THE SOVIET ECONOMY IN 1976-77 AND OUTLOOK FOR 1978

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP91G01170R003505680009-2
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 30
• Document Creation Date: December 22, 2016
• Document Release Date: July 26, 2010
• Sequence Number: 9
• Publication Date: August 1, 1978
• Content Type: REPORT

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Central Intelligence Agency
Washington, D.C. 20505
[phone]
Herbert E. Hetu
Director of Public Affairs
2 October 1978
Enclosed for your use is a research paper,
"The Soviet Economy in 1976-77 and Outlook for
1978" prepared by the National Foreign Assess-
ment Center of the Central Intelligence Agency.
The study points out that the 3.8 percent
increase in Soviet gross national product during
1976-77 represents the combined impact of a
marked slowdown in industry, construction, and
transportation and a marked recovery in agricul-
tural products. The slowdown in economic growth
has been much sharper than Soviet leaders antici-
pate, according to the paper, and means that a
smaller volume of goods and services is being
added each year to be divided between consumption,
investment, and defense.
erbert E. Hetu
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National r
Foreign
Assessment
Center
The Soviet Economy
in 1976-77
and Outlook for 1978
ER 78-10512
August 1978
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The Soviet Economy in 1976-77
and Outlook for 1978
Central Intelligence Agency
National Foreign Assessment Center
Highlights
Gross national product increased at an average annual rate of 3.8
percent during 1976-77, about the same as the preceding five-year average.
This aggregate measure, however, reflects the combined impact of a marked
slowdown in industry, construction, and transportation and a marked re-
covery in agricultural production:
? Industrial production-the traditional mainstay of GNP growth-
slowed sharply from an average annual growth rate of 6.0 percent in
1971-75 to 3.9 percent in 1976-77. Shortfalls in the production of key
industrial commodities-especially steel-were the principal causes of
this slowdown. These shortfalls can be traced mainly to the increasing
Soviet dependence on less accessible and lower quality ore plus past
failures to build sufficient processing capacity.
? Shortages of steel impinged on machinery output, a key source of
technological progress and productivity gains. Machinery production-
which accounts for one-third of industrial output-increased by 5.9
percent annually during 1976-77 after an average of 8.2 percent in
1971-75.
? In the energy sector, only a major push in West Siberia kept growth in
primary energy near 5 percent in 1976-77, about the same as in
1971-75. Some gains in energy conservation were achieved last year as
the slowly rising rate of energy consumption per unit of output was
brought to a standstill. Nevertheless, growth in energy production-
particularly oil-is slowing. Furthermore, the major efforts to exploit
the oil-producing fields of West Siberia over the past two years will
shorten their producing lives and consequently may cause a sharper
slowdown in the years immediately ahead.
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Growth of construction activity slowed sharply, and completion of new
plant and equipment failed to meet the leadership's expectations in 1976-77:
? While investment grew near the rate planned for 1976-80, runaway
growth in the backlog of uncompleted investment projects in both years
sharply curtailed the increase in additions to new capacity. The
leadership had been counting heavily on reducing the volume of
unfinished projects as a major source of increments to new capacity,
and we expected that some success would be realized in this area.
Large swings in crop production during 1976-77 continued to cause
annual fluctuations in net agricultural production:
? After rebounding in 1976 from the disastrous grain crop of 1975, the
growth of farm output fell back to its long-term trend of about 3.5
percent last year-a sharp upturn in livestock production more than
offsetting a decline in the production of crops. Some buildup in
livestock inventories was facilitated by a liberalized government policy
toward private agricultural holdings.
? Per capita meat production in 1976 was set back to levels of the early
1970s as a result of the poor harvest in 1975. Despite a rebound in
meat production in 1977, severe shortages persisted, leading to longer
queues and scattered reports of protests against food shortages.
These problems are now being joined by a downturn in growth of the
working-age population, which will begin to be felt this year and will continue
until the mid-1980s:
? Soviet leaders are exhorting management and labor to accelerate
productivity growth in order to offset labor shortages but have failed to
alter incentive systems to induce such change.
One area in which the Soviets achieved major success in 1976-77 was in
reducing the hard currency trade deficit:
? The trade deficit was cut from $6.3 billion in 1975 to $5.5 billion in
1976 and $3.3 billion in 1977.
The Soviet leadership has outlined a scenario of continuing slow growth
for 1978. Although modest by Soviet standards, the 1978 plan nevertheless
will require better-than-average weather for agriculture as well as success in
dealing with the problems of steel and energy. The Soviets must break the
bottleneck in steel output, for example, if they are to meet their output plans
for industry as a whole and for machinery in particular.
Prospects for economic growth through first half 1979 are heavily
dependent on developments in agriculture, which in turn is still at the mercy
of the weather:
A very good crop this year will stimulate industrial growth next year
by providing sufficient raw materials while at the same time helping
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the nation's hard currency position by reducing the need for grain
imports.
? A poor crop, however, will result in a further slowing of economic
growth, leading to increased spending for foreign grain and making
gains in consumption even harder to achieve.
The Soviet hard currency deficit, also heavily dependent on develop-
ments in agriculture, probably will land between $2 billion and $3 billion in
1978.
? Imports of machinery and equipment from the West will drop sharply,
reflecting last year's decline in orders; but orders should stage a
comeback in 1978-79.
? Imports of Western grain in 1978 probably will be in the neighborhood
of $2.5 billion to $3.0 billion.
? A poor crop in 1978, however, would increase import requirements in
1979 and possibly hard currency borrowing.
The slowdown in economic growth has been much sharper than Soviet
leaders anticipated and means that a smaller volume of goods and services is
being added each year to be divided between consumption, investment, and
defense. So far, investment growth appears to have borne the brunt of this
slowdown-falling from an average annual rate of 7.0 percent in 1971-75 to
about 4 percent in 1976-77. Whether this trend will continue remains to be
seen. If it does, and Soviet plans seem to imply just that, the Soviets will find
it increasingly difficult to maintain even the present pace of economic growth.
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Highlights .................................................................................................. i
Preface ........................................................................................................ vii
Economic Performance in 1976 and 1977 .............................................. 1
Agriculture ................................................................................................ 2
Industry .................................................................................................... 4
....................................................................................................
Energy 4
Oil ...................................................................................................... 4
Natural Gas ...................................................................................... 5
Coal .................................................................................................... 6
Electric Power .................................................................................... 6
Energy Conservation .......................................................................... 6
Steel ........................................................................................................ 7
Other Industries .................................................................................... 7
Resource Availability and Use ................................................................ 8
Labor Force ............................................................................................ 8
Capital Formation .................................................................................. 9
Changes in Efficiency of Resource Use ............................................ 9
From New Plant and Equipment .................................................... 9
From Managerial Reforms .............................................................. 10
Consumer Welfare .................................................................................... 10
Defense ...................................................................................................... 10
Foreign Trade .......................................................................................... 11
Soviet Perceptions of Economic Problems .............................................. 14
The Outlook for 1978 and Early 1979 .................................................... 16
1. USSR: Growth of GNP, by Sector of Origin ................................ 1
2. USSR: Growth of GNP, Factor Supplies, and Factor Productivity .. 1
3. USSR: Shares of GNP ...................................................................... 2
4. USSR: Production of Major Crops and Livestock Products .......... 2
5. USSR: Livestock Inventories ............................................................ 3
6. USSR: Industrial Production ............................................................ 4
7. USSR: Steel Production .................................................................... 7
8. USSR: Indicators of Capital Formation .......................................... 9
9. USSR: Hard Currency Balance of Payments .................................. 13
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10. USSR: Machinery Orders Placed With Hard Currency Countries .. 13
11. USSR: Planned and Actual Growth ................................................ 14
12. USSR: Industrial Growth Plans in Perspective .............................. 16
13. USSR: Aggregate Growth Performance and Plans ........................ 16
Graphs
1. USSR: Value of Livestock in Privately Owned Herds .................. 3
2. USSR: Energy Production ................................................................ 5
3. USSR: Hard Currency Debt and Debt Service Ratio .................... 12
4. USSR: Selected Indicators of Economic Performance .................... 15
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This paper is the first review of current Soviet economic performance
since publication of our comprehensive assessment of longer term trends and
prospects for the Soviet economy through the mid-1980s, CIA ER 77-
10436U, Soviet Economic Problems and Prospects, July 1977, which was
also published by the Joint Economic Committee of the US Congress, 8
August 1977. Economic events in the USSR during 1976-77 support the
general trends projected in our earlier study, and we conclude that the central
findings of the earlier study remain valid.
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The Soviet Economy in 1976-77
and Outlook for 1978
Economic Performance in 1976-77
Growth in gross national product during 1976-
77 was influenced primarily by a general upturn
in farm output and a marked slowdown in indus-
try, construction, and transportation. Because of
these offsets, the average annual rate of growth
for the two-year period-3.8 percent-was
roughly the same as for the first half of the 1970s
(3.7 percent). Growth was somewhat more rapid
in 1976 than in 1977, reflecting primarily a
strong recovery in farm output-highlighted by a
record grain crop-after the previous year's har-
vest failure. Growth in industry, construction,
and transportation was sluggish in both years
(see table 1).
The slowdown in industry in 1976-77 is only
partially explained by the dislocations stemming
from shortages of agricultural raw materials. In
both years, the investment program was far
behind in completing new plant and equipment,
with a pronounced adverse effect on both indus-
trial materials and machinery production.
Also, the poor progress in 1976-77 reflected
both the relatively slow increase in the supply of
factors of production (man-hours of labor, capi-
tal stock, and agricultural land area) and near
stagnation in overall factor productivity (see
table 2). Inability to raise productivity is now the
key problem confronting the leadership in its
quest for sustained economic growth.
USSR: Growth of GNP, by Sector of Origin'
Average Annual Percent Change
GNP
5.3
3.7
3.8
Agriculture Y
4.5
-0.6
5.5
Industry ....................
6.3
6.0
3.9
Construction
5.5
5.3
2.8
Transportation .......
6.8
6.6
4.1
Communications ......
8.9
7.2
6.1
Trade
6.5
4.8
3.7
Services ......................
4.3
3.6
3.1
Other ..........................
4.4
2.9
2.5
' Calculated at factor cost.
'Excluding intra-agricultural use of farm products and not
making an adjustment for purchases by agriculture from other
sectors. Value added in agriculture grew by 4.2 percent in 1966-70,
-2.1 percent in 1971-75, and 5.5 percent in 1976-77.
USSR: Growth of GNP, Factor Supplies,
and Factor Productivity
GNP ............ ......... 5.1
Factor supplies 4.3
Man-hours .................................................. 1.8
Capital stock ................................................ 8.1
Agricultural land ....................................... 0.4
Factor productivity ........................................ 0.8
3.7 3.8 5.0
4.2 3.5 3.5
1.9 1.2 1.5
7.9 7.1 6.5
0.8 0.1 0.5
-0.6 0.2 1.5
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As shown in table 3, the downturn in growth of
major producing sectors of the economy has not
yet affected the shares of GNP going to con-
sumption, investment, and defense. Each of the
three major claimants is growing at about the
same rate as GNP.
Growth in personal consumption slowed in
1976-77 mainly because of a setback in food
availability. Demand for meat in particular far
ekceeded supply, resulting in long queues and
scattered reports of protests against meat short-
ages late last year. Other consumer items, such
as automobiles, television sets, and refrigerators,
maintained their slow but steady expansion in
output, sales, and cumulative inventories held by
Soviet households.
Agriculture
After rebounding in 1976 from the disastrous
grain crop of 1975, the growth of farm output in
the USSR fell back to its long-term trend of
about 3.5 percent last year. A decline in crop
output in 1977 offset much of the rebound in
output of livestock products after two consecutive
years of decline. The record grain crop in 1976,
coupled with the continuation of large grain
imports, assured abundant forage for livestock in
1977 and accounted in large part for the increase
in meat, milk, and wool output (see table 4).
Moscow imported approximately 11 million met-
ric tons of grain from the West in 1977, aug-
menting its record 1976 grain harvest by about 5
percent. About two-thirds was purchased from
the United States.
1970
1975
1977
Consumption ............................
58
58
57
New fixed investment in plant
and equipment ....................
20
23
24
Defense ......................................
11-13
11-13
11-13
Other' ....................................
9-11
6-8
6-8
' Including capital repair, administration, civil research and de-
velopment, and net additions to livestock.
USSR: Production of Major Crops and Livestock Products
Major crops ' ..................................................................
Livestock products Q ......................................................
Grain' ............................................................................
Potatoes .........................................................................
Sugar beets ...................................................................
Sunflower seed ..............................................................
Cotton ............................................................................
Vegetables .....................................................................
Meat (slaughter weight) ................................................
Milk ................................................................................
Wool ...............................................................................
-1.9
22.1
-5.5
3.6
-5.6
7.3
181.6
223.8
195.5
89.8
85.1
83.5
76.0
99.9
93.3
6.0
5.3
5.9
7.7
8.3
8.8
23.0
25.0
23.0
14.0
13.6
14.8
87.4
89.7
94.8
0.44
0.44
0.46
Net of seed and estimated waste.
Excluding changes in inventories of herds.
' Measured in "bunker weight," that is, gross output from the combine, which includes excess moisture,
unripe and damaged kernels, and weed seeds, and other trash. In order to compare Soviet grain output with
that of other countries, a downward adjustment of about 11 percent is in order.
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To maintain momentum in the growth of
livestock output in the face of a slow recovery of
this sector on state and collective farms, the
government has relaxed somewhat its restrictions
on private agriculture. The persistent shortage of
meat and dairy products following the poor 1975
harvest apparently was the impetus for the latest
policy swing favoring private agricultural activ-
ity. Press articles in 1976 and 1977 not only
officially sanctioned private farming but also
promised aid, including the all-important provi-
sion of a steady supply of feed from state sources.
The Ministry of Agriculture issued an order in
October 1977 ordering local authorities to ex-
plore the possibility of higher quotas for privately
held livestock;' such quotas have remained un-
changed since the early 1960s.2
As shown in table 5 and figure 1, the private
sector has begun to respond to these official
initiatives. Inventories of all livestock were high-
er on 1 January 1978 than a year earlier, with
private holdings actually registering a gain-its
first since 1970. Hogs, for example, have rela-
tively short gestation and maturation periods and
provide a good leading indicator of the private
sector's direction. The number of privately held
hogs was 25 percent larger on 1 January 1978
than on 1 January 1977.
In addition to encouraging private farming
activity during 1976-77, the USSR continued to
allot a relatively large share of its investment
resources to farming. Investment in agriculture
increased by an average of 9 percent annually,
compared with only 2 percent for the rest of the
' The private agricultural sector supplies more than 25 percent of
the USSR's total farm output, including more than 30 percent of its
livestock products. It is almost exclusively composed of individual
holdings of one-half hectare or less, frequently combined with the
ownership of one or two head of livestock and small flocks of
chickens, geese, or ducks.
Because the government considered private farming to be ideo-
logically inferior to socialized farming, it has treated private
farming as no better than a necessary evil. Thus, after a series of
average or above-average harvests when the leadership feels opti-
mistic about the agricultural situation, the private sector is re-
pressed. After production setbacks, the leadership recognizes the
need for the additional output of the private sector and promotes its
expansion.
' One of the first-and certainly most popular-acts of the
Brezhnev-Kosygin leadership was to relax Khrushchev's restrictions
on private farming. In 1965-the first year in which the more
lenient policy was operative-there was a spurt of 13 percent in
private livestock holdings (see figure 1).
1971
1975 1976
1977
1978
Index: ' 1971 =
100
Livestock ....................
100.0
109.0 106.1
106.9
110.6
Socialized ..............
100.0
113.6 111.5
113.4
116.9
Private ....................
100.0
95.2 89.9
87.3
91.8
Cattle ..........................
99.2
109.1 111.0
110.3
112.5
Socialized ..............
74.3
84.6 87.6
87.5
89.3
Private ....................
24.9
24.5 23.4
22.8
23.2
Hogs ............................
67.5
72.3 57.9
63.1
70.3
Socialized ..............
50.9
58.6 45.7
51.3
55.6
Private ...................
16.6
13.7 12.2
11.8
14.7
Sheep and goats ........
143.4
151.2 147.1
145.3
146.2
Socialized ..............
110.2
119.2 117.7
116.5
117.3
Private ....................
33.2
32.0 29.4
28.8
28.9
' Weighted by average prices of all producers in 1970.
As of 1 January of the stated year.
USSR: Value of Livestock in
Privately Owned Herds
Index 1960=100
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economy. Agriculture's share of investment in-
creased from 22 percent in 1970 to 27 percent in
1977.' Deliveries of mineral fertilizers to agricul-
ture, however, increased only about 2.5 percent
annually, compared with a yearly average of 10
percent during 1971-75, as new capacity for
fertilizer production has been slow coming on-
stream. Most of the increase in agriculture's
share of investment occurred prior to 1976 and
reflects the Brezhnev regime's high priority to
improving food production-a policy that Brezh-
nev has stated will continue.
Industry
Industrial output-the traditional mainstay of
Soviet economic performance-slowed abruptly
in 1976-77, registering an average annual growth
rate of 3.9 percent. Production of an unprec-
edented number of commodities fell short of
target-particularly in 1977. Output of industri-
al materials increased less than 3 percent, with
record low growth rates posted by ferrous metals,
construction materials, electric power, and crude
oil (see table 6). Although recurrent shortages
are endemic in the Soviet economy, the stringen-
cies occurring during the last two years have
been unusually severe:
? Shortfalls in drilling and prospecting work,
due to insufficient drilling crews and equip-
ment, slowed oil production.
? Tight fuel allocations slowed progress across
a broad spectrum of industries and transpor-
tation facilities.
? Bottlenecks in rail transportation disrupted
deliveries of industrial products.
? Tight iron ore supplies and scrap shortages
impeded steel output.
Energy
Total primary energy production in 1976-77
was sustained at about the 5-percent annual rate
' This includes productive investment, such as the purchase of
agricultural machinery, as well as investment for "nonproductive"
purposes such as municipal and communal facilities, schools, and
rural roads. Alone, productive investment in agriculture amounts to
about 20 percent of the economy's total investment. In the United
States, productive investment in agriculture is less than 5 percent of
total investment.
USSR: Industrial Production
Average Annual Percent Change
1971-75
1976
1977
Industrial production .................
... 6.0
3.7
4.1
Industrial materials .................
... 5.4
3.6
2.8
Ferrous metals ........................
3.8
2.7
1.3
Crude steel ..........................
4.0
2.5
1.7
Rolled steel ..........................
4.1
2.8
0.7
Steel pipe ............................
5.1
5.3
1.2
Primary energy ......................
5.0
5.0
4.8
Coal ......................................
1.7
1.5
1.0
Oil ........................................
6.8
5.9
5.0
Gas ......................................
7.9
11.0
7.8
Electric power ........................
7.0
7.0
3.5
Construction materials ..........
5.1
3.2
1.0
Cement ................................
5.1
1.8
2.2
Slate ......................................
4.8
3.5
-10.0
Soft roofing ........................
5.7
7.1
-3.0
Machinery ..................................
8.2
5.9
5.9
Consumer nondurables ..............
3.4
-0.6
3.4
Food ........................................
4.2
-4.5
4.8
Soft goods ................................
2.6
3.9
1.9
of the past decade (see figure 2) largely because
of unrepeatable increases in gas capacity and
production. Growth of oil production continued
to slow down. The high priority given to raising
energy exports for balance-of-payments reasons
and increasing concern about future energy sup-
plies led Moscow to enforce stringent energy
conservation measures.
Oil. The increase in oil output in 1977 was
about 500,000 barrels per day, the smallest
absolute amount since 1972 and the lowest per-
centage growth (5 percent) in three decades.
Only in the new far northern oil regions-West
Siberia and the Komi ASSR-did production
increase substantially. In the older regions, out-
put declined by 3 percent instead of the drop of
about 1.5 percent anticipated by Soviet planners.
The increase in West Siberian production in
1977 was the highest for any year since commer-
cial production began in 1964. West Siberian
output now equals that in the Urals-Volga re-
gion, long the nation's major producer. Produc-
tion at West Siberia's Samotlor field, the largest
in the country, reached a level of almost 130
million tons (2.6 million b/d) in 1977 and ac-
counted for almost one-fourth of national output.
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USSR: Energy Production
Average annual percent change
Primary energyl
Hydroelectric and
nuclear power
Coal
1.7
1966- 71- 76 77 1966- 71- 76 77 1966- 71- 76
70 75 70 75 70 75
This field, however, should reach peak output
this year, and purchase of expensive Western
gas-lift equipment, which would extend its pro-
ducing life, currently is being negotiated. Devel-
opment of other small West Siberian fields is
lagging behind plan. During 1976-80, at least six
to eight new fields per year were to begin
commercial production to compensate for the
leveling off of Samotlor's output. However, in
1976 and 1977 only about five fields per year
were added, mainly because of failure to meet
schedules for massive drilling and infrastructural
tasks.
Meanwhile, declines in output in 1976-77 were
recorded in the Urals-Volga region, the Caspian
region, and Central Asia. Most of the Urals-
Volga oil-producing fields are in late stages of
production so that the decline will continue in the
years ahead.'
' Production problems during 1976-77 apparently prompted the
USSR to reduce its statistical reporting on the oil industry. In 1977,
for example, conflicting data were issued for West Siberian oil
production while output figures were withheld for older regions
where output is declining. For the first time in this decade, no
77 1966- 71- 76 77 1966- 71- 76 77
70 75 70 75
Natural Gas. In 1976 and 1977, annual output
goals for natural gas were overfulfilled, some-
thing that had never happened previously. The
1976 increase-31.3 billion cubic meters 5-was
a record and was 8 billion cubic meters above
plan. In 1977, output reached 346 billion cubic
meters, 25 billion cubic meters over 1976 and 4
billion cubic meters above plan. This unprece-
dented two-year expansion resulted primarily
from new fields coming onstream in West
Siberia and the completion of pipelines to the
principal consuming regions-the Urals and
European USSR.
Maintaining such growth, however, will be
difficult. The cost and physical difficulty of
developing the major untapped Soviet gas re-
serves exploitable over the next decade-located
in northern Tyumen Oblast-is unprecedented in
the history of the world's oil and gas industries
and poses problems not previously encountered in
quarterly or annual output figures were reported for three repub-
lics-Azerbaidzhan, Turkmenistan, and Kazakhstan.
' To convert to cubic feet per day, multiply by 0.096753.
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either the USSR or the West. Meanwhile, com-
bined gas production from the country's non-
West Siberian gas regions peaked in 1977 and
will begin declining this year, forcing West
Siberia to cover increasingly large losses in na-
tional output.'
Coal. Efforts to accelerate the growth of coal
output in 1976-77 were unsuccessful as the
USSR failed to reach production targets in both
years. As with oil and gas, many of the deposits
in European Russia are nearing exhaustion and
are becoming more costly and difficult to work.
Other major bottlenecks include rail car short-
ages, poor use of the labor force, and inadequate
new production capacity to offset the depletion of
old mines. During 1971-75, for example, an
average of 22.8 million tons of new capacity was
put into operation annually, but only 12.5 million
tons were installed in 1976 and 17.4 million tons
in 1977. At the same time, old mines in the
Donetsk and Moscow basins were closing at an
accelerating rate. Output has been declining in
the Moscow basin for several years, but 1977
marked the first year since 1961 that output
declined substantially in the Donetsk.
Electric Power. Growth in electric power pro-
duction fell to an all-time low last year, and for
the first time since World War II, power con-
sumption grew at the same rate as GNP-about
3.5 percent-and below the rate of industrial
output.'
Most of the marked slowdown in growth of
electric power use reflected some success in the
conservation campaign to reduce consumption of
power per unit of industrial output. However, a
shortage of generating capacity in the European
USSR appears also to be a problem. During
1971-75, electric power output rose 40 percent
while power plant capacity increased only 31
percent. The Minister of Power and Electrifica-
tion noted in early 1976 that an imbalance had
reduced the reserve capacity and lowered the
6 For more details on the prospects of the Soviet gas industry, see
CIA ER 78-10393, USSR: Development of Gas Industry, July
1978.
' Because of the rapid growth in the stock of machinery and
industrial processes dependent on electric power, the rate of
increase in electric power consumption has normally exceeded the
annual boost in GNP by 2 to 3 percentage points.
reliability of power supply. Subsequently in
1976, capacity rose by only 5 percent whereas
output increased 7 percent, creating further
strain on available capacity.
In addition to insufficient generating capacity,
providing adequate fuel for thermal power plants
is becoming more difficult in the energy-short
European USSR. Consequently, Soviet planners
regard nuclear power as the most promising
source of growth in electricity production in this
area. However, the nuclear program is lagging
badly. The Soviet machinery industry has not yet
been able to supply the planned volume of com-
ponents, and attempts to purchase nuclear equip-
ment from Western countries have borne no
fruit. It will be at least 1990 before the USSR
can achieve the hoped-for new nuclear power
plant capacity of 10,000 megawatts per hour.'
Energy Conservation. The tightening supply of
energy resources-together with Moscow's de-
sire to expand exports of oil to hard currency
countries in the West-led to stringent domestic
fuel allocations last year, which in turn con-
tributed to unusually frequent and widespread
fuel shortages.
Recognizing that energy resources must be
conserved, the government has recently initiated
a program of long-term energy conservation
aimed at widespread areas of the economy. The
new emphasis on conservation contrasts with the
earlier Soviet line that the USSR was insulated
from world energy shortages by immense domes-
tic resources.
Unlike the pattern in most Western countries,
energy use in the USSR has been growing more
rapidly than GNP. However, energy conserva-
tion efforts apparently had a measurable effect
in 1977. After increasing by about 1 percent per
year in 1971-76, energy consumption per unit of
GNP leveled off in 1977. In large part, this
"energy savings" reflects structural changes in
the growth of GNP: specifically, the sharp de-
clines in the growth of energy-intensive branches
of industry-ferrous metals, construction materi-
als, and machinery. While a continuation of this
trend would further reduce energy consumption
' Even with this capacity, nuclear energy is likely to provide less
than 5 percent of total energy.
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per unit of GNP, it also would mean a smaller
increment to the output of producer goods for
future investment and/or defense programs.
The pattern of energy consumption, which is
substantially different from that in Western in-
dustrial countries, makes large energy savings
through efficiency gains more difficult. In West-
ern countries, transportation and residential en-
ergy use is large, and the potential for energy
savings in these uses is great. In the USSR,
many of the techniques now being discussed in
the West to save energy in industry and house-
holds are already employed on a wide scale. Most
urban space heating in the USSR, as well as
large amounts of industrial process heat, is pro-
vided through cogeneration. In the West, only a
relative handful of cogeneration plants exist-in
Sweden and West Germany-while the USSR
has more than 1,000. The overwhelming bulk of
intercity traffic in the USSR is shipped on
electrified rail lines rather than by truck. As for
passenger autos, the USSR has one for every 40
to 50 inhabitants, compared with more than one
for every two inhabitants in the United States
and Canada and one for every four to five in
Western Europe.
Because of the consumption structure, major
energy gains will have to be largely obtained by
upgrading industrial technology-a very time-
consuming, capital-intensive process-or by
major shifts away from heavy industry and to-
ward light industry and services-a shift con-
trary to the view of dominant Soviet interest
groups. Notably, Soviet output of highly energy-
intensive products such as iron, steel, and cement
is substantially larger than comparable US out-
put. Iron and steel, for example, account for
nearly 13 percent of Soviet energy consumption,
compared with only about 3 percent in the
United States.
Steel
Growth of steel production fell sharply in both
1976 and 1977 (see table 7). Growth has slowed
because of inadequate investment in steelmaking
facilities and insufficient supplies of high-quality
raw materials. A steady decline in the quality of
Soviet iron ore has forced the diversion of invest-
ment funds to ore-mining and ore-beneficiating
USSR: Steel Production
Average Annual Percent Change
Crude steel ......................................
4.0
2.5
1.7
Finished rolled steel ......................
4.1
2.8
0.7
Steel pipe ........................................
5.1
5.3
1.2
projects. Tight supplies of iron ore have ham-
pered production of pig iron. Scrap-the other
major steelmaking ingredient-also is in short
supply.,
Inability of the Soviet steel industry to produce
cold-rolled sheet, tinplate, large-diameter pipe,
and even structural steel in sufficient quantities
has transformed the USSR into a net steel
importer at a substantial cost in hard currency.
Moscow spent $2.3 billion on steel imports from
the West in 1976 and at least another $2 billion
in 1977.
The USSR's dependence on imported steel
probably will continue or even increase. Con-
struction of new steelmaking capacity has lagged
badly, and most of the potential for squeezing
additional output from existing plants has al-
ready been tapped. Meanwhile, programs to ac-
celerate resource development in the eastern
regions of the country are gaining importance
and will spur demand for types of steel already in
short supply.
Other Industries
There are growing signs that the shortfalls in
domestic steel output, coupled with a hard cur-
rency constraint for expanding steel imports,
have begun to hurt machinery production, espe-
cially the output of spare parts. Production of
machinery-the source of producer's equipment,
defense hardware, and consumer durables-in-
creased by 5.9 percent annually during 1976-77,
down from the 8-percent average annual rate of
growth in the first half of the 1970s. The decline
' The Soviets launched a campaign in 1977 to press industrial
enterprises to meet their quotas for turning in scrap. The pressure
was so intense in some quarters that managers were known to turn
in as scrap machinery imported several years ago but never
installed or used.
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in freight car and diesel locomotive production
aggravated the existing bottleneck in railroad
transportation. During 1977 the Soviet press
blamed freight car shortages for limiting deliv-
eries of a wide spectrum of industrial materials.
Below-plan output of generators, electric motors,
machine tools, and oil equipment last year will
also spawn problems of capacity expansion in the
industrial materials sector in 1978.
The number of metalcutting machine tools
increased during 1976-77 at about the planned
average annual rate of 1 percent. Production of
numerically controlled machine tools was sched-
uled to increase by about 9 percent annually in
value terms during 1976-80 but increased only
6.7 percent annually in 1976-77. This shortfall-
caused by a lack of critical mechanical compo-
nents-suggests that the Soviets continued to
have problems shifting the product mix toward
high-precision, automatic, and semiautomatic
machine tools-a key element in the leadership's
program to modernize the industrial sector.
The Soviet computer industry is on the thresh-
old of a major new advance in computer technol-
ogy as a new family of data-processing computer
systems patterned after the IBM 370 is now
moving into production. These RYAD-II com-
puters are faster and much more versatile than
the models they will replace, but the need for
high-grade associated software and technical
manpower, as well as the ineffective employment
of advanced computers at the enterprise level,
will severely limit their usefulness.
Resource Availability and Use
Anticipating a slowdown in labor force growth
this year, Soviet planners have been urging more
efficient use of the work force. Despite official
concern with the impending labor shortage, en-
terprise managers continue to ignore the leader-
ship's appeals for introducing labor-saving inno-
vations; current managerial "success indicators"
still make it profitable to squirrel away extra
labor resources and to avoid innovations. As a
result, the size of the industrial labor force in
1977 already exceeded the 1980 plan, and the
total number of wage and salary workers at all
state-owned enterprises was only slightly below
the 1980 plan target. The rapid employment
growth was made possible by the continuing
expansion of the working-age population (men
ages 16 to 59 and women 16 to 54) in both 1976
and 1977 and by continuing transfers from col-
lective farms to industrial and other state-owned
establishments." This trend will change abruptly,
however, as a marked slowdown in the growth of
the overall labor supply starts taking effect this
year.
To prepare for the slowdown in labor force
growth in 1978, Moscow modified its education
system to ensure that secondary school graduates
would be ready for immediate entrance into the
work force. In recent years, the share of general
secondary school graduates admitted to full-time
higher schools has declined, and increasing num-
bers of secondary school graduates were un-
trained and unemployable. Many of these stu-
dents enrolled in parallel secondary school
systems where they spent an extra year or more
and thus delayed entering the labor force.
To deal with this problem, Moscow ordered in
late 1977 that vocational training in general
secondary schools (grades 9 to 10) be increased
from two to four hours each week. In addition,
eighth-grade graduates were to receive expanded
counseling services, and local commissions would
help them choose one of four alternative paths of
secondary education:
? Vocational technical schools with three-year
programs that provide a specific skill but only
a slight chance for admission to higher
schools.
? Secondary specialized schools with three- or
four-year courses for technicians and other
semiprofessionals.
? General secondary schools with the tradi-
tional two-year program that is the path to
higher education.
10 The working-age population increased at an average annual
rate of close to 2 percent, and the annual increments to that
population-about 2.8 million persons-were the largest in almost
25 years. Meanwhile, collective farm employment dipped from 15.4
million in 1975 to 14.7 million in 1977, about a 2-percent annual
decline and about the same as the average annual decline during
1971-75.
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? Schools for working youth, which provide
part-time general secondary education in-
tended mostly for those in rural areas.
If effective, these changes should expedite the
hiring of teenagers and increase their share of
the labor force.
Capital Formation
Problems in investment programs over the past
two years are harbingers of continued poor
growth performance. Despite efforts to concen-
trate on completion of projects already begun,
the increase in gross additions of new plant and
equipment-a measure of the amount of new
capacity brought onstream-fell to a record low
of 1.4 percent in 1976; progress was a little better
last year (see table 8). Meanwhile, as additions
of new plant and equipment faltered, the inven-
tory of uncompleted projects-"unfinished con-
struction" in Soviet terminology-increased by
more than 20 percent during 1976-77." Project
completions continue to be frustrated by endemic
bottlenecks in the supply of components-par-
ticularly machinery-and a lack of incentive in
construction organizations, where bonuses are
based largely on the value of work completed.
Basic construction work has a high ruble value,
but finishing work does not.
A key plank in the regime's current investment
strategy is a halt in the growth in 1976-80 of
unfinished construction and an acceleration of
completions, emphasizing projects involving
more new equipment and less new construction.
Thus, a continued slide in growth of machinery
output could dash the leadership's investment
plans and, in turn, jeopardize needed gains in
"The resultant backlog of uncompleted projects has tied up
enormous sums of investment resources and contributed to a further
decline in the productivity of investment. The volume of unfinished
construction amounted to more than three-fourths of total invest-
ment in 1977. In industrial investment the ratio of uncompleted
construction to total investment in the USSR is about double that
for the United States. Soviet sources indicate that the elapsed time
between project initiation and full-scale production averages seven
to eight years for large enterprises; comparable installations in the
developed West average only one-half as much time. Even if the
Soviets managed to halt the growth in unfinished construction
completely, the addition to the stock of plant and equipment that
this measure would provide by 1980 would amount to 1.7 percent of
the level of capital stock in 1977.
Table 8
USSR: Indicators of Capital Formation
Average Annual Percent Change
Gross additions of new plant and
equipment' ................................
Backlog of unfinished
' Estimated.
Y Gross additions of new plant and equipment (capital stock)
differ from gross fixed investment in that they include only those
investment projects that were completed.
' Some equipment installed in unfinished plants is included in this
category.
productivity." In addition, major investment
projects are becoming longer term and costlier,
requiring large amounts of supporting infrastruc-
ture before they can become operational. For
example, the Soviets are becoming increasingly
dependent on the natural resources of Siberia
where transportation, housing, and other facili-
ties are lacking and where construction costs
range from 30 percent higher to more than
double those in the European areas. Therefore,
the construction component of new investment
likely will remain large.
Inability to bring new capacity onstream more
rapidly will lead to continued slowdowns in capi-
tal formation. This will depress the growth of
output even further-particularly if no gains are
made in raising the productivity of the stock of
plant and equipment. Here the Soviet record is
not encouraging.
Changes in Efficiency of Resource Use
From New Plant and Equipment. Because the
principal carrier of new technology into the
production process is new machinery and equip-
ment, Soviet planners had hoped that by stepping
up the rates for replacing obsolescent machinery
with new machines, they would be able to rely
more heavily on productivity gains as the major
source of growth. However, although the ratio of
replacement of used machinery to investment in
" Most gains in productivity result from technological advances
embodied in new machinery and equipment. When introduced into
the production process, the new machinery and equipment usually
results in a direct saving of labor and/or materials per unit of
output.
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new "green field" sites is increasing, much of the
new equipment is technologically similar to that
already in existence. Moreover, the acquisition of
foreign technology and equipment has not pro-
vided a dramatic boost to the productivity of
capital. The USSR will continue to benefit from
imports of Western machinery and equipment in
selected areas such as chemicals, high-quality
steels, and oilfield equipment. But the over-
whelming share of the USSR's producer dura-
bles must come from domestic production, and as
long as the domestic economy remains no more
capable than in the past of generating its own
technical progress, productivity gains are likely
to remain small.
From Managerial Reform. Despite lipservice
to economic reform by the top leadership and by
prestigious economists during 1976-77, no sig-
nificant steps were taken to focus incentive sys-
tems toward more efficient production, acceler-
ated introduction of new technology, and
improved product quality. The near stagnation in
productivity growth in 1976-77 reflected at least
in part the perpetuation of inefficiencies in plan-
ning and management. Bonuses still depend di-
rectly or indirectly on gross output, encouraging
lavish use of inputs and discouraging introduc-
tion of new products or production techniques.
At the 25th Party Congress in February 1976,
President Brezhnev acknowledged the need for
an overhaul of the incentive system but offered
no specific alternatives. Thereafter, the Soviet
media unleashed a barrage of criticism against
the existing incentive system and suggested that
some form of "net output" success indicator
replace "gross output."
The difficulties of successfully integrating new
technology into the Soviet economy also result in
large part from perverse incentives. Enterprise
managers resist introducing new processes or
equipment because it disrupts production sched-
ules, thereby reducing "gross output." In De-
cember 1977 Pravda appealed to economists to
find an incentive system that would speed the
introduction of new technology because the fear
of financial loss clearly deters the use of new
technology. So far, however, no major changes
have been forthcoming.
The gap between consumer expectations and
the availability of goods probably widened dur-
ing 1976-77, largely because food shortages
stemming from the poor 1975 harvest persisted
in both years. Supplies of nonfood consumer
goods and services continued to grow at moder-
ate rates. Aside from agriculture, which has
received an increasing share of investment re-
sources, the consumer industries have not risen
from their traditionally humble position in the
investment pecking order. Consumer-related ma-
chinery imports, for example, are a relatively
small percentage of total machinery imports
from the West.13
The leadership's pledge to increase the variety
and quality of the diet continued to be one of its
most expensive and elusive goals. Increasing
meat output in particular has become the key
target and the one by which the Soviet consumer
tends to measure his relative affluence. Yet over
the past two years, despite massive feed imports,
Soviet agriculture was not able to maintain meat
output at the 1975 level. Meat output fell sharply
in 1976, then recovered in 1977, leaving per
capita meat output in 1977 slightly below that in
1974 and 1975. Meat shortages were frequent
and widespread, especially in 1977, occurring in
small cities and towns as well as in major cities.
In contrast with food supplies, the availability
of nonfood consumer goods and services contin-
ued to improve. Nevertheless, poor quality and
design, coupled with the lack of assortment,
constrained the growth in sales of such goods,
and inventories of unsold goods probably rose in
the last two years.
Defense '?
Although continued worsening of the eco-
nomic scene is likely to trigger debate in Moscow
over the future levels and patterns of military
expenditures, to date the defense sector appar-
ently has not been affected by the changes in the
rate of economic progress. Defense programs
"In 1976-77 consumer-related machinery imports constituted
2 percent of all machinery imports from the West.
" For a more detailed treatment of recent Soviet defense spend-
ing, see CIA SR 78-10121, Estimated Soviet Defense Spending:
Trends and Prospects, June 1978.
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have great momentum as well as powerful politi-
cal and bureaucratic support, and major military
programs have been well funded.
During 1976 and 1977, estimated Soviet de-
fense spending in constant rubles grew at an
average annual rate of 3 to 4 percent. Although
this pace is slightly below the average growth of
4 to 5 percent for the past decade, it does not
signal a major policy shift, nor is it related to
economic difficulties. Rather, it reflects the fact
that several major weapons procurement pro-
grams, such as the D-class SLBM program and
tactical fighter aircraft programs, are winding
down.
As in earlier years, defense spending during
1976-77 had a significant economic impact:
? The defense effort consumed between 11 and
13 percent of Soviet GNP.
? Defense consumed about one-third of the
final product of machinebuilding and metal-
working, the branch of industry that pro-
duces investment goods as well as military
hardware.
? In addition, the defense sector siphoned off a
large share of the economy's best scientific,
technical, and managerial talent and large
amounts of high-quality materials, com-
ponents, and equipment.
During the 1976-77 period, about one-half of
total Soviet defense spending went for invest-
ment-which includes spending for procurement
of new equipment and major spare parts as well
as for construction of facilities. Operating ex-
penditures-which include spending for military
personnel and for the operation and maintenance
of military equipment and facilities-received a
little more than one-fourth of total defense
spending. Slightly less than one-fourth of total
defense spending went for military research,
development, testing, and evaluation.
No major shifts were evident in the shares of
defense spending allocated among the military
services. The Ground Forces and Air Forces
continued to claim the largest shares, while the
Strategic Rocket Forces continued to claim the
smallest share.
During the 1976-77 period, Soviet uniformed
military manpower, including militarized se-
curity forces and Construction and Transporta-
tion Troops, totaled more than 4.5 million men-
almost 3.5 percent of the total labor force. The
Ground Forces claimed the largest share of
military personnel-almost 40 percent.
Foreign Trade
During 1977 Moscow virtually eliminated its
short-term hard currency payments problems,
although hard currency debt increased to $15
billion to $16 billion (see figure 3). Soviet foreign
trade data for 1977 indicate that a substantial
reduction in the trade deficit reduced the current
account deficit to its lowest level in three years.
In 1978, current account transactions will prob-
ably be roughly in balance.
After a record $6.3 billion hard currency trade
deficit requiring heavy borrowing in 1975, Mos-
cow started to tackle its balance-of-payments
problems. In 1976, the Soviets reduced their
hard currency trade deficit to $5.5 billion and
did even better in 1977, cutting it to roughly $3.3
billion (see table 9). Soviet hard currency grain
imports fell from a record high of $2.6 billion in
1976 to about $1.4 billion last year. Grain
imports from the United States declined from
$1.58 billion in 1976 to about $810 million in
1977. Equipment imports also grew more slowly
in 1977, rising by an estimated 5 percent to $5.2
billion."
As a major world supplier, the USSR took
advantage of higher nonfarm commodity prices
in 1977. Oil earnings rose to $5.6 billion on the
strength of both higher prices and export volume.
The Soviets also reaped the benefits of higher
world prices for diamonds and platinum-group
metals-traditional hard currency earners. So-
viet natural gas exports jumped from $358 mil-
lion in 1976 to roughly $568 million last year,
mainly because of increased volume.
Moscow's hard currency earnings from other
sources-arms sales, tourism, and transportation
services-have risen substantially in recent
years. Shipments of military equipment paid for
15 Excludes purchases of Western equipment for the Orenburg
pipeline bought by Moscow on behalf of Eastern Europe.
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USSR: Hard Currency Debt and
Debt-Service Ratio
Hard currency debt
Billion US $
Debt-service ratio1
Percent
1Defined as principal and interest payments as a share of
hard currency exports.
$790 million-up from $600 million in 1976,
primarily because of a decline in grain imports
carried on Western ships.
These trends have reduced Moscow's hard
currency debt problems, which had become
worrisome by the end of 1975. Net borrowing
has fallen from $5 billion in 1975 to $4 billion in
1976 and to between only $1 billion and $2
billion last year.
The Soviets have also reduced their reliance on
Western commercial credits in an effort to
counter adverse publicity on the size of their debt
and to avoid paying what they considered unac-
ceptable interest rates on further bank loans.
Moscow has increasingly favored government-
guaranteed supplier credits and direct govern-
ment loans, which usually contain more attrac-
tive terms. The Soviets stepped up gold sales,
which produced about $1.4 billion in revenues in
1976 and roughly $1.6 billion in 1977.
Soviet orders for Western machinery and
equipment fell sharply to $3.7 billion in 1977,
the lowest level in three years (see table 10).
Roughly $1 billion of the $2.3 billion fall in
orders from their 1916 level can be accounted for
by the fact that the USSR placed a major share
of its equipment orders for the Orenburg natural
gas pipeline in 1976. The magnitude of the
overall drop in orders also reflects Moscow's
desire to further curb future hard currency trade
deficits and thus improve its balance-of-pay-
ments position in 1978-79. The decline in Soviet
imports of Western equipment expected for 1978
would not necessarily damage short-term Soviet
industrial performance; indeed, it may facilitate
Moscow's efforts to reduce the backlog of un-
finished construction and uninstalled machinery
discussed above.
The timing of orders for Orenburg (reflected
in "oil and natural gas" in table 10) accounted
for almost one-half of the drop in total 1977
orders. Metalworking and metallurgical equip-
ment also fell sharply from $1 billion in 1976 to
in hard currency probably reached $1.5 billion in $600 million in 1977. More than one-half the
both 1976 and 1977, up from $800 million in 1977 total orders for this category was made up
1975. Major recipients have included Algeria, of yearend orders for West German direct reduc-
India, Iraq, Libya, and Syria. Net receipts from tion and pelletizing equipment for the Kursk
transportation and tourism were an estimated steel combine.
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USSR: Hard Currency Balance of Payments
Trade balance ..............................................................
Exports, f.o.b . ............................................................
Imports, f.o.b . ..........................................................
Gold Sales ......................................................................
Invisibles and hard currency trade, nes' ................
Current account balance ............................................
Net medium- and long-term credits' .......................
Basic balance ..................................................................
Net short-term credit' ............................................
Errors and omissions' ..............................................
-6,335
-5,517
-3,279
7,794
9,721
11,354
14,129
15,238
14,633
1,000
1,400
1,600
900
1,200
1,200
- 4,435
-2,917
-479
3,020
2,188
1,200
-1,415
-729
721
1,980
1,812
200
-565
-1,083
-921
' Estimated.
' Including a rumored $250 million sale to Middle Eastern countries.
Including net interest payments, net receipts from tourism and transportation, net official transfers, and
arms deliveries.
Excluding medium-term borrowing by the International Investment Bank and the International Bank
for Economic Cooperation, which borrow on behalf of countries of the Council for Mutual Economic
Assistance (CEMA). The extent to which the USSR has borrowed from these CEMA banks (if at all) is
unknown.
Including estimated short-term bank-to-bank borrowing, payments deferments obtained from suppliers,
and possible borrowing from Middle Eastern countries.
Including intra-CEMA hard currency trade and other hard currency payments.
Principal repayments on medium- and long-term debt plus interest payments on all debt.
Debt-service payments as a share of merchandise exports.
USSR: Machinery Orders Placed With Hard Currency
Countries
Percent
Million US $ Change
Total .................................................. 5,957 3,652 - 39
Of which:
Chemical and petrochemical .... 1,818 1,615 -11
Oil and natural gas .................... 1,685 303 -82
Metalworking and metallurgy 1,015 587 -42
Timber and wood ...................... 146 65 -55
Automotive ................................ 355 183 - 48
Ships and port equipment ...... 283 67 - 76
Consumer goods equipment .... 121 75 -38
Mining and construction .......... 120 147 22
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Orders for Western chemical equipment de-
clined by roughly $200 million. New contracts
were concentrated on machinery for the manu-
facture of (a) petrochemicals, particularly inter-
mediates for the production of plastics and syn-
thetic fibers, and (b) chemical fertilizers, which
are needed in tremendous quantities to imple-
ment plans for agricultural growth. Large pur-
chases included three chemical fertilizer plants
and 10 ammonia plants totaling $380 million
from Japan and two methanol plants worth $250
million from the United Kingdom. Moscow also
gave the British orders for a $139 million ma-
terials processing plant for tires and for an $86
million polyethylene plant.
Soviet Perceptions of Economic Problems
Soviet leaders clearly have been disappointed
with the economy's recent performance. Al-
though Moscow anticipated some slowdown as
reflected in their plans for 1976 and 1977, actual
growth has fallen more sharply than they ex-
pected (see table 11).
The leadership is particularly concerned about
their inability to get more capital onstream
quickly. They see the continued slide of return on
investment and the sharp slowdown in industry,
construction, and transportation.
The economic plan for 1978, announced in
December 1977, reflected the tacit recognition
by the Soviet leadership that key targets of the
10th Five-Year Plan (1976-80) were unattain-
able (see figure 4). We calculate that an indus-
trial growth rate of 8 percent annually would be
required to meet the 1980 goal, but the 1978
Soviet plan called for an increase of only about
4.5 percent. More specific plan cutbacks are
apparent in the critical energy sector as well as in
machinery production (see table 12).
Also in December 1977, the Central Com-
mittee called for more concentration of resources
on oil and gas development in West Siberia's
Tyumen Oblast, which possesses virtually all the
major untapped Soviet reserves feasibly exploit-
able in the next decade. This policy reflects the
government's concern about (a) the peaking of
the Samotlor oil and Medvezhye gas fields in
Tyumen, (b) the critical rundown of oil reserves
because of a decade of insufficient geological
exploration, and (c) the steeply rising resource
costs associated with drilling wells in increas-
ingly less productive deposits farther away from
established bases of support and transportation.
Soviet responses to the CIA analysis of Soviet
oil production-issued during the spring and
summer of 1977-had already demonstrated
that Soviet authorities were well aware of their
energy difficulties. Even the most optimistic re-
sponses leaned heavily on the assumption that
Siberia holds huge stores of yet undiscovered or
unexploited energy resources.
According to planning officials, during the
past 18 months the USSR's efforts to formulate
a 15-year plan (1976-90) hit a snag because of
serious difficulties in estimating and allocating
energy resources and other raw materials. Their
remarks indicated that the long-term economic
plan was far from complete. In addition, public
information on the 15-year plan as well as more
detailed information on the five-year plan for
1976-80 is likely to be limited.
Meanwhile, at the recent July session of the
Supreme Soviet, Premier Kosygin announced
that the Council of Ministers has formed a high-
Plan Actual Plan Actual Plan Actual
Average Annual Percent Growth Percent Growth
GNP ................................... 6.0
Industry ............................... 8.0
Agriculture ............................ 3.5
3.7 4.5 4.3 5.3 3.3
6.0 4.3 3.7 5.6 4.1
-0.6 8.5 7.7 7.5 3.4
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USSR: Selected Indicators of Economic Performance
Average annual percent change
level commission to "solve current questions of
economic growth" and to check on fulfillment of
the state plan and budget. This action appears to
be another indicator of the government's concern
over increasingly serious economic problems.
Soviet perceptions of their own economic prob-
lems are necessarily reflected in their economic
policies toward their allies in Eastern Europe.
The latter had been told early in the 1970s of the
Soviet intent to limit 1976-80 oil exports, clearly
because of anticipated production constraints.
The Soviets subsequently eased these limitations
mainly because of severe hard currency short-
ages in parts of Eastern Europe, which limited its
ability to purchase oil in the West. The less
restrictive energy export policy, however, was
conditioned on Eastern Europe's participation in
resource development in the USSR.
Despite its own energy problems, the USSR
plans to honor its commitments in 1978 to supply
Eastern Europe with the volume of oil estab-
lished for that year in the current five-year plan
(1976-80). This is important to the East Euro-
peans, who depend on Moscow for more than 75
percent of their oil consumption. According to an
official of the Soviet oil trade organization, total
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USSR: Industrial Growth Plans in Perspective
Average Annual Percent Change
1976-80
Plan
1976-77
Actual
1978-80
Required
1978
Plan
Energy
Coal .............................
3
1
354
3
Oil ................................
5%
5%
5'A
5
Gas ..............................
854
954
8
7
Electric power ............
Ferrous metals
6
5
654
5
Crude steel ..................
3%
2
454
4
Rolled steel ..................
35
154
4%
454
Steel pipe ....................
4%
3
5
454
Construction materials ..
554
2
754
NA
1/
2
454
NA
Machinery ......................
9
6
11
754
Consumer nondurables ..
454
1'
7
4
Chemicals ........................
1054
554
1354
NA
oil deliveries to Eastern Europe are expected to
reach 1.56 million b/d by 1980.
Finally, decisions and activities of the Soviet
leadership in first quarter 1978 suggested
strongly that Moscow perceived the severity of
its long-term energy problem and was developing
appropriate conservation policies. A Communist
Party Central Committee resolution in March
1978 commissioned research and development
institutes to step up production of technology for
long-term energy saving. In the same month,
Andrey Kirilenko, Second Secretary of the Com-
munist Party Secretariat, convened a special
conference in the Kremlin attended by other
high-level party and industry officials. He called
for a speedup in "the creation of new, progressive
types of internal-combustion engines-reducing
the amount of metal used in their manufacture
and, above all, enhancing their economy of
operation."
USSR: Aggregate Growth Performance and Plans '
1978
1976
1977
Plan
GNP ........................................
4.3
3.3
3.9
Agriculture ? ........................
7.7
3.4
3.3
Industry ..............................
3.7
4.1
4.5
Construction ........................
3.4
2.2
5.0
Transportation ..................
4.5
3.8
5.0
Communications ................
6.4
5.8
6.0
Trade ..................................
2.9
4.0
3.9
Services ................................
3.0
3.3
3.5
Other ..................................
2.9
2.1
4.3
' Calculated at factor cost.
Excluding intra-agricultural use of farm products and not
making an adjustment for purchases by agriculture from other
sectors. Value added in agriculture grew by an average of 8.4
percent in 1976, 2.3 percent in 1977, and will grow by 2.4 percent in
1978 if plans are realized.
The Outlook for 1978 and Early 1979
The economic plans for 1978 (see table 13) are
among the lowest ever set by the USSR. How-
ever, the overall performance of the Soviet econ-
omy this year could be better than the rate of
about 3'h percent posted in 1977 if the USSR
were able to:
? Break the bottleneck in steel output.
? Arrest the growth of uncompleted projects
for new plant and equipment.
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? Lift substantially larger quantities of oil from
West Siberian fields.
? Luck out with better-than-average weather
for agriculture.
? Achieve major efficiencies in the use of mate-
rial resources, especially energy and metals.
? Minimize disruptions caused by deficiencies
in rail transport.
The Soviets are critically dependent, for ex-
ample, on an acceleration in steel output if they
are to meet their 1978 plan for industrial produc-
tion, particularly for machinery output and in
construction. Even though the 1978 target for
steel output of 152.6 million tons is practically
the same as the 1977 goal, it will require an
increase in production of more than 5 million
tons since output fell so far below planned levels
last year. Steel production increased by 3.5
million tons in 1976 and only 2.5 million tons in
1977. A large capacity was completed at the end
of 1977, but startup problems and shortages of
iron ore and scrap are likely to result in a failure
to reach output goals in 1978.
Once again, Soviet planners are counting
heavily on maintaining growth in plant and
equipment by holding down the backlog of un-
completed construction projects. Investments in
new plant and equipment are to continue rising
at about 3.5 percent-one-half the annual rate of
growth in 1971-75-with emphasis remaining on
replacing obsolescent machinery and equipment.
This strategy-cutting back on new "green
field" construction in favor of replacement ma-
chinery and equipment-may need to be revised,
however, in order to provide the supporting infra-
structure for enhanced development of oil and
gas resources in Siberia.
Energy production is continuing to slow. Thus
far in 1978, output of both coal and oil has
slowed still further, and total energy production
growth is likely to be less than 4 percent in 1978.
Based on the monthly production data released
so far, we believe that oil production this year is
unlikely to exceed 11.3 million b/d, for growth of
only 3 to 4 percent. With a peak and subsequent
decline in oil production almost certain by the
early 1980s, a further sharp slowdown in total
energy production is likely to occur.
The most striking information in the 1978 plan
is that the Soviets expect only five of the 26 oil-
producing regions to boost their output in 1978.
Of these five, only West Siberia is committed to
a large increase-700,000 b/d. The other four
regions together are likely to increase their pro-
duction by only 100,000 b/d. The USSR obvi-
ously expects sharp declines in a number of the
older producing regions, where many deposits
tapped for more than 30 years are being
depleted.
Such heavy dependence on West Siberia for
the bulk of future increases probably means that
the Samotlor oilfield will have to be pushed
beyond earlier planned peak output levels. Other
smaller West Siberian fields also may have to be
operated above maximum efficient rates of re-
covery to achieve output targets. This will result
in still shorter producing lives for these fields,
but the Soviets have no practical alternative until
they are able to make large new oil finds.
Output of gas during 1978 will probably total
about 370 billion cubic meters as planned. The
five-year plan calls for 1980 output of 400 billion
to 435 billion cubic meters, and the USSR
should be able to fulfill that target. However, the
task will not be easy. Beginning in 1977, output
of gas from all of the older producing regions
(particularly the Ukraine and Central Asia)
began to decline, and all of the growth had to be
provided by the enormous reserves located in the
far northern portion of West Siberia, where
infrastructure problems and massive pipeline re-
quirements will limit growth of output and
sharply boost the costs of production and
transport.
Coal is doing poorly. In first half 1978, coal
output was unchanged from the corresponding
1977 output, and 1978 annual output may not
much exceed 1977's 712 million tons. Soviet
spokesmen are also less bullish on coal over the
longer term, perhaps reflecting the growing prob-
lems of maintaining output in the old European
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areas and the massive transport difficulties in-
volved in a large expansion of Siberian coal
output.16
Stringent goals for economizing on steel and
fuel have been set for all sectors of the economy.
Although few tangible figures are available, the
conservation theme runs throughout the plan and
budget announcements.
The 1978 plan calls for grain production of
220 million tons, up from the 195.5 million tons
harvested last year. This level of output has been
attained only twice before and can be achieved
only if the weather proves highly favorable. In
1977, grain output fell nearly 20 million tons
short of the goal even with above-average pre-
cipitation in important grain-producing areas.
Even with favorable weather for agriculture,
the actual downturn in forage crop production in
1977 could adversely affect growth in the live-
stock sector in 1978. Production of these crops-
including corn for silage, fodder roots (beets,
turnips, and carrots), and hay-dropped 4 per-
cent in terms of nutrient value from 1976 levels.
The reduction in forage supplies will need to be
offset by additional feeding of grain. Grain sup-
plies, down because of the smaller 1977 grain
crop, already are being squeezed in the socialized
sector as farms comply with official directives to
guarantee private owners adequate grain for
their livestock holdings.
Even if a record grain crop is achieved this
year, the Soviets will still have to import 15
million to 20 million tons of grain in the fiscal
year beginning 1 October 1978 and will almost
certainly be forced to import comparable quanti-
ties in the following years unless better-than-
average weather conditions prevail. Meanwhile,
the resource allocational policies in support of
agriculture for the 1976-80 plan period appear to
remain intact. In a major address on long-range
agricultural policy to the Central Committee
Plenum in early July, Brezhnev indicated no new
initiatives in the intermediate term of 1978-80
and, indeed, implied continuation of recent
trends in resource use in the 1981-85 period. He
also repeated his admonition, first voiced in
16 In the past year the Coal Minister postponed the time at which
output will reach I billion tons from 1990 to the year 2000.
October 1976, that greater attention and assist-
ance must be given to private farm plots. Brezh-
nev confirmed that there has been an important
policy change-the scuttling of ambitious plans
for high-rise urban-type housing in the country-
side-as a result of renewed official interest in
providing families in rural areas with separate
houses surrounded by garden plots and outbuild-
ings for livestock and poultry.
The Soviet leadership apparently expects con-
sumption to make substantial gains this year.
Meat output in particular is expected to do well,
increasing by about 5.5 percent over 1977. A
good increase in herd size, according to the 1
January 1978 census, makes this number attain-
able if feed supplies can be maintained.
Growth in employment-a topic not covered in
the plan announcement-will almost certainly
decline as the number of persons reaching work-
ing age drops for the first time in 18 years. As a
result, the planners are restating their perennial
hopes for large gains in labor productivity. In
this connection, 1978 was named the "year of
shock labor" by the planners, and a more inten-
sive use of labor and equipment a primary
slogan. In addition, Soviet leaders may be count-
ing on a boost in total man-hours worked by
encouraging larger holdings of crop land and
livestock herds by the private sector. This is
probably the least costly and most effective
method of simultaneously augmenting a declin-
ing labor force and providing a boost to
consumption."
During the period 1978-80, Soviet defense
spending probably will grow temporarily at a
lower rate than the long-term average of 4 to 5
percent. This will result primarily from the trail-
ing off in procurement cycles of several major
weapons systems currently in production. These
procurement cycles do not, however, signal
changes in resource allocation policy but rather
the phasing in and out of weapons production
programs.
" On balance, an expansion of labor use in private agriculture
will provide mostly a net gain in overall man-hours used in
economic activity. For the most part, for member of households in
both agriculture and nonagriculture it will be a substitution of labor
for leisure rather than a reduction in hours in either socialized
agricultural or other economic activity.
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During the early 1980s, we expect the Soviets
to begin testing and deploying a number of new
weapons systems, including the next generation
of strategic missiles, aircraft, and ballistic missile
and attack submarines. These programs probably
will cause defense spending to increase to a pace
more in keeping with the long-term growth
trend.
The atmosphere in Moscow with regard to
defense and the economy will be one of concern
in which the leadership may consider making
marginal-but not substantial-alterations in
military force goals. Marginal alterations, how-
ever, would have little impact on the growth of
either defense spending or GNP. For example,
changes such as those envisaged by a SALT II
agreement would produce a savings of only about
1.5 percent of total defense spending for 1978-85
and boost GNP by only about 0.2 percent.
The Soviet hard currency deficit is likely to
be between $2 billion and $3 billion in 1978.
Because repayments on past loans are catching
up to new drawings, the growth in debt should be
further slowed this year. Imports of Western
grain are expected to be between $2.5 billion and
$3.0 billion, unless the Soviet harvest falls well
short of current estimates. Imports of machinery
and equipment are expected to decline because of
the large drop last year in machinery orders.
In light of the sluggish economic recovery in
the West, Soviet exports are not likely to rise as
much as in 1977. The volume of hard currency
oil exports may rise only slightly this year if at
all. Increased oil exports in 1976 and probably
1977 were made possible by restrictions on the
growth of domestic oil consumption and the
drawing down of fuel stocks. A further slowing in
the growth of oil production appears almost
certain this year.
Given our estimate of a 1978 trade deficit of
$2.0 billion to $3.0 billion, Moscow should not
experience any difficulty in meeting its financial
obligations in 1978 even though they include
about $3.5 billion in debt service. The current
excess liquidity in the Eurocurrency market and
the high price of gold give Moscow financial
flexibility. In this context the USSR recently
obtained a $400 million syndicated Eurocurrency
loan-its first since July 1976-at a very attrac-
tive interest rate.
Soviet orders for Western machinery, particu-
larly oil and gas equipment, probably will make a
comeback in 1978. Large quantities of explora-
tion and development equipment are needed if
Moscow expects even to maintain current levels
of oil production over the next several years. In
addition, further purchases of compressors,
valves, and large-diameter pipe will be required
to sustain the growth in gas output.
By the spring of 1978, the volume of oil
equipment orders had already exceeded the pre-
vious full-year record due largely to a $158
million order for the expansion of the drill bit
plant at Kuybyshev. Negotiations were under
way on several large contracts, including the
purchase of gas-lift equipment-which could
reach $1 billion over a five-year period-for the
giant Samotlor oilfield and the Fedorovo field in
West Siberia. Moscow was reportedly shopping
for offshore oil equipment to be used in the
Caspian Sea, the offshore areas of Sakhalin, and
eventually the Barents Sea.
Orders for the metalworking and metallurgy
industries in 1978 are expected to pick up from
1977 levels. Moscow could sign some large con-
tracts for electric furnaces, continuous casting
facilities, and rolling mills, all for the $1 billion
Kursk metallurgical combine; this equipment is
designed to bolster the production and quality of
finished steel products. In addition, the Soviets
after.several years of shopping may finally place
an order for a $1 billion aluminum plant to be
located in Sayan-Shushensk, West Siberia.
Although hard currency trade prospects ap-
pear good in 1978, the outlook is much dimmer
over the longer term. We expect a decline in
Soviet oil exports possibly as early as 1979 and
accelerating thereafter. Unless oil prices rise
drastically, Moscow will be hard put to achieve
more than offsetting increases in other exports.
The impact of new credits on Soviet import
capacity is likely to be minimal. Repayments on
past medium- and long-term borrowing are ex-
pected to rise and may nearly offset new draw-
ings in 1978. Thanks to their healthy balance-of-
payments position, the Soviets could borrow sub-
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stantially more and thus boost import capacity
for a short time, but we expect Moscow to
continue its present conservative financial poli-
cies and thus avoid a possible repetition of its
earlier heavy borrowing.
Performance of the economy in first half 1979
will depend largely on the harvest of 1978.
Generally favorable spring and summer weather
into August was expected to yield a record grain
crop, but overall crop prospects for 1978 will
remain uncertain until September-October, when
harvesting nears completion in Siberia. An
above-average crop will impact favorably on the
food and clothing industries in 1979, while limit-
ing grain import needs and thereby easing hard
currency shortages. A poor crop, on the other
hand, would depress economic growth in 1979
and seriously exacerbate the leadership's eco-
nomic difficulties.
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