AS OIL PRICES FALL, MOSCOW'S WOES RISE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90-00965R000605300057-9
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 2
• Document Creation Date: December 22, 2016
• Document Release Date: May 8, 2012
• Sequence Number: 57
• Publication Date: March 6, 1985
• Content Type: OPEN SOURCE

Declassified in Part - Sanitized Copy Approved for Release 2012/05/08: CIA-RDP90-00965R000605300057-9
WALL STREET JOURNAL
6 March 1985
As oil Prices ~ . _ Fall,. Moscow's Woes Rise
If the world oil price drops sharply, will 1 for hard currency. All of this would be dif
By HENRY S. ROWEN the Soviets give them the full benefit of I ficult, would take time and is unlikely to
And VLADIMIR G. TRE~IL lower prices? If not, and the price gap be- recoup much of a large revenue loss.
tween Soviet and Western oil widens Other steps might include trimming ,
As the price of oil declines there are enough, the East Europeans might try to military expenditures and reducing con-
both happy and worried people around the shift to Western sources for oil. The sad Sumer-goods production in order to make
world. Among the latter should be the oli- shape of their economies gives them a more machinery for the investment sector.
garchs in Moscow. The Soviets' future powerful incentive to do this, but they The military would strongly resist and the
looks bleak, one with no good options. don't have much to sell that the West regime must be frightened of the popular
The Soviet Union prospered from the wants, and Moscow would set sharp limits reaction to cuts in consumption. Grain im-
great world commodities inflation of the to such a Westward reorientation of East- ports could be reduced for a year or two,
1970s. The value of its exports of oil, na- ern Europe's trade. But for Moscow to but this would mean slaughtering livestock
tural gas, gold and diamonds surged. How- switch from a policy of subsidizing the and less meat consumption in the future.
ever Soviet leaders long have wanted to es- East Europeans to, in effect, taxing them As for sales of natural gas to Western
cape from being a commodity exporter would further heighten tensions within the Europe, the famous "deal of the century"
like Chile or Brazil, and instead to use Bloc. The result is likely to be continued, has turned out to be less than a bonanza
their raw materials to produce finished but reduced, subsidies by Moscow. for Moscow. The contracted quantities
goods, such as machinery, for export. But On the import side, Moscow gives high- have been smaller than expected, and
Russia now imports both grain and ma- est priority to food imports that recently most buyers are taking only the minimum
chinery; the prices of the commodities it have averaged about $10 billion to $12 bil- amounts of gas called for in the contracts.
sells have lately gone into reverse, and the -lion a year in hard-currency payments. No More important, an oil price decline will
most important, oil, threatens to plunge. significant agricultural reforms are in the drag down the gas price further.
The best information-futures prices-says offing; something like this level of imports With oil at $15 a barrel, natural-gas
that the oil price later this year will be still will be needed in the years ahead. earnings from the deal of the century
about $25 a barrel. However, the best infor- Most of the remaining earnings go to would be only $1 billion to $2 billion a year
mation isn't very good. The Organization the importing of critically needed ma- during the next decade after interest and
of Petroleum Exporting Countries might chinery both from Eastern Europe and the amortization payments to Western banks.
be able to stabilize the price. But suppose West. Recent Soviet statistics show that However, price declines are removing new
it drops to $20 a barrel, maybe even to $15 about 35% of Soviet machinery invest- supplies of Norwegian gas from the scene,
in they next several years? ment-about half originating in the West most of which are probably too costly to -
Eighty percent of the value of the and half in Eastern Europe-comes from develop at a price below the equivalent of
U.S.S.R.'s exports to the West and about abroad, a big increase from a decade ago. $25 a barrel for oil. The sale of, say, an-
40% of its exports to Eastern Europe are in Much of this imported machinery is con- other one trillion cubic feet of gas a year
-the form of energy About 3.5 million bar centrated in such sectors as fertilizers and might earn Moscow an added $2 billion to
' papermaking, and there are many im- $2.5 billion annually in
refs a day of oil are exported, more than gross terms (the net
half to the West for hard currency. About ported components-for instance, elec- would be less if more Western pipe or,
two trillion cubic feet of gas goes to West- tronic controls-used in much Soviet ma- pumps had to be bought). This wouldn't go
ern and Eastern Europe. These exports chinery. Moreover, much East European far in recouping large foreign-exchange
generated almost $25 billion of last year's machinery sent to the Soviet Union incor- losses, even assuming the West Europeans
total hard-currency earnings of about .$30 porates Western technology. would risk becoming still more dependent
ren A cut in machinery imports from the on Soviet gas.
billion. Some of the remaining hard cur
cy earnings are energy related: the West ~by,s~sa.yy,.., one half plus perhaps sub In short, Siberian gas, which may be-
stanualreductions from Eastern Europe, come a large hard-currency earner in the
enia of wea
ons to oil-ri
h A
b
p
c
ra
states.
Every $1 a barrel decline in the oil would be a serious setback for the Soviet ' long run, probably won't yield large extra
economy. According to the Central Intelli- sums in the next decade.
price probably would pull down hard-cur Bence Agency, the pace of Soviet economic ? Export other products. Gold and dia-
rency earnings by close to $1 billion. (The growth has slowed in the past decade. mond prices have fallen greatly and Soviet
West Europeans are negotiating lower Over this period, gross national product sales have been pushing them down. The
prices for Soviet gas in parallel with lower growth has averaged a little more than 2% market for more weapons sales to oil-rich
oil prices; Moscow goes along because it annually, about 1% per capita. The loss of Arab states is declining as their oil reve-
wants to sell them more gas.) With oil at a sizable part of its machinery imports, if nues shrink. The Soviets have little else
$15 a barrel, Moscow would see its hard- it persiste or some years, would depress that the rest of the world wants.
currency earnings drop to about $20 billion economic growth further. Trouble Raises Prices
from $30 billion. What could Moscow do? Here are some
A Shift to the West possibilities: ? Borrow more money. By ordinary
It is harder to predict what would hap- ? Tighten belts and increase energy ex- banking standards, the Soviet Union's
pen in its trade with Eastern Europe, ports. As oil prices began to fall after the gross debt of $20 billion to the West and net
which takes place largely under bilateral early 1980s, Moscow responded by increas- debt of $10 billion is modest. Its debt-serv-
agreements denominated in an accounting ing oil exports. Its oil production was still ice ratio is about 20% of 1984 export earn-
currency ("transferable rubles"). During rising then; now it is falling. (Tars reports ings, but this ratio would climb if foreign-
the past decade the East Europeans were that 1984 production fell slightly from 1983; exchange earnings fall. Nonetheless, addi-
subsidized by Moscow under these agree- this is the first decline since World War tional borrowing seems feasible. Although
meats. But lately the Soviets have been II.) It might push harder to substitute still this would be. only a stopgap, many eco-
cutting back on the subsidy, reducing oil plentiful gas for scarcer oil domestically, , nomic managers are probably focusing on
shipments and raising the price while sell- supply less oil and more gas to Eastern how to get through the next few years. In
ing them more gas. Europe, and supply more -oil to the West any case, statements are once again ema-
Ctflt1"?tt
Declassified in Part - Sanitized Copy Approved for Release 2012/05/08: CIA-RDP90-00965R000605300057-9
 Declassified in Part - Sanitized Copy Approved for Release 2012/05/08: CIA-RDP90-00965R000605300057-9
naffing from Moscow on?tne virtues_cf,U.S:.,
Soviet trade; perhaps Moscow is alsollook-;
ing for some ,long-term U.S. financingas
parf of the. package..
? Act in the Persian Guff. 'rnefecord'uf`-the past decade shows that nothing.is more ..
bracing for the price of oil than serious
trouble in the Middle East. Moscow has a
clear economic interest in the continuation
of the Iran-Iraq War, a conflict that keeps
several million barrels of oil a day off the
market. Perhaps the Soviets could provide
.more powerful weapons to Iraq to help it
make more effective attacks on tankers.
Or, they might tilt politically back toward
Iran on the theory that Iran is more impor-
tant strategically than Iraq and that Iran-
ian successes would produce profitable
chaos in the region. Or, circumstances per-
mitting, Moscow might make a direct mili-
tary move into the area. Assuming that
war with the U.S. could be averted, such
actions might be seen in Moscow as both
benefiting its economy and hurting those of
its Western adversaries.
Probably nothing, this:drastic will occur.
Mo=w can.. trim and cut and almost cer-
tainly will scrape through. But even if the
a : price` doesn't fall greatly, the terms of
trade "irrr.~utg-aga^m- Moscow at a
time when its 'economic problems have be-
come manifestly grave. This.is an impor-
tant reason the Soviets are back at the
arms-control talks in Geneva and we are
hearing about the possibility of more Jews
being allowed to emigrate.
The Soviets doubtless also hope, not
without reason given the record of past
aid, that once again the West will help
them get out of a tight corner. Western
governments need to focus now on how i
best to use increased leverage with Mos-
cow, leverage that could grow markedly in
the next several years.
Mr. Rowen is professor of public man-
agement at the Business School and senior
research fellow at the Hoover Institution. of
Stanford University. Mr. Treml is profes-
sor of economics at Duke University.
Declassified in Part - Sanitized Copy Approved for Release 2012/05/08: CIA-RDP90-00965R000605300057-9