DCI REMARKS TO THE PRESIDENT'S ECONOMIC POLICY ADVISORY BOARD 18 MARCH 1982

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88B00443R001103940021-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 8
• Document Creation Date: December 20, 2016
• Document Release Date: November 28, 2007
• Sequence Number: 21
• Publication Date: March 18, 1982
• Content Type: REPORT

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DCI REMARKS TO THE PRESIDENT'S ECONOMIC POLICY ADVISORY BOARD
18 March 1982
Vulnerabilities of the Soviet Economy
and Possible Policy Initiatives for the US
1. The Pentagon has a briefing on the Soviet military buildup which
is frightening. This has been sanitized and made publicly available in a
document titled, "Soviet Military Power."
Perhaps just as serious is a further Soviet strategy working with
Cuba, Libya, and Vietnam to destabilize and back insurgencies in strategically
located third countries. They saw that Vietnam had weakened our will to
help countries under this kind of attack. Soviet arms moved over huge
distances to link up with Cuban troops to establish new governments in
Angola and Ethiopia. Since 1975 this kind of insurgency has been supported
in over a dozen countries (Chad, Namibia, Mozambique, Morocco,* Kampuchea,*
Guatemala,* Nicaragua, El Salvador,* Angola, Somalia,* Ethiopia, South Yemen.,
North Yemen,* Sudan, others have been tested. Seven have been taken over and
six, marked *, are still under way). To support this, the Soviet Union gave
Cuba close to $4 billion this year and Vietnam over $1 billion. It got half
a billion in hard currency by selling arms to Libya, some of which Libya
redistributed elsewhere. The Soviets earned 20 percent of their hard currency
from arms sales.
2...The key to the drive for military power has been the ability of the
Soviet economy to provide small but steady improvements to the standard of
living. Until recently, the Russian economy provided enough additional
butter to support the acquisition of more and more guns.
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3. We now recognize that a key element in Moscow's ability to keep
this strategy alive through the 1970s was help from the West, in the form
of credits to buy equipment, technology, and food. In addition,,the Russians
helped themselves by acquiring Western technology through espionage, and by
earning hard currency through exports of oil, arms and gold. US inertial
guidance technology and precision grinders have produced the accuracy and
MIRVing in Soviet missiles which have resulted in budget busting appropriations
for MX and Trident.
4. The Soviet economy is now spiraling down toward an extended period
during which annual growth rates will be in the 1 percent to 1.5 percent
range at best. Shortages of oil and declining rates of labor productivity
are major causes of this declining performance. In the Soviet Union, most
rises in productivity have come from; increments to the labor force, as
opposed to technological innovation. But due to low birth rates during the
1960s among ethnic Russians and other Slavs, the Soviet Union now has a
shortage of workers in key regions. During this decade, the work force
in the Russian Republic -- which accounts for 60 percent of the country's
total industrial output and 75 percent of total military output -- will
shrink by 1,300,000.
5. It is in large part to compensate for this shrinkage in the work
force that the Russians have turned to Western equipment and technology.
The fact is that their need for our equipment and technology is greater now
than it was during the heyday of detente. But the Soviet Union's ability
to import equipment and technology is declining rapidly due to a shortage
of hard currency:
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a. Oil prices are dropping.
b. Gold prices are low (due, in part, to heavy Soviet selling).
c. The market for Soviet arms is softening.
d. Western banks are increasingly reluctant to extend credit
to the Soviet Union -- or its satellites -- at preferential rates.
e. Three consecutive poor harvests have forced the Russians
to divert billions of dollars from equipment and technology purchases
to grain.
6. All this spills over into diverse sectors of the economy. There
have been major disruptions in the already seriously burdened Soviet rail
system resulting from priority to harvest and food shipments, overland shipments-
to Iran and Afghanistan, slow freight clearances and maneuvers around Poland.
This has produced embargoes of rail nets, car shortages, further disruptions
to industry.
7. Monitoring the economic troubles of the Soviet Union, and its satellites,
is now a top priority of the US intelligence community. We are learning just
how close to the edge Moscow is now operating. Reports have recently surfaced
that:
a. For economic reasons alone the Russians will reduce the number of
foreign military trainees in the USSR.
b. The quality of Soviet potatoes has degenerated so badly that to
reverse a decline in crop yields the Soviet Union recently imported 20,000
tons of seed potatoes from the Netherlands. That suggests the old joke
about Soviet efficiency being so bad that if the Russians ever do take
over Saudi Arabia, within five years they'll have to import sand. As
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c. We are also learning that productivity declines anywhere in the
Soviet bloc trigger industrial back-ups throughout the bloc. A lack of
Polish coal has closed steel mills in Russia; a lack of Polish integrated
circuits has forced a decline in the output of Czech computers that use
these chips.
8. Since 1965, the growth in Soviet defense spending in ruble terms has
averaged about 4 percent a year -- about the same as that for the overall
economy. Over most of this period, the defense share of GNP was a relatively
constant 12 to 13 percent. In 1979, the share increased by a percentage point
to 13-14 percent, and has increased slightly since then because of declining
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growth in GNP. Given current and future economic conditions, maintaining
historical rates of growth in defense spending will be economically and
politically more difficult. Nevertheless, on the basis of observed military
activity -- the number of weapon systems in production, weapons development
programs, and trends in capital expansion in the defense industries -- we
expect that Soviet defense spending will continue to grow at about its
historical rate through at least 1985. In this case, the defense share of
GNP would increase to at least 15 percent in 1985 and could approach 20
percent by the end of the decade. With an increase in production of less
than 2 percent to continue a 4 percent annual increase in military spending,
the military will have to increase its share of the increment from the present
25 percent to 50 percent by 1985 and 66 percent by 1990. It's difficult to
see how Moscow can continue its arms buildup without strangling its economy
without continued help from the West.
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9. For.Kremlin leaders, the trick will be to keep the old strategy
going for a while longer by somehow finding enough additional money to
support current levels of defense spending while fending off disaster in
the civilian sectors. One option would be to order a tightening of belts,
using more police power if necessary to keep the lid from blowing. A second
option would be to "starve" the satellites to feed the Motherland, for instance
by reducing subsidies the Soviet Union now provides to Eastern Europe by selling
oil at roughly half the world market price. Another option would be to find
alternate sources of hard currency, and thus to continue imports of Western
technology, equipment, and food. Alternate sources of hard currency could
include:
a. Credits from new lenders, such as Mideast governments.
b. Increased exports of raw materials including natural gas,
minerals, and increased exports of chemicals.
c. Access to wealth without spending hard currency through a
Soviet drive politically, economically or militarily toward the Persian
Gulf is a source of worry.
10. To some extent, the Russians are pursuing all these options:
a. As for belt-tightening, we know that food is being withheld
from shops, and transferred instead to key industrial enterprises
such as the Kama River truck plant for distribution to workers. This
keeps discontent among workers down--and places the burden of the
cut-backs on those least likely to cause trouble, such as pensioners.
b. As for starving the satellites, the Russians are increasing
the subsidized oil prices they extend to Eastern Europe.
c. A push is on for new sources of hard currency -- scrambling
around the world for loans, cash advances from and deposits for their
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banks, extended purchase terms, increased gold and diamond sales.
The Yamal pipeline will provide the Russians with about $9 billion
a year, starting in 1987 or 1988.
11. At least so far, all these activities have a strong ad hoc flavor.
Kremlin leaders seem to be winging it, so to speak, rather than confronting
the issue squarely and adopting a coherent, comprehensive response. It is
probable that no major decisions will be made until Brezhnev leaves the scene.
Indeed, the pressing need to start making decisions may speed his departure.
The ouster of Khrushchev in October 1964 was hastened in part by the perceived
failure of his economic policies, as well as his international setbacks and
domestic political struggles. The man who succeeds Brezhnev will be the first
Soviet leader to take power at a time when his country is, arguably, the world's
number one military power. If US will is perceived as so weak, the ability of
Moscow to intimidate is enhanced. Mideast governments may respond to Soviet
threats by extending credits at low rates of interest--or by selling oil to
the Soviet Union and its satellites at sweetheart prices. A variant of this
option would be for the Russians to get what they need without actually spending
hard currency, for example by bartering or by intimidating Mideast governments
into selling oil at sweetheart prices--or taking control of the Persian Gulf
outright. All we can say is that the pressures are intense.
12. What can we do:
We can work to deny credits to the Soviet Union. As you know, we
are exploring this path now. But perhaps we can look beyond the usual financial
centers and find ways of blocking new sources of credit, such as Mideast
governments and multi-national lending organizations.
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We can work to limit the Soviet Union's ability to earn hard currency.
Developing alternate sources of energy for Europe--for instance by developing
Norwegian natural gas fields or boosting US coal exports--is one,-promising way.
We can and are strengthening our efforts to deny the Soviet Union
access to Western technology and equipment.
In a wholly separate category I would put the use of food as a
potential weapon.
A cartel of the US, Canada, Australia, and Argentina would control
78 percent of all wheat in world trade, 87 percent of all corn, and 90 percent
of all soybeans. By way of comparison, the 13 OPEC nations control just 71
percent of world oil. At current prices, for about $20 billion--less than
one-tenth of the defense budget--the US could purchase every bushel of grain
on the world market.
It should take only a fraction of that to hold farmers in the US and
Argentina harmless from the consequences of withholding their grain from the
Soviet Union. That would be very powerful leverage indeed but it would be
an extraordinary measure which cannot be taken lightly. It would not be
justified in world opinion unless taken for a very specific and important
purpose. We are likely to face a gravely intensified anti-nuclear campaign
during the spring and summer. President Reagan's initiative on the zero
option on INF deployment registered strongly with European and world opinion.
We will have to show that Brezhnev's freeze offer is a fraud and it may be
that the most effective way to do this would be to call for substantial
reductions in strategic weapons, possibly including a zero option on land
based missiles. The magnitude of and concern over the nuclear threat to all
nations and all peoples may offer the best justification for using a comprehensive
economic threat.
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13. The use of economic inducements to achieve arms limitations has
been discussed before and always foundered on the difficulty of measuring and
verifying budget reductions and other general measures of arms limitations.
A better result may follow if negotiations are confined to very specific measures
(credits, energy, food, technology) and the destruction and renunciation of
specific weapons which now threaten the other party, the withdrawal of which
could be readily ascertained. For example, we could spell out:
a. The military and other advantages the Soviet Union has enjoyed
from trade and technology, food, credits and energy markets in its
dealings with the West.
b. The burdens these advantages have imposed on us.
c. The mutual advantages that could flow to both superpowers
and other countries as well if we agreed to reduce existing arsenals
by eliminating specified weapons in consideration of maintaining and
even increasing credit, food and trade designed to develop needed
resources in our two countries and around the world. In this way,
the umbrella and motivation of arms limitation might enable us to
use effectively and comprehensively the very significant economic
leverage we command but have difficulty in marshaling in the current
state of our own public and allied opinion.
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