AS OIL PRICES FALL, MOSCOW'S WOES RISE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90-00965R000706580019-9
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 1
• Document Creation Date: December 22, 2016
• Document Release Date: March 20, 2012
• Sequence Number: 19
• Publication Date: March 6, 1985
• Content Type: OPEN SOURCE

Si Declassified in Part - Sanitized Copy Approved for Release 2012/03/20: CIA-RDP
WALL STREET JOURNAL
6 March 1985
90-00965 R000706580019-9
As Oil Prices Fall, Moscow's Woes Rise
I R S ^ ~ ~' L
By HENRY S. Rower.
And VLADIMIR G. TRENuL
As the price of oil declines there are
both happy and worried people around the
world. Among the latter should be the oli-
garchs in Moscow. The Soviets' future
looks bleak, one with no good options.
The Soviet Union prospered from the
great world commodities inflation of the
1970s. The value of its exports of oil, na-
tural gas, gold and diamonds surged. How-
ever Soviet leaders long have wanted to es-
cape from being a commodity exporter
like Chile or Brazil, and instead to use
their raw materials to produce finished
goods, such as machinery, for export. But
Russia now imports both grain and ma-
chiner~ ; the prices of the commodities it
sells have lately gone into reverse, and the
most important, oil, threatens to plunge.
The best information-futures prices-says
that the oil price later this year will be
about $25 a barrel. However, the best infor-
mation isn't very good. The Organization
of Petroleum Exporting Countries might
be able to stabilize the price. But suppose
it drops to $20 a barrel, maybe even to $15
in the next several years?
Eighty percent of the value of the
U.S.S.R.'s export:. to the West and about
4090 of its exports to Eastern Europe are in
the form of energy. About 3.5 million bar-
rels a day of oil are exported, more than
half to the West for hard currency. About
two trillion cubic feet of gas goes to West-
ern and Eastern Europe. These exports
generated almost 525 billion of last year's
total hard-currency earnings of about 530
billion. Some of the remaining hard-cur-
rency earnings are energy related: the
sale of weapons to oil-rich Arab states.
Every 51-a-barrel decline in the oil
price probably would pull down hard-cur-
rency earnings by close to $1 billion. (The
West Europeans are negotiating lower
prices for Soviet gas in parallel with lower
oil prices; Moscow goes along because it
wants to sell them more gas.) With oil at
S15 a barrel, Moscow would see its hard-
currency earnings drop to about $20 billion
from $30 billion.
A Shift to the West
It is harder to predict what would hap-
pen in its trade with Eastern Europe,
which takes place largely under bilateral
agreements denominated in an accounting
currency ("transferable rubles"). During
the past decade the East Europeans were
subsidized by Moscow under these agree-
ments. But lately the Soviets have been
cutting back on the subsidy. reducing oil
shipments and raising the price while sell-
in, them more gas.
If the world oil price drops sharply, will
the Soviets give them the full benefit of
lower prices? If not. and the price gap be-
tween Soviet and Western oil widens
enough, the East Europeans might try to
shift to Western sources for oil. The sad
shape of their economies gives them a
powerful incentive to do this, but they
don't have much to sell that the West
wants, and Moscow would set sharp limits
to such a Westward reorientation of East-
ern Europe's trade. But for Moscow to
switch from a policy of subsidizing the
East Europeans to, in effect, taxing them
would further heighten tensions within the
Bloc. The result is likely to be continued,
but reduced, subsidies by Moscow.
On the import side, Moscow gives high-
est priority to food imports that recently
have averaged about $10 billion to $12 bil-
lion a year in hard-currency payments. No
significant agricultural reforms are in the
offing; something like this level of imports
still will be needed in the years ahead.
Most of the remaining earnings go to
the importing of critically needed ma-
chinery both from Eastern Europe and the
West. Recent Soviet statistics show that
about 35% of Soviet machinery invest-
ment-about half originating in the West
and half in Eastern Europe-comes from
abroad, a big increase from a decade ago.
Much of this imported machinery is con-
centrated in such sectors as fertilizers and
papermaking, and there are many im-
ported components-for instance, elec-
tronic controls-used in much Soviet ma-
chinery. Moreover, much East European
machinery sent to the Soviet Union incor-
porates Western technology.
A cut in machinery imports from the
West by say, on -half nius perhaps sub-
stanitaTreductions from Eastern Europe,
would be a serious setback for the Soviet
economy. According to the Central Intelli-
gence Agency. the pace of Soviet economic
growth has slowed in the past decade.
Over this period, gross national product
growth has averaged a little more than 2cc
annually, about 1`-,( per capita. The loss of
a sizable part of its machinery imports, if
it persisted or some years, would depress
economic growth further.
What could Moscow do? Here are some
possibilities:
? Tighten belts and increase energy ex-
ports. As oil prices began to fall after the
early 1980s, Moscow responded by increas-
ing oil exports. Its oil production was still
rising then; now it is falling. (Tass reports
that 1984 production fell slightly from 1983;
this is the first decline since World War
II.) It might push harder to substitute still
plentiful gas for scarcer oil domestically,
supply less oil and more gas to Eastern
Europe, and supply more oil to the West
for hard currency. All of this would be dif-
ficult. would take time and is unlikely to
recoup much of a large revenue loss.
Other steps might include trimming
military expenditures and reducing con-
sumer-goods production in order to make
more machinery for the investment sector.
The military would strongly resist and the
regime must be frightened of the popular
reaction to cuts in consumption. Grain im-
ports could be reduced for a year or two,
but this would mean slaughtering livestock
and less meat consumption in the future.
As for sales of natural gas to Western
Europe, the famous "deal of the century"
has turned out to be less than a bonanza
for Moscow. The contracted quantities
have been smaller than expected, and
most buyers are taking only the minimum
amounts of gas called for in the contracts.
More important, an oil price decline will
drag down the gas price further.
With oil at $15 a barrel, natural-gas
earnings from the deal of the century
would be only $1 billion to $2 billion a year
during the next decade after interest and
amortization payments to Western banks.
However, price declines are removing new
supplies of Norwegian gas from the scene,
most of which are probably too costly to
develop at a price below the equivalent of
$25 a barrel for oil. The sale of, say, an-
other one trillion cubic feet of gas a year
might earn Moscow an added $2 billion to -
$2.5 billion annually in gross terms (the net
would be less if more Western pipe or
pumps had to be bought). This wouldn't go
far in recouping large foreign-exchange
losses, even assuming the West Europeans
would risk becoming still more dependent
on Soviet gas.
In short, Siberian gas, which may be-
come a large hard-currency earner in the
long run, probably won't yield large extra
sums in the next decade.
? Export other products. Gold and dia-
mond prices have fallen greatly and Soviet
sales have been pushing them down. The
market for more weapons sales to oil-rich
Arab' states is declining as their oil reve-
nues shrink. The Soviets have little else
that the rest of the world wants.
Trouble Raises Prices
? Borrow more money. By ordinary
banking standards, the Soviet Union's
gross debt of S20 billion to the West and net
debt of $10 billion is modest. Its debt-serv-
ice ratio is about 20% of 1984 export earn-
ings, but this ratio would climb if foreign-
exchange earnings fall. Nonetheless, addi-
tional borrowing seems feasible. Although
this would be only a stopgap, many eco-
nomic managers are probably focusing on
how to get through the next few years. In
any case, statements are once again ema-
Conti^.ueE
Declassified in Part - Sanitized Copy Approved for Release 2012/03/20: CIA-RDP90-00965R000706580019-9