SOVIET OIL PRODUCTION DECLINE IS NIGHTMARE FOR GORBACHEV

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP91-00587R000100010090-3
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 1
• Document Creation Date: December 22, 2016
• Document Release Date: February 25, 2011
• Sequence Number: 90
• Publication Date: October 18, 1985
• Content Type: OPEN SOURCE

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AS Sanitized Copy Approved for Release 2011/02/25: CIA-RDP91-00587R000100010090-3
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18 October 1985
Soviet oil production decline
is nightmare for Gorbachev
By Ralph Z. Hallow
THE YW.5H TON TIMES
When President Reagan meets
Mikhail Gorbachev in Geneva on
Nov 19-20, the Soviet leader may
have more troubling him than U.S.
space-defense research and
restrictions on high-technology
trade.
What almost surely will darken
Mr. Gorbachev's inner thoughts,
according to a number of Western
experts, is that the Soviet economy
is being wracked by a self-inflicted
setback in the one area in which it
has global supremacy.
Though the Soviet Union leads the
world in energy resources and oil
production, it is the only industri-
alized nation that still has an energy
crisis.
Soviet oil production began to
decline in late 1983, a bit later than
Predicted a-1977 C n
encx enc Stu . It was rested
i uun w en acco to
aaengyli
economic re search director 3-
ir s Dress-co erence ref-
erence to the classified document
or its re ease.
The oil-production decline has
accelerated, falling by 4 percent in
the first eight months of this year,
according to Marshall I. Goldman of
Harvard University's Russian
Research Center
As a result, the Soviets have can-
celed sales to Western Europe of an
estimated I million barrels a day in
oil, worth nearly $10 billion a year in
hard-currency earnings to a Russian
economy sorely Pressed for invest-
ment capital.
Mr Goldman notes that the large
drop in oil exporpthas meant that for
the first half aftlM year the Soviets
ran a trade deQc1r with France,
which used to complain bitterly of
its trade deficit with the Soviet
Union.
Worse, from Mr. Gorbachev's
viewpoint, is that at the same time
Soviet oil exports are down, grain
and especially corn imports from
the United States are up.
Overall, what was a Soviet trade
surplus with Western Europe and
Japan for the last three years has
turned into a deficit "A trade swing
of this magnitude undoubtedly hurts
the Soviet Union," says ML Goldman.
Oil is the critical factor because it
is the Soviet Union's No.1 generator
of foreign currency and pays for
food and technology imports from
the West.
The impact on the Soviet economy
has strategic implications for Pres-
ident Reagan and General Secretary
Gorbachev at their encounter next
month, according to some US. offi-
cials.
Speaking on a not-for-attribution
basis, these officials say a continu-
ing hard-currency loss of the magni-
tude the Soviets are now
experiencing could spell trouble if
Mr. Gorbachev, who needs oil-export
earnings to help finance his top-
priority plan for modernizing Soviet
manufacturing, feels compelled at
some point to risk an adventure in,
say, the Mideast.
One faction in the Reagan admin-
istration, represented by Richard N.
Perle, assistant secretary of
defense, has been counseling the
president to take advantage of the
Soviets' economic problems,
sources say, by hanging tough at
Geneva on trade concessions and the
Strategic Defense Initiative.
Sources say the argument being
made to the president for keeping up
the pressure on Moscow is not based
on the simplistic notion that the
Soviet economy is on the verge of
collapse.
Selling the Soviets more technol-
ogy, it is argued, would make it eas-
ier for Moscow, in spite of its
hard-currency crunch, to build bet-
ter weapons sooner instead of divert-
ing more investment into technology
catch-up.
Normally, the Soviet Union earns
more than half its. hard currency
from exporting about 1.7 million
barrels of oil a day to noncommunist
customers, mainly in Western
Europe, and a similar amount to East
European members of Comecon, the
communist trading bloc, and to
Cuba.
But last month the Soviet Union
had to tell its West European oil cus-
tomers that it would cancel or delay
shipments of up to 80
p percent of the
crude oil and up to 70 percent of the
gasoline, heating oil and diesel fuel
contracted for delivery this month.
"The surprise is that in allocating
those export cuts, the Soviets have
steered what oil they had to East
Europe and cut way back on exports
tote West;' says Thane Gustafson,
director of Soviet studies at
Georgetown University's Center for
Strategic and International Studies.
"But conventional wisdom in the
West held that the Soviets cannot
afford a sharp drop in the hard cur-
rency they need for grain, machin-
ery and technology imports from the
West:'
What this reveals about the politi-
cal thinking of the Gorbachev lead-
ership is that it puts the stability of
the Soviets' client states in Eastern
Europe at the "absolute top of the list
of priorities," says Mr. Gustafson.
Further confirmation of this Gor-
bachev emphasis, he says, came ear-
lier this week with the naming of
Nikolia Talyzin to head Gosplan, the
Soviet state planning organization.
Mr. Thlyzin, 56, who was also made
one of four first deputy prime min.
isters, was the Soviet Union's chief
permanent representative to
Comecon.
None of this means, however, that
the Soviet Union will relax pressure
on its East European clients to sub-
stitute more Soviet natural gas for
oil.
But just as surely, the East Euro-
peans, who depend on Russia for 90
percent of their oil needs, will con.
vince the Soviet Union that any
cutack would be disastrous, says Ed
A. Hewett, a Soviet specialist at the
Brookings Institution. "The East
Europeans aren't bad at playing that
game;" Mr. Hewett adds.
What could drive Mr. Gorbachev
to the brink is if world oil prices, now
nearly $28 a barrel, slide to $24 a
barrel or even to $20, as some oil
analysts predict. This would further
reduce earnings from what little oil
the Soviets manage to export.
Beyond allocating export cut-
backs, the Soviet leadership has to
turn around its domestic oil produc-
tion, which for the first time since
1979 has fallen below 12 million bar-
rels a day.
"Mr. Gorbachev thinks he can get
Soviet production back up above 12
million barrels a day. He's wrong;"
says Mr. Hewett.
"He could if he threw enough
money at it, but he wants to direct
investment in the technological ref-
ormation of the Soviet economy, in
renovating factories with a new gen-
eration of machines that are
computer-controlled," Mr. Hewett
says.
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