
there appear bleak. Nor does it seem likely that the
Soviets will turn to the West for more nonfood
goods. Faced with declining hard currency reve-
nues, the leadership probably will be unwilling to
alter the traditional low priority assigned hard
currency purchases of nonfood consumer goods.
Implications
Gorbachev's industrial modernization program
could eventually pay off for the consumer if it
results in substantially more machinery and equip-
ment that could be channeled into the consumer
sector. In the meantime, Gorbachev, like his prede-
cessors, will probably give less resource priority to
consumption-particularly services and nonfood
goods-than other sectors of the Soviet economy.
Premier Ryzhkov implied at the party congress that
the share of consumption in national income will
fall in 1986-90 despite the ambitious goals of the
consumer program, suggesting inconsistencies
within the plan.
Although the consumer program tries to provide
reassurance of regime concern with living stan-
dards at a time of calls for greater labor discipline
and sacrifice, we judge that increases in production
of nonfood goods and services in the 1986-90 period
will continue to be slow. Failure of the much touted
program to provide incentives for greater worker
effort will hamper Gorbachev's efforts to raise
labor productivity and would undermine his credi-
bility with the Soviet consumer.
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Secret
Soviet-East European
Trade Plans for 1986-90
Plans call for trade between the Soviet Union and
Eastern Europe to grow more slowly in the next five
years than at any time since the 1960s. Rapid
increases in East European exports in recent years
have resulted in roughly balanced trade with the
USSR, and we expect both the value and volume of
those exports to grow much more slowly. Soviet
pressure is likely to force the East European re-
gimes to make tough choices about exporting to the
West and supplying domestic needs. Moscow's
ability to export to Eastern Europe will be limited
by declining oil production and a hard currency
squeeze. Any major cuts in oil exports could well
disrupt East European economies and dramatically
alter Moscow's economic relations with Eastern
Europe.
Beginning in the mid-1970s, the USSR permitted
its East European partners to run large trade
deficits because of their inability to generate
enough exports to cover the rising cost of Soviet oil
deliveries. In recent years, Moscow has become less
willing to support Eastern Europe and may have
become impatient with the East Europeans' inabil-
ity to close the trade gap. Moscow's push for more
balance narrowed the annual trade deficits from
1981 to 1984, and may have nearly eliminated
them in 1985 for all countries except Poland.
Over the past decade the Soviets enjoyed a sharp
improvement in their terms of trade with the East
Europeans because energy prices were rising faster
than other prices in intra-CEMA trade. In value
terms, Soviet exports to and imports from Eastern
Europe more than doubled from 1977 to 1985. But,
according to our estimates, the volume of Soviet
deliveries to Eastern Europe rose by less than 10
percent over the entire period, while real import
volumes from the region increased by nearly 50
percent.'
The 1986-90 protocols concluded in the final
months of 1985 call for trade to total 380 billion
rubles over the period. This target implies a nomi-
nal average annual growth rate of only 5 percent-
the slowest growth in planned trade in the past 15
years. The modest targets in the protocols belie the
oft-discussed need to increase trade and coopera-
tion within CEMA, as well as statements by offi- 25X1
cials in some East European countries who say that
trade will be diverted away from the West toward
the USSR.
The slowdown in trade projected through 1990
reflects, in part, planners' expectations of slower
price increases than in the early 1980s. With
energy prices falling and at least some price in-
creases likely for East European exports, Moscow
faces a deterioration in its terms of trade for the
next several years. Any effort by the Soviets to
overcome this deterioration-by changing the pric-
ing formula in their favor or through item-by-item
negotiation-would meet with strong East Europe-
an resistance.
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as price deflators of official Soviet foreign trade statistics. Soviet
and Polish indexes for prices and trade volumes show similar trends
but are not as comprehensive as the Hungarian data 25X1
Secret
DI IEEW 86-011
14 March 1986
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Secret
Index of Soviet Imports From Eastern Europe, 1977-858
- Nominal
- Real
75 1977
100
85 75 1977 80
100
I I I I I I I I I j
85 75 1977 80 85
Emerging Trade Patterns
Several factors in addition to the shift in the terms
of trade suggest that East European surpluses are
likely, reversing the trade deficits of the past
decade:
? Because of domestic production difficulties Mos-
cow's oil deliveries will be at best constant and
could well decline.
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Secret
Index of Soviet Exports to Eastern Europe, 1977-85?
Nominal
- Real
100 100
75 1977 80 85 75 1977 80
100
I I I I i I I 11 1
75 1977 80 85 75 1977 80
,J I I I I I I I I I I I I I I I 1 I
85 75 1977 80 85 75 1977 80 85
? The Soviet leadership clearly feels that its allies Eastern Europe conceivably could run surpluses
should repay the debt accumulated during the large enough to repay the entire 15-billion-ruble
1970s and early 1980s. debt by increasing exports, in nominal terms, by 7
percent annually and holding import growth to 4
? The protocol for Poland-the country in the percent.
weakest position to meet Moscow's demands-
calls for trade to be balanced over the next five
years, and the Soviets may feel that the other
countries could do even better.
100
85 75 1977 80 85
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Secret
Soviet-East European Trade Plans
Five-Year Trade Turnover a
(billion rubles)
Increase b
Average Annual
Increases
Date Protocol
Signed
1981-85
1986-90
1986-90/
1981-85
(percent)
1986-90
(percent)
Bulgaria
52
70
35
5
20 December 1985
Czechoslovakia
55
73
33
4
29 October 1985
East Germany
66
82
24
3
31 October 1985
Hungary
40
51
28
5
28 November 1985
Poland
50
74
48
8
7 October 1985
a Trade in 1985 estimated on the basis of six-month Soviet trade
statistics and annual protocols.
b These estimates differ somewhat from several East European
announcements for turnover growth with the USSR: 28 percent for
East Germany; "approximately 40 percent" for Bulgaria; and
"more than 30 percent" for Hungary.
c Calculated using estimates of trade in 1985 as base year.
Nearly all of the protocols, as well as other bilateral
and CEMA agreements emphasize that the East
Europeans must improve the quality of their ex-
ports. Meeting Soviet demands, in turn, may cut
into their ability to earn foreign exchange-their
best goods are normally sold in hard currency
markets-and satisfy domestic needs. Implied So-
viet threats to cut energy and raw material deliver-
ies if the requisite quantity and quality of goods are
not forthcoming are a potent lever. Moscow's de-
mands for better machinery, food, and other con-
sumer goods, however, will be tempered by Eastern
Europe's ability to maintain domestic economic
growth and remain financially solvent. Moreover,
Moscow may still be willing to grant new trade
credits or other concessions if an East European
country's economic problems become serious
enough.
We expect the major constraint on trade in 1986-90
to be Moscow's inability to boost exports to Eastern
Europe. Little growth can be expected in deliveries
of oil and other fuels-the mainstay of the USSR's
exports. Moscow will maintain oil deliveries at
1985 levels of about 70 million metric tons, accord-
ing to statements by Soviet and East European
officials. While the Soviets stand ready to increase
oil deliveries to Romania, and possibly other coun-
tries, in exchange for dollars or for goods that could
be sold for dollars, the East Europeans probably
cannot afford major purchases on these terms.
Gas deliveries will not grow substantially until
1989 when the Yamburg pipeline comes on line. All
countries will invest machinery, equipment, or
manpower in this project in exchange for a share of
20-22 billion cubic meters of gas annually over 20
years. East European participation in other joint
projects, such as the Krivoy Rog iron ore complex,
probably will lead to only moderate increases in
some raw material deliveries.
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Soviet Exports
Bulgaria Machinery and equipment for recon-
struction of metallurgical, chemical,
machine-building industries. Continua-
tion of energy deliveries at reduced
1985 levels.
Czechoslovakia 50 percent increase in machinery.
Equipment for power, metallurgical,
chemical industries and for Prague
subway. Maintenance of oil and raw
materials at 1985 levels.
East Germany Annual deliveries of 17.1 million tons
of oil, 6.9 billion cubic meters of gas,
4.5 million tons of coal, 1.7 million
tons of iron ore, 3.2 million tons of
rolled steel.
15 percent increase in gas this year,
probably in exchange for food and agri-
cultural products. Additional 2 billion
cubic meters of gas from Yamburg
beginning in 1989.
Poland Maintenance of oil deliveries at 15
million tons annually. Additional 1
billion cubic meters of gas this year
through Kobrin-Brest pipeline, plus
another 5 billion cubic meters from
Yamburg beginning in 1989.
Romania 2-3 million tons of oil annually.
Increases in gas and iron ore.
East European Exports
Increases in machine-building, elec-
tronic, electrical-engineering products.
More consumer goods, fruits,
vegetables.
"Substantial" increase in consumer
goods. Equipment and 12,000 workers
for construction of Yamburg pipeline
and gas treatment plant at
Karachaganak.
40 percent increase in consumer goods
and 50 percent in chemicals.
Doubling of electrical engineering and
computer-related products.
Increase in oil and gas equipment.
Equipment for reconstruction of Soviet
chemical, agricultural machinery, light
industries.
"Large" deliveries of ships, heavy ma-
chinery, lathes, electric motors, textile
and chemical industry equipment,
roadbuilding and agricultural machin-
ery. Increases in food and agricultural
products.
Doubling of machinery deliveries to 6.5
billion rubles. 1-1.5 billion rubles in
ships, equipment for oil drilling and
exploration. 500 million rubles in agri-
cultural machinery. Metallurgical
equipment worth I billion rubles. In-
crease in consumer goods and
chemicals.
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Secret
Agreements by Country
There are important differences among the agree-
ments signed with each country. The highest rates
of growth in trade are projected for those countries
with the most troubled economies-Romania and
Poland. In contrast, the East German and Czecho-
slovak protocols call for much more modest trade
growth, but these countries will probably face the
strongest demands to improve the quality of their
exports.
ungary has con-
vinced Moscow to continue purchasing its meat
surplus for hard currency by arguing that the
planned elimination of such transactions by the
Soviets would threaten Hungary's fragile hard
currency position.
Bulgaria's relationship with Moscow over the past
year has been strained. Soviet displeasure over
Bulgaria's economic policies and the Slavicization
campaign against the Turkish minority in the
country probably is the major reason Moscow cut
Romania's agreement calls for a more than 70-
percent trade increase-the highest rate in Eastern
Europe. Bucharest's ailing economy, however, is
unlikely to meet its export commitments. In 1985,
for the second year in a row, Romania received
little more than half of the oil it had contracted for
because of its inability to provide the meat, other
foodstuffs, and industrial machinery demanded by
in Poland, the
1986-90 period will focus on the development of
both economies-in contrast to 1983-85, when the
Soviets extended substantial economic assistance to
help Warsaw recover from its economic crisis.
While Moscow will allow Warsaw to run trade
deficits through 1987, the protocol calls for Poland
to run surpluses in 1989 and 1990 large enough to
balance trade for the five-year period as a whole.
Repayment of 5 billion rubles owed to the Soviets
will be deferred until after 1990.
Moscow's negotiations on 1986-90 trade with East
Germany-its largest trade partner-were difficult
and long because of disagreements on raw materi-
als deliveries and participation in Soviet resource
projects
Czechoslovakia will contribute equipment and
12,000 workers for the construction of the Yam-
burg gas pipeline and a gas treatment plant in the
USSR in exchange for 5 billion cubic meters of gas
annually over 20 years. Despite the claim in the
protocol, Czechoslo-
vak officials expect annual crude oil deliveries to be
cut by at least 1.4 million tons by 1990 even if
back on crude oil deliveries to Bulgaria last year.
Oil: The Key Unknown
Although we believe that the trade plans an-
nounced in the protocols genuinely reflect inten-
tions, future developments could cause results to
diverge from goals. The largest uncertainties are in
Soviet oil exports. Although Moscow for the most
part has so far insulated Eastern Europe from cuts
in oil exports, it may find it increasingly difficult to
do so if oil production and prices continue to fall.
With hard currency shortages of its own, Eastern
Europe would be hard pressed to replace any Soviet
deliveries diverted to the West. The region already
faces tight energy supplies as evidenced by severe
shortages in several countries during the past year.
Even modest cuts in oil deliveries could seriously
undermine the economic performance of several
countries.
Moreover, if Moscow chose to make the cuts large
and abrupt, it would risk the entire structure of its
economic relationship with Eastern Europe. The
USSR has little to offer besides oil, especially in
the short run, and the East Europeans would be
forced to divert their trade to the West or to the
Middle East to obtain oil.
Prague invests in Soviet projects.
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Secret
Energy
Iran Cuts Financial disputes between Damascus and Tehran are still interfering with oil
Oil Shipments deliveries to Syria. Since December Iran has delivered only about one-third of
To Syria the oil that Syria contracted to receive by the end of March because Damascus
has not paid for earlier deliveries. Similar problems and Iraqi attacks on
Khark Island caused Iran to suspend deliveries to Syria for four months last
year. The two countries will soon discuss the debt problem and negotiate an ex-
tension of the oil agreement beyond 31 March. Iran wants Syria to make
larger cash payments for future shipments and to increase its payments on past
debts-which amount to about $2 billion. Syria cannot afford additional
payments and will urge Iran to continue deliveries at lower prices until an
agreement on the debt is reached. Tehran probably will continue shipping the
oil, probably at lower levels than Damascus would like, to retain Syrian
political and military support.
Problems Marketing The growing gap between the official Indonesian price of crude oil and the
Indonesian Crude market price-which has increased from roughly $7 to $13 per barrel since the
beginning of the year-is further complicating Jakarta's ability to market its
output. In a move designed to make Indonesian crude more attractive, in late
January Pertamina-the national oil company-was granted authority to
reduce oil prices by 15 percent, but the rapid decline in spot prices and
increased international competition have continued to erode Indonesia's share
of its traditional markets-notably Japan. Despite reports that Pertamina is
under increased pressure to boost profits-in part, to finance the government's
1987 general election campaign-in our judgment, significant revenue gains
are unlikely until the government provides even greater latitude in setting oil
prices.
Brazil's Success in Oil Past investment and exploration is now enabling Brazil to raise oil output, cut
its import bill, and strengthen its payments position. Bolstered by new offshore
discoveries, oil production is up about 75 percent since 1983 to 600,000 b/d at
yearend 1985, and will probably reach 630,000 b/d in 1986, according to the
US Embassy. With domestic consumption declining since 1983-to less than
one million b/d-because of intensified conservation and higher product
prices, Brazil has cut oil import costs 30 percent to $5.8 billion in 1985. These
oil import savings have helped Brasilia increase international reserves to $11.5
billion despite an export decline. In addition, the administration has new
latitude to boost nonoil imports, up 5 percent in 1985, to aid domestic recovery.
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Secret
Continued growth in domestic production, together with the recent fall in
world oil prices, will chop another $1.5-2 billion from the oil bill in 1986,
according to a recent US Embassy report. Brasilia also is now carefully
watching Mexican debt negotiations in hopes of benefiting from better
repayment terms granted by creditors in the wake of crumbling crude prices.
London To Allow London's decision to end British Gas Corporation's (BGC) monopoly buyer
Natural Gas Exports position and allow UK producers to export North Sea gas is designed to
encourage further exploration in the area. Oil companies have long pressed
London to allow gas exports, charging that BGC has too much power in
determining the rate of depletion of North Sea gas. The new rules, which will
take effect after BGC is denationalized in November, will allow gas producers
to find foreign buyers if BGC does not buy their entire production. The oil
companies have said that such flexibility is needed to increase the profitability
of gas production and encourage continuing exploration for new gasfields in
the North Sea. London's revised export policy is unlikely to increase British
gas exports in the near future. Although BGC presently pays marginally less
for gas than other European companies, continental gas prices are falling
because they are tied to oil prices, while domestic gas prices are likely to rise
because BGC will no longer have control over prices.
Increased Philippine The Asian Development Bank met this week to discuss renewed lending to
Financial Assistance Manila, and a senior official of the bank told US officials that a new $100-200
million balance-of-payments loan will probably be made to the Central Bank.
The World Bank is considering investing in a government-owned company
being formed to return firms acquired by the Marcos government to the
private sector. The Bank is also negotiating a $250 million loan to help service
the debts of government financial institutions. Japanese Foreign Ministry
officers recently told US officials that Tokyo will disburse $275 million that
had been delayed by the political turmoil after last month's election. In
addition, Prime Minister Nakasone and Foreign Minister Abe have pledged to
increase aid to Manila, and Tokyo plans to send a team of economic experts to
Manila soon. Australia yesterday promised to double its economic aid to
nearly $18 million a year and is studying increased military assistance,
according to the US Embassy in Canberra. Italy and West Germany are
considering larger aid programs, according to press and US Embassy reports.
The amount of new money to be made available to Manila has yet to be
determined, but the Asian Development Bank's new loan would represent at
least 20 percent of last year's $486 million trade deficit, and the total will sub-
stantially improve the prospects for economic recovery. Divestiture of state-
owned corporations-valued at more than $5 billion-would aid efforts to
control the budget deficit, which reached $500 million last year.
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Kenya Avoids New Kenyan and IMF officials have concluded that Kenya does not require a new
IMF Standby standby arrangement this year because of improvements in the world coffee
market and declining oil prices. The IMF has revised its 1986 projections for
Kenya from a balance-of-payments financing gap of about $100 million to a
surplus of about $170 million. Kenyan officials have indicated they will
continue to adhere to IMF targets, but the economic upturn and lack of IMF
oversight make it less likely that Kenya will fully implement additional
reforms needed for sustained economic growth. Moreover, despite this year's
expected economic boost, Kenya still faces rapid population growth and
probable foreign payments difficulties over the medium term.
China Gets First China's first project finance loan will provide approximately $125 million
Project Finance toward a $400 million coal-fired power plant under construction by a joint
Package venture in Shenzhen, near Hong Kong. Although China will not directly
guarantee the loan, Guangdong provincial authorities are responsible for
ensuring adequate coal deliveries and for buying at least 60 percent of the elec-
tricity generated. Moreover, the plant itself is collateral, though it is extremely
unlikely that lenders could ever exercise their right to repossess state property
in China. this arrangement will set a precedent
for future project financing in China. Beijing may increase its use of similar
commercial financing this year, but projects will be closely evaluated for their
foreign exchange earning potential-this plant was undoubtedly approved
because it will help China reduce electricity imports from Hong Kong. Joint
venture partners, which include Hong Kong's Hopewell group (with a 50-
percent share), and the Bank of China (40 percent), will operate the plant for
10 years, and then turn it over to China at no cost.
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Secret
Bonn Concerned
About US MFA
Approach
arrangements to replace the next MFA.
West German officials are concerned that US calls for cutbacks and zero
growth rates in next month's Multifiber Arrangement (MFA) renegotiation
talks could undermine the more liberal EC position they see developing. Bonn
hopes to offer increased market access for countries that open their own
markets, but wants to reduce access for countries that unfairly subsidize textile
exports. This position is supported by West German political parties, manufac-
turers, and unions. West Germany-the world's second-largest textile exporter
and importer-particularly wants to liberalize offshore processing, on which
its apparel producers depend. German officials also want to make textiles an
important part of the new GATT round and would prefer new GATT
Possible The Fijian Government has raised the prospect of increased economic ties to
Soviet-Fijian the USSR, according to the US Embassy. Primary Industries Minister Walker
Trade Ties said publicly last week that the government would not forbid Fijian companies
from buying Soviet-caught fish, servicing Soviet ships, or selling timber to the
USSR. The Soviet Ambassador reportedly made several such proposals on a
visit to Fiji last month. Prime Minister Mara later told the US Ambassador he
probably would conclude a sugar deal with the Soviets, but he was less positive
about the cannery proposal. Walker's comments reflect unhappiness with what
Fijians see as US unresponsiveness to their appeals for help in dealing with Fi-
ji's economic problems. The government probably is also trying to blunt
opposition accusations that the Prime Minister has moved the country too
close to the US politically. Moscow would consider a ship-provisioning
arrangement a victory after failing to obtain port access and servicing for
Soviet ships in nearby Kiribati last January.
Global and Regional Developments
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London Metals
Exchange Takes
Action in Tin Crisis
the United Kingdom.
The London Metals Exchange (LME)-frustrated by the International Tin
Council's (ITC) failure to agree on the most recent bailout proposal in the four-
month-old tin crisis-decided last week to close all tin contracts at a fixed
price and to end tin trading on the exchange permanently. The LME
settlement price has been set at $4.12 a pound, 30 percent lower than the aver-
age price on outstanding contracts. As a result, LME brokers stand to lose
$200-300 million, which could lead to bankruptcy for some. Cancellation of
LME tin trading will mean more direct transactions, with prices largely set by
the producers. Reference prices, however, will be available through the Kuala
Lumpur Tin Exchange and the New York Commodity Exchange. The LME
decision, together with ITC inability to control the market, will lead to still
lower tin prices and a shakeout of high-cost producers-notably Bolivia and
West German Shift Bonn has announced that it will decide whether to participate in the Hermes
on Hermes Spaceplane spaceplane project by this fall, instead of the original 1987 deadline. Accord-
ing to US Embassy reporting, the Kohl government has come under increasing
pressure from both the domestic aerospace industry and Paris to join the
French initiative. An official of West Germany's Research Ministry-whose
director, Heinz Riesenhuber, is a severe critic of Hermes-told US Embassy
officers that ministry officials were surprised by the announcement and believe
that President Mitterrand personally persuaded Chancellor Kohl to make an
early decision during the Franco-German summit on 27-28 February. While
the decision suggests a shift in West German policy in favor of Hermes, it
leaves some important questions unanswered, particularly the source of
funding for Hermes. We believe that Bonn's announcement will not affect
future US-West German space cooperation.
Soviet Role in Argentina is taking a new look at Soviet participation in rehabilitating the port
Argentine Port of Bahia Blanca, according to Embassy reporting. Previously, Buenos Aires
Project asked the World Bank to finance the entire project, rejecting a bid by Moscow
it considered technically poor. To cut costs, however, the Bank is reevaluating
Argentine plans for a major dredging of the port in favor of a cheaper topping-
off facility. Buenos Aires is now considering splitting the project by financing
the renovation of structures and loading facilities through the Bank and having
the Soviets dredge the deepwater channels. The government has asked
Moscow to bid on the dredging, and we believe there is a reasonable chance
that Buenos Aires will approve such Soviet participation. Defense Minister
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Secret
Carranza-a decisive opponent of a Soviet presence-died in mid-February.
Also, Moscow has been pressuring Buenos Aires to correct the heavy trade
imbalance in favor of Argentina. Nevertheless, if the World Bank concludes
that the split scheme is unfeasible it could still quash Soviet involvement by
threatening to withdraw financing.
National Developments
Developed Countries
Ottawa Checking Ottawa is increasingly worried about the effect of the sharp oil price decline on
Bank Energy Loans Canadian banks. The government is asking banks to provide figures detailing
loan exposure to the energy industry, and may require banks to set aside
specific reserves to cover possible defaults-a provision already imposed on
loans to a group of LDCs. Ottawa is anxious to avoid a repetition of last year's
banking crisis, which was precipitated by the collapse of two small Western
Canadian banks holding bad loans to the energy sector. Although Ottawa
wants to be prepared to facilitate orderly mergers for small banks, its main
concern is potential pressure on major banks. Financial analysts believe that
the CIBC, Canada's third-largest bank, with 13 percent of outstanding loans
to the energy-producing Province of Alberta, is most susceptible.
Film Distribution in Communications Minister Masse's pledge to break US domination of the
Canada Becomes Canadian film distribution market has increased pressure on Ottawa to defend
a Major Issue its "cultural" flank in the national debate over freer trade with the United
States. Masse, a powerful and popular Tory minister from Quebec, probably
believes he has a veto over issues relating to cultural industries in any trade
accord with Washington. In his first public statement on the findings of his
task force on the Canadian film industry, Masse appeared sympathetic to its
recommendations on forced divestiture as the means of wresting control from
US firms. Masse promised to study new antitrust procedures to combat foreign
distributors. He disparaged government aid for filmmakers on a project-by-
project basis as inadequate to defend Canada's "cultural industries," and
suggested a national investment fund to finance Canadian film projects. By
publicly promoting policy goals at odds with a comprehensive trade pact with
the United States, supported by Prime Minister Mulroney, Masse is forcing
the Prime Minister to choose between a blatantly discriminatory investment
policy and appearing unwilling to defend Canadian culture.
Japanese Export MITI has issued administrative guidance to 50 Japanese companies participat-
Controls at ing in an October trade fair in Moscow. The guidelines enforce Japanese law
Trade Fairs that exhibit equipment be returned within three months after the fair and that
sales from the floor require COCOM approval.
the guidelines are a warning to Japanese firms to uphold Japan's obligations
under COCOM. MITI may be attempting to blunt foreign criticism that
Japanese firms use occasions such as trade fairs to transfer controlled
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Secret
technology without COCOM approval. A French journal recently reported
that Japanese companies would be displaying 14 categories of technology the
Soviets are seeking, much of which falls under COCOM restrictions, at the
Moscow trade fair.
Less Developed Countries
Soaring Prices and Large price and wage increases announced last Sunday are unlikely to reduce
Wages in Nicaragua current food shortages substantially and will further exacerbate Nicaragua's
triple-digit inflation, according to press and US Embassy reporting. Controlled
prices on some 50 consumer goods were raised an average 150 percent. Milk,
rice, salt, soap, sugar, and toilet paper, for example, were raised 130 percent,
on the average, and corn and beans 300 percent. While most fuel and
transportation prices rose about 50 percent, local bus fares were frozen. The
Embassy reports that the new prices are still about one-third below black-
market rates. Moreover, prices paid to farmers for their products lagged even
further behind. For example, producer prices for corn and beans remained
stable. Despite the second 50-percent wage hike this year, the Embassy reports
that purchasing power continues to deteriorate. While the government claims
inflation is running at about 200 percent, nongovernment economists estimate
an annual rate of more than 400 percent.
Brazil's Economic The new economic reforms announced by President Sarney two weeks ago-
Program Cheered including temporary price and wage freezes and gradual deindexation of the
by Public economy-received immediate strong public support. According to the US
Embassy, domestic polls indicate initial approval of the inflation-fighting
measures at 80 to 90 percent, even though most Brazilians believe that real in-
comes will suffer somewhat. Consumers are enthusiastically helping to enforce
the price freeze, and there was a record 23-percent increase in the Sao Paulo
stock exchange index. Both of Brazil's labor confederations initially threatened
a general strike. In addition, Rio de Janeiro Governor Brizola, a leading leftist,
condemned the package as IMF-style austerity. Nevertheless, since witnessing
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Secret
the strong public backing, both labor leaders and Brizola have moderated their
criticism. Public support may be weakening a bit. The government has
vehemently denied the rumors of bank failures as a result of the new program,
and it has taken steps to increase the liquidity of the banking system. In
addition, after a sharp drop immediately following the announcement, the
parallel market dollar exchange rate-traditionally a barometer of public
confidence in the economy-is beginning to rise somewhat.
Floods Add to Flooding in the region around Lake Titicaca has cost nearly $3 million in crop
Peru's Economic and livestock losses and displaced at least 90,000 peasants, according to
Problems Peruvian and Bolivian civil defense officials. Food shortages already exist in
Lima, and this disaster will boost domestic prices and require more imports,
thus eroding a planned $800 million trade surplus. President Garcia will
probably seek credits from Argentina and Uruguay during his visits this
weekend to cope with Peru's worst food crisis in 40 years.
Tunisian Economy Drought conditions throughout Tunisia threaten to devastate livestock herds
Plagued by Drought and further widen the trade deficit this year. The US Embassy says forage is
virtually nonexistent in large parts of the country, forcing farmers to slaughter
many animals and buy high-cost feed to sustain depleted herds. Livestock
losses may top 40 percent in some areas and take years to replace. Crop losses
could approach 600,000 metric tons, adding $90 million to the import bill this
year and shaving 1 to 2 percentage points off GDP growth. The drought is a
particularly hard blow in the face of sharply reduced oil export revenues and
the loss of remittances from workers expelled from Libya last summer. Prime
Minister Mzali probably will have to seek more foreign lending and rely even
more heavily on domestic security services to stem growing labor disgruntle-
ment with his austerity program.
Pakistani Wage An influx of returning workers from the Middle East has begun to depress
Rates Falling wage rates in Pakistan. According to the US Consulate in Lahore, wages for
semiskilled and skilled labor have dropped as much as 40 percent between
January 1985 and January 1986. The Consulate estimates roughly 700,000
workers returned to Pakistan in this period. Falling world oil prices are likely
to further reduce employment prospects for Pakistani workers in the Gulf and
to increase the repatriation process. The absorption of the displaced workers
into the already overcrowded domestic labor market will increase the possibili-
ty of political unrest.
Rumors of Ali Wardhana, Coordinating Minister for Economics, Finance, and Industry,
Indonesian Devaluation appealed for calm last week following a sudden surge of US dollar buying in
local foreign exchange markets as businessmen hedged against a possible
rupiah devaluation. rumors of a
devaluation emerged in the wake of the dramatic decline in crude oil spot
Secret
14 March 1986
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 Declassified in Part - Sanitized Copy Approved for Release 2012/01/09: CIA-RDP88-00798R000300070006-8
prices-which last week slumped to below $12 per barrel. The rupiah was
devalued by almost 30 percent in 1983 and has since been tied to a basket of
currencies. Jakarta can maintain the exchange rate at its present level but
would be forced to choose between permitting greater foreign exchange
outflows or allowing domestic interest rates to soar. Total foreign exchange
reserves are ample-$10.3 billion-and, despite the slowdown in real economic
growth, inflation has been kept under wraps.
Singapore Economic A tug of war over economic policy is emerging between the government-
Policy Wrangle appointed special Economic Committee-composed primarily of private bank-
ers and businessmen-and the central bank. The Committee proposes long-
term, deregulatory solutions while the central bank is attempting to solve
short-term problems by regulating the financial sector more strictly. In
December, for example-after a three-day closure of the Singapore Stock
Exchange-the government negotiated a privately funded credit line to rescue
overleveraged brokers and prevent a collapse of the Exchange. The central
bank has imposed such strict guidelines on the use of the funds, however, that
heavily indebted brokerage houses have been denied access-three have failed.
Similarly, on 21 February the central bank arrested the depreciation of the
Singapore dollar by selling US dollars-contrary to the Committee's recom-
mendations for a float. Two opposition members of Parliament charged that
the Committee's proposed economic recovery package does not benefit the
working class, prompting Parliament to add personal tax reductions. In our
judgment, Prime Minister Lee must soon decide whether to let the Committee,
headed by his son, or the central bank, headed by his longtime adviser, take
charge of policy to retain any chance of a quick economic recovery.
China To Reduce Beijing has ordered further reductions in imports of diammonium phosphate
Imports of (DAP) fertilizer from the United States, probably to conserve foreign ex-
US Fertilizer change. Last year the United States sold more than 700,000 metric tons of
DAP to China-about half the 1984 level-worth about $116 million. The
Chinese plan to shift purchases of DAP and other fertilizers to alternate
suppliers, especially East European countries that will engage in barter trade.
China plans to order at least 8 million tons of all types of fertilizer this year.
China's Technology According to Chinese press reports, China's trade ministry approved imports
Import Boom of advanced technical equipment worth nearly $3 billion last year-triple the
Continues 1984 level. We estimate that China last year imported $2 billion worth of
computers, telecommunications equipment, and scientific instruments-$500
million from the United States. The Chinese figures probably inflate the
35 Secret
14 March 1986
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 Declassified in Part - Sanitized Copy Approved for Release 2012/01/09: CIA-RDP88-00798R000300070006-8
Secret
actual value of technology imports by including contracts for goods to be
shipped in 1986 and later. They probably undervalue total technology
contracts, however, by excluding imports negotiated by the more than 200
technology import and export corporations operating outside the trade minis-
try's jurisdiction. Nonetheless, technology imports should continue to show
strong growth over the next five years, with priorities going to energy,
transport, telecommunications, and advanced manufacturing equipment, ac-
cording to Chinese statements.
Secret
14 March 1986
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 Declassified in Part - Sanitized Copy Approved for Release 2012/01/09: CIA-RDP88-00798R000300070006-8
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 Declassified in Part - Sanitized Copy Approved for Release 2012/01/09: CIA-RDP88-00798R000300070006-8
Secret
Secret
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 Declassified in Part - Sanitized Copy Approved for Release 2012/01/09: CIA-RDP88-00798R000300070006-8
Directorate of
Intelligence
Economic & Energy
Indicators
DI EEI 86-006
14 March 1986
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 Declassified in Part - Sanitized Copy Approved for Release 2012/01/09: CIA-RDP88-00798ROO0300070006-8
This publication is prepared for the use of US Government
officials, and the format, coverage, and content are designed to
meet their specific requirements. US Government officials may
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liaison channels from the Central Intelligence Agency.
Requesters outside the US Government may obtain subscriptions to
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Library of Congress
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or: National Technical Information Service
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Economic & Energy
Indicators
Economic Industrial Production
Export Prices in US, $
Import Prices in US $
Exchange Rate Trends
Money Market Rates
Agricultural Prices
Industrial Materials Prices
Foreign Trade
Current Account Balance
Consumer Prices
Money Supply 2
Unemployment Rate 2
World Crude Oil Production, Excluding Natural Gas Liquids 8
Big Seven: Inland Oil Consumption 9
Big Seven: Crude Oil Imports 9
OPEC: Crude Oil Official Sales Price 10
OPEC: Average Crude Oil Official Sales Price (Chart) 11
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United States
Japan
West Germany
2.6
1.0
-2.3
-7.2
0.4
-3.2
5.9
3.5
0.3
11.6
11.1
2.4
France
-2.6
-1.5
1.1
2.3
United Kingdom
Italy
-3.9
-1.6
2.1
-3.1
3.9
-3.2
1.3
3.1
United States
2.5
-2.1
3.4
2.3
Japan
4.1
3.1
3.3
5.0
West Germany
-0.2
-1.0
1.6
2.7
France
0.2
1.8
0.7
1.6
Canada
3.3
-4.4
3.3
Percent change from previous period
seasonally adjusted at an annual rate
Year 3d Qtr
2.2 2.1
4.7 -0.4
4.6 0.4
0.4 6.2
4.8 0.7
1.1 -2.3
4.3 9.4
4th Qtr
Dec
Jan
1.8
9.0
3.9
-2.9
7.1
-10.3
2.4
-6.8
1.0
-36.0
2.2
-24.0
2.5
-39.3
5.5
8.3
Percent change from previous period
seasonally adjusted at an annual rate
Year 1st Qtr 2d Qtr 3d Qtr 4th Qtr
2.3
2.3
3.7
1.1
3.0
1.2
1.7
5.8
2.6
-4.6
5.6
9.2
1.4
3.4
4.5
I.I
0.8
7.0
5.4
Percent change from previous period
seasonalh' adjusted at an annual rate
United States
10.3
6.2
3.2
4.3
Year
3.5
3d Qtr
2.4
4th Qtr Jan Feb
4.3 4.1
Japan
4.9
2.6
1.8
2.3
2.0
2.1
2.1 1.9 2.2
West Germany
6.0
5.3
3.3
2.4
2.2
0.1
0.9 -0.9 3.0
France
13.3
12.0
9.5
7.7
5.8
4.4
3.1 0.7
United Kingdom
11.9
8.6
4.6
5.0
6.1
3.1
3.1 6.1
Italy
19.3
16.4
14.9
10.6
8.6
7.3
6.9 2.9
5.8
4.3
4.0
3.2
4.4 6.1
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Money Supply, M-1
Percent change iron, previous period
seasonally adjusted at an annual rate
Year
3d Qtr
4th Qtr
Dec
Jan
7.1
6.6
8.9
15.3
11.0
13.3
1.2
Japan 3.7
7.1
3.0
2.9
4.6
2.9
0.2
14.3
57
6
West Germany 1.1
3.6
10.3
3.3
4.3
8.1
14.6
43.8
.
-8
1
France 12.2
13.9
10.0
7.8
9.9
.
United Kingdom NA
NA
13.0
15.4
Italy 11.2
11.6
15.1
12.3
11.3
Canada
3.2
Based on amounts in national currency units.
Including MI-A and MI-B.
Unemployment Rate a
Year
4th Qtr
Dec
Jan
Feb
United States
7.5
9.6
9.4
7.4
7.1
6.9
6.8
6.6
7.2
Japan
2.2
2.4
2.7
2.7
2.6
2.9
2.9
2.7
West Germany
5.6
7.7
9.2
9.1
9.3
9.2
9.1
9.0
9.2
France
7.6
8.4
8.6
9.6
10.2
10.5
10.5
10.5
10.5
United Kingdom
10.0
11.6
12.4
12.6
13.1
13.2
13.2
13.3
13.2
Italy
8.4
9.1
9.9
10.4
Canada
7.5
11.1
11.9
11.3
10.5
10.2
10.0
9.8
9.8
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Year
2d Qtr
3d Qtr
4th Qtr
Jan
United States b
Exports 233.5
Imports 261.0
Balance -27.5
212.3
244.0
-31.6
200.7
258.2
-57.5
217.6
325.6
-108.0
213.3
346.1
-132.8
52.6
86.4
-33.8
52.6
84.5
-31.9
52.4
90.8
-38.4
Japan
Exports 149.6
Imports 129.5
Balance 20.1
138.2
119.6
18.6
145.5
114.0
31.4
168.1
124.1
44.0
173.9
117.9
56.0
42.6
29.5
13.1
43.6
29.2
14.4
47.3
30.3
17.0
16.4
10.4
6.0
West Germany
Exports 175.4
Imports 163.4
Balance 11.9
176.4
155.3
21.1
169.5
152.9
16.6
171.9
153.1
18.8
184.3
159.0
25.3
43.3
37.2
6.2
48.8
41.7
7.1
51.0
43.6
7.4
18.8
15.2
3.6
France
Exports 106.3
Imports 115.6
Balance -9.3
96.4
110.5
-14.0
95.1
101.0
-5.9
97.5
100.3
-2.5
101.9
104.5
-2.5
24.4
24.7
-0.4
26.1
26.8
-0.7
28.8
29.2
-0.4
10.2
9.7
0.5
United Kingdom
Exports 102.5
Imports 94.6
97.1
93.1
92.1
93.7
93.7
99.1
-5.3
101.2
103.9
-2.7
25.4
25.7
-0.3
25.5
26.2
-0.7
27.3
27.3
0
8.9
8.7
0.2
Italy
Exports 75.4
Imports 91.2
Balance -15.9
73.9
86.7
-12.8
72.8
80.6
-7.9
73.5
84.3
-10.9
78.9
90.7
-11.8
18.3
21.9
-3.6
20.4
21.2
-0.8
22.5
26.1
-3.6
7.1
8.9
1.8
Canada
Exports 70.5
Imports 64.4
Balance 6.1
68.5
54.1
14.4
73.7
59.3
14.4
86.5
70.6
15.9
88.0
75.7
12.3
21.8
18.6
3.2
21.8
19.6
2.2
22.5
19.6
2.9
Seasonally adjusted.
e Imports are customs values.
Imports are c.i.f.
Year
3d Qtr
4th Qtr Nov
Dec
Jan
United States
6.3
-8.1
-46.0
Japan
4.8
6.9
20.8
West Germany
-6.8
3.3
4.2
France
-4.7
-12.1
-4.9
United Kingdom
15.3
8.5
4.5
Italy
-8.6
-5.7
0.6
Canada
-5.0
2.1
1.4
-107.4
35.0 49.3 13.1 16.1 4.5 6.8 1.9
6.0 13.7 2.0 7.0 1.9 2.8 1.4
-0.8
1.6 4.6
-. -3.2
1.9 -1.9
Seasonally adjusted; converted to US dollars at current market
rates of exchange.
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Percent change from previous period
at an annual rate
United States
Japan
West Germany
France
United Kingdom
Italy
Canada
9.2
5.5
14.9
-12.0
NA
-7.8
3.9
1.5
-6.4
-2.8
5.5
NA
-3.0
-2.0
1.0
2.4
-3.2
-4.8
6.2
--4.4
-1.3
1.4
0.2
-7.1
-2.9
--5.1
-5.2
3.7
Year
-0.6
0.9
0
2.5
2.6
-3.1
3d Qtr
2.9
5.9
37.5
35.7
29.2
20.0
8.0
4th Qtr Dec Jan
2.1 7.1
39.1 10.0
44.6 50.1 31.4
30.8 42.3
13.0 4.4 10.6
-4.9 2.6
Percent change.Irom previous period
Cl! an annual rate
Year
3d Qtr
4th Qtr Dec .Ian
United States
5.3
2.0
-3.7
1.7
2.4
-0.1
3.1 2.7
Japan
3.6
7.4
-5.0
2.8
-4.3
2.6
3.0 24.9
West Germany
-8.6
-4.7
5.2
-4.8
1.5
19.4
27.6 29.9 7.8
France
7.8
-7.2
-7.0
--3.8
-0.3
18.6
12.2
United Kingdom
NA
NA
5.7
-4.6
0.5
16.4
8.1 7.3 13.6
ItaIy
1.0
5.3
-6.6
- 3.7
6.6
Canada
8.7
--1.1
-3.3
-0.1
- 1.3
9.3
4.2 1.7
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Exchange Rate Trends
Percent change from previous period
at an annual rate
Trade-Weighted
United States
10.5
10.6
5.8
9.1
-14.9
Japan
9.3
-5.7
10.4
6.2
11.1
West Germany
-2.1
7.0
5.8
1.0
8.5
France
-5.1
-6.1
-4.7
-2.1
9.9
United Kingdom
2.5
-2.1
-5.0
-2.5
16.7
Italy
-9.2
-5.1
-1.6
-3.1
-9.7
Canada
0.3
0.2
2.3
-2.3
Dollar Cost of Foreign Currency
2.7
-12.9
4.6
0
-0.3
18.6
42.9
14.1
61.4
West Germany
-24.6
-7.2
-5.2
-11.5
-3.3
27.8
32.1
27.4
41.0
France
-28.7
-20.8
15.9
-14.7
-2.7
28.0
31.6
26.3
41.0
United Kingdom
-13.2
-13.4
-13.3
-11.9
-3.0
44.5
17.8
-12.8
-0.3
-32.8
-18.8
-12.3
-15.6
-2.5
-2.9
0.1
-5.1
Money Market Rates
Year
2d Qtr
3d Qtr
4th Qtr
Jan
sO ---
United States
90-day certificates of
deposit, secondary market
8.16 8.04 7.90 7.93 7.95
Japan
loans and discounts
(2 months)
West Germany
interbank loans
(3 months)
France
interbank money market
(3 months)
United Kingdom
sterling interbank loans
(3 months)
Italy
Milan interbank loans
(3 months)
Canada
finance paper (3 months)
Eurodollars
3-month deposits
12.19 8.82 5.78 5.96 5.40 5.80 d.86 4.81 4.63
18.46 14.48 9.53 11.30
16.87 13.25 9.69 10.86
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 Declassified in Part - Sanitized Copy Approved for Release 2012/01/09: CIA-RDP88-00798R000300070006-8
Bananas
Fresh imported,
(Total world, $ per metric ton)
Beef (c per pound)
Australia
(Boneless beef,
f.o.b. US Ports)
Year 3d Qtr 4th Qtr Jan Feb
214.0 217.0 232.0 243.0 110.3 110.9 108.1 109.4 NA
United States
(Wholesale steer beef,
midwest markets)
Cocoa (c per pound)
89.8
74.3
92.1
106.2
98.7
98.4
100.8
100.6
95.5
Coffee ($ per pound)
1.28
1.40
1.32
1.44
1.43
1.33
1.52
2.04
1.94
Corn
150
123
148
150
125
118
117
119
117
(US #3 yellow,
c.i.f. Rotterdam, $ per metric ton)
Cotton
(World Cotton Prices, "A"
index, c.i.f. Osaka, US Q/Ib.)
Palm Oil
(United Kingdom 5% bulk,
c.i.f., $ per metric ton)
Rice ($ per metric ton)
US (No. 2, milled,
4% c.i.f. Rotterdam)
Thai SWR
573
362
339
310
249
236
263
238
237
(100% grade B
c.i.f. Rotterdam)
Soybeans
288
244
282
283
225
213
208
218
218
(US #2 yellow,
c.i.f. Rotterdam, $ per metric ton)
Soybean Oil
507
447
527
727
571
518
454
457
402
(Dutch, f.o.b. ex-mill,
$ per metric ton)
Soybean Meal
252
219
238
197
157
152
174
186
184
(US, c.i.f. Rotterdam
$ per metric ton)
Sugar
16.93
8.42
8.49
5.18
4.04
4.21
5.30
4.87
5.55
(World raw cane, f.o.b.
Caribbean Ports, spot prices g per pound)
Tea
91.0
89.9
105.2
156.6
90.0
72.3
78.1
82.1
85.7
Average Auction (London)
(c per pound)
Wheat
(US #2. DNS
c.i.f. Rotterdam, $ per metric ton)
Food Index a (1980=100)
The food index is compiled by The Economist for 14 food commodities which enter international trade. Commodities are weighted by 3-
year moving averages of imports into industrialized countries.
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Aluminum (C per pound)
Major US producer
77.3
76.0
77.7
81.0
81.0
81.0
81.0
81.0
81.0
LME cash
57.4
44.9
65.1
56.8
47.2
45.6
44.6
50.6
50.6
Chrome Ore
53.0
50.9
50.0
50.0
43.9
41.0
40.0
40.0
40.0
(South Africa chemical
grade, $ per metric ton)
Copper (bar, C per pound)
79.0
67.1
72.0
64.2
64.5
62.6
64.2
64.2
63.8
Gold ($ per troy ounce)
460.0
375.5
424.4
Lead (c per pound)
32.9
24.7
19.3
Manganese Ore
82.1
79.9
73.3
(487 Mn, $ per long ton)
Nickel ($ per pound)
Cathode major producer
3.5
3.2
3.2
3.2
3.2
3.2
3.2
3.2
3.2
LME Cash
2.7
2.2
2.1
2.2
2.2
2.2
1.9
1.8
1.8
Platinum ($ per troy ounce)
Major producer
New York dealers' price
Rubber (c per pound)
Synthetic h
Natural
Silver ($ per troy ounce)
Steel Scrap d ($ per long ton)
Tin (c per pound)
641.4
581.6
590.9
556.6
543.2
571.0
559.4
NA
NA
Tungsten Ore
18,097
13,426
10,177
10,243
10,656
10,648
9,488
8,588
8,745
(contained metal,
S per metric ton)
US Steel
(finished steel, composite,
$ per long ton)
33.7
34.7
41.5
35.4
33.4
28.6
29.4
27.6
Lumber Index
95
(1980=100)
Industrial Materials Index
85
71
(1980=100)
Approximates world market price frequently used by major world
producers and traders, although only small quantities of these
metals are actually traded on the LME.
h S-type styrene, US export price.
Quoted on New York market.
,i Average of No. I heavy melting steel scrap and No. 2 bundles
delivered to consumers at Pittsburgh, Philadelphia, and Chicago.
This index is compiled by using the average of I I types of lumber
whose prices are regarded as bellwethers of US lumber construction
costs.
The industrial materials index is compiled by The Economist for
18 raw materials which enter international trade. Commodities are
weighted by 3-year moving averages of imports into industrialized
countries.
Declassified in Part - Sanitized Copy Approved for Release 2012/01/09: CIA-RDP88-00798R000300070006-8
 Declassified in Part - Sanitized Copy Approved for Release 2012/01/09: CIA-RDP88-00798R000300070006-8
World Crude Oil Production
Excluding Natural Gas Liquids
55,837
53,092
52,633
53,691
Non-Communist countries
41,602
38,810
38,228
39,257
Developed countries
12,886
13,276
13.864
14,302
United States
8,572
8,658
8,680
8,735
Canada
1,285
1,270
1,356
1,411
United Kingdom
1,811
2,094
2,299
2,535
Norway
501
518
614
700
Other
717
736
915
921
Non-OPEC LDCs
6,036
6,633
6,823
7,515
Mexico
2,321
2,746
2,666
2,746
Egypt
598
665
689
827
Other
3,1 17
3,222
3,468
3,942
OPEC
22,680
18,901
17,541
17,440
Algeria
803
701
699
638
Ecuador
211
211
236
253
Gabon
151
154
157
152
Indonesia
1,604
1,324
1,385
1,466
Iran
1,381
2,282
2,492
2,187
Iraq
993
972
922
1,203
Kuwait b
947
663
881
912
Libya
1,137
1,183
1,076
1,073
Neutral Zone
370
317
390
410
Nigeria
1,445
1,298
1,241
1,393
Qatar
405
328
295
399
Saudi Arabia b
9,625
6,327
4,867
4,444
1,500
1,248
1,1 19
1,097
2,108
1,893
1,781
1,813
Communist countries
14,235
14,282
14,405
14,434
USSR
11,800
11,830
1 1,864
11,728
China
2,024
2,042
2,121
2,286
Other
411
410
420
420
I st Qtr
2d Qtr
3d Qtr
4th Qtr
Nov
Dec
53,464
52,405
52,373
55,015
54,709
55,051
38,672
37,610
37,588
40,707
40,418
40,760
14,704
14,617
14,643
14,958
14,989
14,860
8,871
8,972
8,954
8,933
8,901
8,936
1,463
1,445
1,444
1,476
1,475
1,500
2,660
2,471
2,399
2,607
2,655
2,481
719
728
823
870
879
870
991
1,001
1,023
1,072
1,079
1,073
7,733
7,802
7,922
7,888
7,849
7,915
2,711
2,724
2,738
2,721
2,679
2,733
877
875
890
856
860
860
4,145
4,203
4,294
4,311
4,310
4,322
16,235
15,191
15,023
17,861
17,580
17,985
660
634
616
660
680
650
274
271
282
287
290
290
150
150
153
160
160
160
1,152
1,167
1,203
1,286
1,200
1,100
2,097
2,299
2,335
2,301
2,200
2,400
1,255
1,340
1,482
1,666
1,700
1,650
914
800
800
899
950
900
1,051
1,057
933
1,234
1,200
1,300
480
333
306
391
400
360
1,590
1,351
1,214
1,686
1,760
1,620
292
297
312
312
300
335
3,659
2,731
2,564
4,067
4,000
4,500
1,123
1,120
1,193
1,242
1,185
1,165
1,538
1,641
1,630
1,670
1,555
1,555
14,792
14,795
14,785
14,308
14,291
14,291
11,920
11,870
11,866
11,367
11,350
11,350
2,452
2,505
2,504
2,521
2,521
2,521
420
420
415
420
420
420
Preliminary.
b Excluding Neutral Zone production, which is shown separately.
Production is shared equally between Saudi Arabia and Kuwait.
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 Declassified in Part - Sanitized Copy Approved for Release 2012/01/09: CIA-RDP88-00798R000300070006-8
Japan
4,444
4,204
4,193
4,349
West Germany
2,120
2,024
2,009
2,012
France
1,744
1,632
1,594
1,531
United Kingdom
1,325
1,345
1,290
1,624
Italy b
1,705
1,618
1,594
1,513
Canada
1,617
1,454
1,354
1,348
Including bunkers, refinery fuel, and losses.
Principal products only prior to 1981.
Year
15,697
4,132
Ist Qtr
15,813
4,720
1,993
2d Qtr
15,452
3,580
2,034
3d Qtr
15,557
3,839
2,258
4th Qtr
15,748
4,388
Dec
16,541
5,072
1,493
1,755
1,881
1,342
1,208
1,310
1,230
1,569
1,504
1,511
1,718
1,327
1,281
1,286
1,417
1,366
1,642
1,707
Year
2d Qtr
3d Qtr
4th Qtr
Nov
Dec
United States
4,406
3,488
3,329
3,402
3,216
3,397
3,171
3,662
4,105
3,640
Japan
3,919
3,657
3,567
3,664
3,118
3,003
3,233
West Germany
1,591
1,451
1,307
1,335
1,284
1,260
1,248
1,210
1,182
1,150
France
1,804
1,596
1,429
1,395
1,476
1,252
1,421
1,590
1,527
1,690
United Kingdom
736
565
456
482
518
444
Italy
1,816
1,710
1,532
1,507
1,328
1,166
Canada
521
334
247
244
216
162
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 Declassified in Part - Sanitized Copy Approved for Release 2012/01/09: CIA-RDP88-00798ROO0300070006-8
29.31
28.70
Algeria
31.30
30.50
44? API 0.10% sulfur
Ecuador
34.42
34.50
32.96
27.59
27.50
28? API 0.93% sulfur
Gabon
31.09
34.83
34.00
29.82
29.00
29? API 1.26 % sulfur
Indonesia
35? API 0.09% sulfur
Iran
Light
34? API 1.35% sulfur
Heavy
31 ? API 1.60% sulfur
Iraq
35? API 1.95% sulfur
Kuwait
31 ? API 2.50% sulfur
Libya
40? API 0.22% sulfur
Nigeria
34? API 0.16% sulfur
Saudi Arabia
29.12
28.48
Berri
39? API 1.16% sulfur
Light
34? API 1.70% sulfur
Medium
28.12
31.84
32.40
27.86
27.40
31 ? API 2.40% sulfur
Heavy
27.67
31.13
31.00
26.46
26.00
27? API 2.85% sulfur
UAE
39? API 0.75% sulfur
Venezuela
26? API 1.52% sulfur
F.o.b. prices set by the government for direct sales and, in most
cases, for the producing company buy-back oil.
n Weighted by the volume of production.
Beginning in 1981 the price of Kirkuk (Mediterranean) is used in
calculating the OPEC average official sales price.
Year
Ist Qtr
2d Qtr
3d Qtr
4th Qtr
28.14
28.25
28.11
28.13
28.15
29.66
30.15
29.50
29.50
29.50
26.41
26.82
26.50
26.15
26.15
28.09
28.35
28.00
28.00
28.00
28.53
28.53
28.53
27.35
27.35
27.35
28.43
28.43
28.43
27.30
27.30
27.30
28.34
28.24
28.37
28.37
28.37
28.10
28.10
28.10
28.10
28.10
27.32
27.48
27.40
27.20
27.20
26.25
26.50
26.50
26.00
26.00
28.52
28.15
28.15
28.15
27.69
27.60
27.10
27.10
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 Declassified in Part - Sanitized Copy Approved for Release 2012/01/09: CIA-RDP88-00798R000300070006-8
OPEC: Average Crude Oil Sales Price
STAT
Declassified in Part - Sanitized Copy Approved for Release 2012/01/09: CIA-RDP88-00798R000300070006-8
 Declassified in Part - Sanitized Copy Approved for Release 2012/01/09: CIA-RDP88-00798R000300070006-8
Declassified in Part - Sanitized Copy Approved for Release 2012/01/09: CIA-RDP88-00798R000300070006-8