INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000706980001-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 53
• Document Creation Date: December 22, 2016
• Document Release Date: July 14, 2010
• Sequence Number: 1
• Publication Date: May 4, 1984
• Content Type: REPORT

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Directorate of
Intelligence
Weekly
International
Economic & Energy
4 May 1984
D/ /EEW 84-0i8
4 May /984
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International
Economic & Energy
Weekly
4 May 1984
iii Synopsis
1 ers ective-Eastern Euro e: Adjustment Efforts
Energy
International Finance
Summit Issues
Global and Regional Developments
National Developments
17 /)~astern Europe: Adjusting to the Debt Crisis
25 ~EC pastern Europe: Limited Trade Dialogue
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31 astern Europe: Declining Soviet Support ~~ 25X1
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37 /USSR-Finland: Economic Ties
i e's Military: The Impact of Economic Crisis
L~
mit Issues: Oil Emergency Response Programs
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Authorized personnel may obtain copies of reports by contacting their local intelligence liaison ice
or the I~t/ormation Management Center q/'the Ojfce oJ'Current Production and Analytic Support,
Comments and queries regarding this publication are welcome. They may be
directed to Directorate of Intelligence,
Secret
4 May 1984
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International
Economic & Energy
Weekly
Synopsis
1 .Perspective-Eastern Europe: Adjustment F~/forts
Most of Eastern Europe has made progress in adjusting to the Western credit
squeeze and reduced Soviet subsidization. Over the next several years, East
European leaders may be forced to make tough decisions to burden already
disgruntled consumers and to reform their Soviet-style management systems.
17 Eastern Europe: Adjusting to the Debt Crisis
Eastern Europe's economic decline seems to have bottomed out, and some
growth in trade and GNP is likely in the near term.
25 EC-Eastern Europe: Limited Trade Dialogue
Despite attempts by countries in Eastern Europe to secure greater access to
West European markets, the European Community so far has negotiated only
limited bilateral trade agreements-largely for political purposes-and has
avoided making concessions that would weaken Western Europe's already
troubled industrial sector.
31 Eastern Europe: Declining Soviet Support
Trade results for 1983 show that Soviet economic support for Eastern Europe
declined significantly for the second consecutive year. The East Europeans
hope to slow this trend at the upcoming CEMA Economic Summit, but
prospects for relief appear limited.
37 USSR-Finland: Economic Ties
Moscow has turned increasingly to Finland as a source of advanced machinery
and equipment.
41 Chile's Military: The Impact of Economic Crisis
Chile's economic decline has caused President Pinochet to tightly control
military spending. Although he has accomplished this without provoking
military officers, escalating- unrest could cause the military to reassess its
domestic political role.
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47 Summit Issues: Oil Emergency Response Programs
Although the International Energy Agency emergency sharing plan could be
used to mitigate a major disruption, oil stocks and the response of the Summit
countries will be principal factors influencing the impact of an oil supply
interruption. ~~
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Perspective
Weekly
International
Economic & Energy
4 May 1984
Eastern Europe: Adjustment FJ.forts
that Soviet and Western cushions are diminishing.
Most of Eastern Europe has made progress in adjusting to the Western credit
,squeeze and reduced Soviet subsidization. East European adjustment policies
have been influenced by concerns about unrest similar to those of Third World
debtors. Although debt problems have eased slightly and growth has revived,
the timidity of the region's adjustment measures, their intractable internal
constraints, and the largely hostile external environment imply no easy fix to
economic problems. Over the next several years, East European leaders may
have to make tough decisions that would force them to burden already
disgruntled consumers and to reform their Soviet-style management systems.
One positive result of recent problems may be a new stimulus to reform, now
Eastern Europe's debt problems peaked in 1982 at the same time that the
CEMA members had to deliver more goods to the USSR to reduce trade
deficits and to offset deteriorating terms of trade. Adjustment was already
under way-with some debt relief arranged-by the time that the debt crisis
hit Latin America. Eastern Europe had little choice but to close the door on
imports as sources of credit dried up and exports lagged because of the
Western recession. Because there was no time to deal with longstanding
problems of export competitiveness, the regimes took quick and comparatively
easy steps to try to adjust. 25X1
The first step was to deflate their domestic economies to shift resources to ex-
ports. The policies chosen demonstrate that the lessons of the Polish crisis at
least initially weighed heavily on the minds of the East European leaders. To
forestall political unrest, total consumption-public and private-has been less
affected than investment. With the exception of Poland and Romania, most
countries have registered positive-albeit slow-growth in real consumption
over the past three years. Even in Poland, Warsaw's attempt to win a modicum
of popular support led to a rise in real consumption in 1983 after previous
sharp declines. 0 25X1
Investment in fixed capital has undoubtedly suffered even though there is
considerable fat in East European investment budgets resulting from over-
spending on inventories and unfinished projects. This will impair necessary
modernization and improved competitiveness. The short-term protection of
consumption may not be worth the longer term cost in terms of poor prospects
for growth and exports, as well as living standards.~~ 25X1
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Adjustment measures-combined with Western financial help-have bright-
ened the financial picture for most of the region. Net debt has declined for all
countries except Poland and Yugoslavia, and borrowing prospects have
improved. Creditors have been impressed with the region's improved trade
performance, as well as the lack of serious political unrest over stabilization
measures. The West helped in terms of rescheduling for Poland and Romania,
refinancing and credits for Yugoslavia, credits for Hungary, and the opening
of the West German umbrella over East Germany. In the cases.of Poland and
Romania, however, the help has protected the interests of Western creditors
more than improved the financial situation of the debtors. In any case, we
expect credit flows to remain well below the peaks of the 1970s, in part
because of the caution of both Western creditors and East European borrow-
Most countries remain vulnerable to further liquidity problems and external
shocks from both East and West. In addition, financing requirements-
although lower except in Poland-still are burdensome. For the reschedulers,
the day of reckoning is fast approaching when the period of debt relief will end.
Most have not taken the steps needed to sustain improved performance, and
little progress has been made in generating the hard currency needed to repay
the debt. The outlook for East Germany, Hungary, and Yugoslavia is far
brighter than for Poland and Romania, while the debt crisis had little impact
on Bulgaria and Czechoslovakia except to reinforce their financial conserva-
Some of the East European countries continue to look for help from Western
governments, banks, and international financial institutions and for better
treatment of their goods in West European markets. But the region will
continue to suffer along with LDC debtors-some of whom can compete more
effectively-as a result of Western Europe's gradual recovery. Political forces
may lead to more trade and credits, but the political stalemate over Poland re-
mains aproblem; Western hopes for political liberalization and economic
reform are now focused on Hungary.
The USSR's economic problems are likely to preclude increased assistance to
its CEMA partners. The CEMA Summit in June will help clarify whether the
economic squeeze on Eastern Europe will tighten and what steps toward
greater integration and cooperation the Soviet Bloc will take. Some hints of
joint economic policies over the next five-year plan period (1986-90) may
emerge. Some East Europeans also may hope to obtain clues about Soviet
toleration of economic reform, but early indications are .that they expect little
good news at the Summit.
In the case of Eastern Europe, fine tuning of adjustment policies and help from
East and West are not enough. Sustainable improvement is not likely without
fundamental reforms-except possibly in the case of East Germany. Even with
reforms, the regimes still must deal with the secular decline in productivity
and diminishing increments to the capital stock and labor force. In any case,
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decentralization and introduction of market forces are needed to enhance
efficiency in investment and foreign trade decisions and to improve worker
incentives. Hungary is the only country where reform measures have been
combined with stabilization policies, and even here there has not yet been
much of a payoff in industrial, efficiency and higher exports. At the same time,
the political fallout could be serious both internally and as a result of recent
criticism from Moscow and Prague. Although tinkering will continue, we
expect the CEMA countries to await encouragement from the Soviet. leader-
ship before taking major steps.
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Libya Fears British
Energy
llout
Tripoli fears that the current political
friction between the United Kingdom and Libya could cause an overzealous
Libyan citizen to retaliate against British nationals living in Libya, forcing 25X1
their recall by London. Such a move could seriously cripple the country's oil
operations for at least three to six months, until other foreign nationals could
be recruited to replace them: British personnel occupy key management and
technical positions in two of the major oil companies operating in Libya, and 25X1
their expertise is critical to maintaining the output of the largest single oil
producer in. Libya, The loss of
British oil workers would expand the already serious exodus o managerial and
skilled technical personnel-both Libyan and foreign nationals-that has
taken place during the past 10 years. If this occurs, Libya's production
capacity could begin to deteriorate and many of the country's ambitious
downstream projects, such as the refinery and petrochemical complex at Ra's
al Unuf, could be further postponed.0 25X1
Aramco Security Increased threats to oil facilities from the Iran-Iraq war and from terrorists
Remains Lax have caused senior Aramco management to continue its campaign of attempt-
ing to raise the security consciousness of employees.
these efforts are being viewed with cynicism by many
company is actually covering up threats to their personal safety-for example,
Aramco's attempt to downplay the sinking in March of one of its service
vessels, probably by a Iraqi missile-and that physical security procedures
within the company still remain relatively lax. Although a personal identity
card is required for access to most Aramco facilities, most guards apparently
fail to positively identify personnel. people have been
allowed aboard drilling rigs simply by displaying a credit card and that only a
cursory check of bags or luggage is usually conducted. This lack of security is
contributing to unease among Aramco's expatriate work force, whose morale is
already low due to the curtailment in recent months of many personal
Western workers. many expatriates feel that the
activities by Saudi religious authorities.
Saudis Request Bids. Saudi Arabia recently called for bids on the construction of a $250 million lu-
o ew R~nery bricating oil refinery at the Yanbu industrial complex on the Red Sea,
according to the trade press. The million-barrel-per-year refinery, a joint
venture between Petromin-the Saudi Government oil-marketing company-
and amajor US multinational oil corporation, would meet all the country's
domestic lube oil needs plus provide an additional 350,000 barrels per year for
export. Financing problems and a final decision on the location of the plant
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4. May 1984
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have delayed release of bids for almost a year, and availability of funds may
yet impede the project.
import credits, while the remainder would come from the joint venture's equity
fund and Saudi commercial financing.
Riyadh currently is asking the
companies to cover 60 percent of the cost with either contractor or export-
~aqi Oil Assistance The US Embassy in Kuwait reports that the Saudi-Kuwaiti oil assistance
rogram Renewed program for Iraq will be extended another year. Under terms of the
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4 May 1984
agreement, Saudi Arabia and Kuwait will continue to provide Iraq's customers
with 248,000 b/d of crude produced by the Arabian Oil Company (AOC) in
the Neutral Zone. AOC will deposit the revenues accrued from the sales
directly into the foreign accounts of Iraq's national oil company. The new
agreement goes into effect on 1 August and is worth $2.5 billion. Saudi Arabia
and Kuwait provide Baghdad's customers about another 85,000 b/d from their
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Dutch Gas Price
Flez~bility
The Netherlands-Western Europe's largest gas supplier-has indicated a
willingness to provide additional gas supplies to Italy at the present price,
according to US Embassy reporting. Two months ago, the Dutch were
demanding a higher price as a premium for being a secure gas supplier,
The Hague's softening on prices follows recent
be developed in the mid-to-late 1990s.
bidding to sell gas to the United Kingdom; the Dutch were surprised to learn
their offer was less competitive than the Norwegian offer. Dutch price
flexibility bodes well for consumers with gas contract renegotiations this year,
especially because additional volumes of Dutch gas are likely to be made
available. Larger Dutch gas supplies have the potential to partially meet future
demand growth and minimize Soviet sales until the Norwegian Troll Field can
Indonesian Price Indonesia has adjusted export prices, of several types of its crude oils and other
Adjustments
Indonesia's Sumatra light crude that is pegged to OPEC's benchmark prices.
fuels retroactive to 1 April. he price
of Duri crude will fall from $27.85 to $25.95 per barrel; the price of Arun con-
densate will drop from $30.95 to $29.00. Jakarta intends to raise the price of
its residual fuel by 25 cents per barrel to $27.25. These moves are unlikely to
draw criticism from other OPEC members because there is no price change for.
the price adjustments are "long
South American
Debtors Urging
L s Austerity
overdue" and reflect the continuing weak oil market.
International Finance
Chile, according to new Finance Minister Escobar, is seeking to relax spending
limits under its IMF program to create jobs and to reduce unemployment. The
US Embassy in Brasilia reports that major contenders for the presidency are
appealing to popular dissatisfaction with austerity and are calling for more
growth. Venezuela is avoiding an IMF agreement in order to stimulate its
support and to generate the financial resources for debt repayment.
Argentina's leading role in South .America in calling for economic growth,
rather than continued spending cuts, as the solution to foreign debt problems
will put' new strains on international financial rescue programs. Buenos Aires
fears the political consequences and is opposed to implementing an IMF-
supported adjustment program that might cause even a brief recession. The
Argentine Government instead intends to stimulate growth to increase popular
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Argentina's position will find increasing favor in other South American
countries, which are widely criticizing continued declines in economic activity
as politically dangerous. Any financial declaration by these countries issued
before the London Economic Summit would be likely to embrace this new
rationale to blunt austerity programs, but there is no evidence of any
coordinated approach to the debt issue. Nonetheless, difficult relations with
foreign creditors probably will result as the debtors urge the IMF to ease
spending constraints. Foreign commercial bankers may support easier repay-
ment terms to stimulate growth, but they are reluctant to extend new loans.
Argentina's Domestic President Alfonsin's failure to curb inflation is causing labor unrest and could
Economic Woes undermine the government's economic program Price rises accordin to US
g
according to the Embassy. ~~ '
?
Embassy reports, slowed moderately in January, but prices rose 20 percent in
March, double the expected rate. A wage policy that grants salary increases in
excess of price rises has been a major factor in keeping inflation high,
The increase in prices, has helped to unify the
Peronists. Their demands for higher wages have intensified, and the number of
strikes by Peronist-led unions has increased in the past several weeks. Two
weeks ago the Peronists publicly rejected collaborating with the government on
economic policy and vowed to resist a slowdown in salary increases. In an
effort to reach an agreement with the Peronists, Alfonsin recently appointed a
representative to try to mollify labor, and he began talks with Peronist political
bosses, according to press and Embassy reporting. Last week Alfonsin replaced
his combative labor minister with a moderate who, according to the Embassy,
is more acceptable to the Peronists.
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Failure to slow inflation is likely to encourage investors to shift funds from pro-
ductive ventures to more speculative fields. Labor.is almost certain to call for
more wage hikes, which Alfonsin will be hard pressed to resist. Further salary
increases will complicate both Alfonsin's domestic growth strategy and his
relations with foreign lenders whose credits are vital to industrial recovery.
Additional wage hikes, however, are unlikely to placate Peronists, who seem
inclined toward confrontation. Peronist leaders also probably will try to exploit
Alfonsin's setbacks before the congressional elections scheduled for next year.
Moreover, the economic problems have opened rifts in Alfonsin's own party,
which will complicate his efforts to cope with the Peronist challenge.
/Philippine Financial The IMF and Manila's commercial creditors are beginning to disagree over
Negotiations
the amount of new financing to be provided in the Philippines' debt reschedul-
ing agreement, The IMF is concerned
that the $3.3 bi ion m new credits originally intended to cover the Philippines'
financial needs this year will be insufficient to tide it over through the end of
1985. the IMF is proposing that an additional $700 million be
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reform
added so that Manila will not have to ask for money again early next year. The
proposal would raise to $2 billion the amount to be supplied by commercial
creditors, who would prefer instead that Manila return to the negotiating table
in early 1985 to ensure the government's accountability for economic policy
Manila's principal commercial creditors will meet on 7 and 8 May in New
York to consider the issue. The commerical creditors will be reluctant to come
up with more than $1.65 billion this year. They already believe this amount
would be hard to raise because many small banks may refuse to contribute.
The banks probably will insist that the IMF stick to its original proposal in or-
der to avoid lengthy rescheduling negotiations after the Philippines and the
IMF reach agreement on a $650 million standby loan.
Japan's New Trade Prime Minister Nakasone is characterizing the trade liberalization measures
Package he announced last week as a demonstration of Japan's willingness to take its
proper role in strengthening the free trade system. The package focuses on " .
tariff cuts. It also includes measures to promote imports and investment and
statements on energy cooperation and on the possibility of future purchases of
foreign communications satellites. In addition, Tokyo emphasized its recent 25X1
steps to reduce trade frictions over agricultural products and high-technology
imports. Tariff reductions on some agricultural goods, however, such as
forestry products, were omitted because of opposition b the farm bloc among
Diet members, according to Embassy reporting. ~~ 25X1
Although the package is directed primarily at improving relations with the
United States, it also addresses concerns of the West Europeans and less
developed countries. Nakasone wants to use the package to smooth the way for
a visit by Vice President Bush and also to set the stage for a successful
performance at the London Economic Summit. The Prime Minister, who is
facing difficulty getting his domestic program through the Diet, needs foreign
policy successes to maintain his political strength.
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reduced demand for imports were important in spurring GDP growth. Private
consumption spending, however, rose by only 0.8 percent, the slowest growth in
the past 10 years. Although real investment fell for the third straight year and
is causing concern over the long-run prospects for the economy, retained
earning of firms jumped 30 percent. Last year's improved current account
balance, slowed consumption, and improved financial position of firms are all
that austerity is working but is still necessary.
First-quarter data indicate, however, that the French are likely to maintain
austerity. The first-quarter current account deficit, although better than in the
first quarter of 1983, still ran at an annual rate of about $7 billion. In addition,
inflation was slightly more than 8 percent at an annual rate. We expect both
President Mitterrand and Finance Minister Delors to use these results to argue
oo~ectives of the trench austerity program.~~
Global and Regional Developments
Brazilian Steel Export Brazil decided last week to voluntarily reduce exports of certain carbon steel
Reduction products to, the United States by 47 percent. Last year, the United States
accounted for about 70 percent of Brazil's foreign steel sales. Earlier this year
Brazil tried and failed to negotiate a voluntary restraint agreement with the
United States in an effort to avoid the imposition of antidumping and
countervailing duties. In late March, in an attempt to offset US countervailing
duties, Brazil levied a 27.4-percent export tax on the carbon steel products-
cold-rolled sheet, hot-rolled sheet, and carbon steelplate in coil-under
investigation. The tax, however, was imposed too late to be incorporated into
the Commerce Department's deliberations, which found that Brazilian sub-
sidies amounted to a weighted average 37 percent of the value of shipments.
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The Brazilian steel export quota was accompanied by other actions designed to
discourage the United States from imposing countervailing duties. A law
s
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4 May 1984
han Expected justments without creating a recession. A 2.3-percent increase in exports and
French Economy French real GDP rose 1 percent in 1983, a stronger performance than had
Slightly Stronger been anticipated. As a result, Paris is likely to claim it is making economic ad-
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the GATT.
introduced in the Brazilian congress on 26 April would allow Brasilia to
retaliate against countries that introduce restrictive measures against Brazil-
ian products. In addition, Brazil is working to publicize its determination to
appeal the countervailing duty decision through US courts or bring it before
Impact of Mozam- The short-term economic benefits to Mozambique of its recently signed
bique-South ,gfrican security pact with South Africa are likely to be minimal. If the accord holds-
,~ecurity Agreement by no means a certainty because of deep mutual distrust-it will only slowly
Saudi Arabia's Budget
11 Secret
4 May / 984
fees-will promote development but only over the longer term.
reduce the damage being done to Mozambique's transportation and communi-
cation network by South African-backed insurgents and will clear the way for
Western aid. Other potential economic benefits-a share of revenues from the
Cabora Bassa dam, greater private foreign investment, and increased transport
foreign exchange earnings
Representatives from South Africa, Mozambique, and Portugal have been
discussing ways to restore profitability to the giant Cabora Bassa dam, a
hydroelectric project in Mozambique that is owned by Portugal and supplies
South Africa with electricity. Low tariffs and sabotage of transmission lines
have made the dam a financial drain on Portugal. An agreement to double tar-
iffs and to give Mozambique a bonus if it can protect the facilities from
sabotage reportedly is about to be signed in Cape Town. Security problems,
however, are likely to continue to limit any significant increase in the dam's
tons per year.
Foreign investment opportunities in Mozambique-such as agricultural pro-
cessing facilities-will remain limited until there are repairs to the infrastruc-
ture and a streamlining of government policies. South African investment
discussions so far have centered on tourism and port facilities. A South
African company has agreed to build a $40 million luxury hotel on Inhaca Is-
land. The same company has expressed confidence that the port of Maputo-
the closest port to South Africa's industrial heartland in the Transvaal~ould
be profitably repaired and updated. Before Mozambique's independence, the
port at Maputo handled some 6 million metric tons of South African goods per
year, third after Durban and Port Elizabeth. Expansion of the Durban port fa-
cilities and competition from the newer and more secure facilities developed by
South Africa at Richard's Bay have reduced tonnage at Maputo to 1.1 million
National Developments
Less Developed Countries
Recently released official data indicate that Riyadh is still trying to weather
the slump in oil revenues without resorting to large and politically sensitive
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South Korea Eases
Restrictions on
Foreign Banks
Riyadh anticipates that oil and other revenues will total $61 billion.
spending cuts. The budget for the fiscal year that began on 1 April projects ex-
penditures of $74 billion compared with the $63 billion the government claims
it spent last year. The biggest increase is slated for military purchases, but al-
locations for consumer subsidies and all other major categories are up as well.
billion owed to foreign contractors.
Riyadh probably hopes its larger budget will signal that the current financial
difficulties will not cause a slowdown in economic activity. The decision to
boost military spending and consumer subsidies probably reflects the royal
family's decision to keep key interest groups satisfied. Nevertheless, revenues
are likely to be somewhat lower than projected, which will leave Riyadh with
difficult choices later this year about where to make spending cuts. One way
Riyadh kept spending down last year was to delay payments on at least $10
in the National Assembly.
Seoul's financial sector reforms-announced 20 April-provide most of the
concessions sought by foreign bankers, including access to Bank of Korea
rediscount facilities by 1986. We believe Finance Minister Kim Mahn Je and
other market-oriented economic policy makers convinced President Chun that
their plans for opening the country's heavily regulated financial sector by
allowing increased foreign competition would spur domestic banks to improve
their efficiency. In addition, Seoul hopes that the banking concessions will
combine with recent import liberalization measures and an easing in foreign
investment regulations to reduce economic friction with Washington and help
diffuse US protectionism. Implementation of the financial reforms, in our view
is likely but not necessarily assured as the measures will face tough questioning
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Do inican Republic Tensions remain high as price increases on basic commodities and planned
E~omic Pressures hikes on petroleum products threaten to push inflation to 40 percent this year
compared with 10 percent in 1983. These price hikes will particularly hurt the
unemployed and underemployed; estimates run as high as 60 percent of the
work force. So far, the government has promised to back wage hikes now
before Congress and to expand the social security system but has not met
union demands to rescind the price increases on basic commodities, which
sparked the recent violence. Strict budgetary controls that are required under
the IMF-supported adjustment program will limit wage increases and proba-
bly will require new taxes. Nevertheless, President Jorge Blanco appears
determined to carry ?out austerity while maintaining public order by granting
limited concessions and by continuing tight security. Negotiations with the
IMF on the second year of a three-year agreement, however, could last well
into May, requiring Jorge Blanco to expand his search for official and
commercial bridge financing.
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Brazil's Manr~1actures Brasilia's efforts to spark an export-led recovery will require increased imports
Imports To Rise of manufactured products this year, an adjustment that probably will not
jeopardize meeting targets under its IMF program. In 1983 we estimate that
Brazil's imports totaled $15.5 billion, down 20 percent from the previous year.
Lower oil imports accounted for over $2 billion of the decline, while imports of
manufactured products from the Big Seven industrial countries fell by $1.4
billion. Machinery and chemical imports were the hardest hit, falling by
$1.2 billion. Although Brazil has been able to manage a modest export boom in
the first quarter, we believe imports to supply key export industries will have to
rise to sustain the recovery. Imports historically have represented 25 percent
and 40 percent, respectively, of total Brazilian supplies of machinery and
chemicals, according to a recent World Bank study. These are essential inputs
for Brazil's manufactured exports. Moreover, additional imports will be
required as the government continues its efforts to increase investment in the
domestic economy
be a major beneficiary of Brazil's import rebound.
Despite the need for greater imports as exports and the domestic economy
expands, Brasilia is~confident it can reach the trade targets in its IMF
program. According to local press reports, Brazil's oil imports for the year will
decline by up to $2 billion because of substantially higher domestic petroleum
production. The United States, which has had its exports of manufactured
products to Brazil fall from $3.2 billion in 1980 to $1.7 billion in 1983, should
Brazil's Agricultural The Figueiredo administration's campaign in the 1980s to boost agricultural
Drive Sputters production through subsidized credits, higher price supports, and other
production incentives has not yet achieved the hoped-for contribution to
Brazil's stabilization program. Brasilia assigned high priority to agriculture in
1979 to combat inflation through increased food production, boost export
earnings, and develop alternative energy sources. Since then, however, output
of basic foodstuffs has risen only slowly. In 1983, Brazil's per capita ~
production of these consumer foodstuffs was considerably less than in 1979,
according to the US Foreign Agricultural Service. Shortages caused higher
imported oil.
Output of export crops-soybeans, coffee, sugar, orange juice, and cocoa
products-also has not risen rapidly since the beginning of the decade nor
provided the boost to Brazil's trade balance the government sought. As a result
of the only moderate rise in production and weak global commodity prices,
agriculture's share of total exports fell from 42 percent in 1979 to 37 percent in
1983. Brazil's most successful agricultural-related achievement has been its
hike in the production of alcohol fuel distilled from sugarcane from 2.5 billion
liters in 1979 to 5.8 billion liters last year; this substitutes for 100,000 b/d of
food prices last year and growing caloric deficiency among Brazil's poor.
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Impact of the Drought
in Senegal
Senegal is facing its worst crop year since independence in 1960 because of
late and inadequate seasonal rains throughout the country. Total cereals
production is projected at only 400,000 metric tons this year, nearly 1 million
tons short of Senegalese needs. Production of groundnuts-the country's major
export-is down 50 percent from last year's level and forei n sales are
expected to be down at least one-third from last year.~~ ? . ,.
Lower Senegalese earnings from the sale of groundnuts will significantly
reduce farmers' incomes. Moreover, farmers will be forced to purchase
imported foods because local production of dietary staples such as millet is
expected to decline by as much as 30 percent. Farmers are likely to lack funds
to purchase seeds and fertilizers needed for the next year's crop. Senegalese in-
dustry will suffer from lower groundnut production because a large segment of
the country's work force is engaged in harvesting, processing and exporting
groundnuts. These problems are likely to result in additional aid requests from
Hungarian Eco omic The Hungarian party plenum last week approved in principle economic
Reforms reforms that probably will face a cool reception in Moscow. The most
controversial measure will permit worker representatives in medium and large
firms to participate with management in enterprise councils to make "strategic
decisions" on the firms' activities. Workers in small plants will be empowered
to select and recall managers, although ministries will retain veto power. Other
measures call for prices to reflect real costs and for greater wage differentia-
tion. Except for the enterprise councils, the reforms announced so far continue
programs that have been evolving since the late 1970s. Far-reaching proposals
to restructure the banking and credit system may still be under debate.
The leadership is committed to the need for major new reforms but faces a
long road ahead in working out details and timing. It also must convince
workers that inflation, unemployment, and greater wage differentation that is
likely to accompany the reforms are shortrun pains needed to generate gains in
Secret
4 May 1984
living standards in the longer term.
The Hungarians are walking a tightrope in explaining their reforms abroad.
Budapest wants to show the IMF and Western creditors that it is making
structural changes to stabilize its financial position: At the same time, it must
convince its skeptical hardline allies that the reforms are no more than afine-
tuning of the socialist systems. According to the US Embassy, senior
Hungarian officials have requested that the US Government and news media
play down the reforms. A Hungarian banker expressed concern about the
difficulty of "selling" the reforms to other CEMA countries and said that a re-
cent-visitor-probably Soviet Foreign Minister Gromyko, according to the
25X1
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Embassy-was upset by the extent of the reforms. The Czechoslovaks-and to
a lesser extent the Soviets-have recently criticized Hungary publicly for
deviating too far from the Soviet model and for seeking unilateral advantages
an untied five-year credit of $50 million,
from the West.
East German Medium- East Germany has obtained commitments from a US and a Japanese bank for 25X1
East Berlin reportedly will pay 1.0 percentage point over LIBOR or 25X1
0.625 point over the US prime rate. The East Germans have been paying much
higher rates for short-term trade credits. Although a $50 million credit would 25X1
provide only a fraction of East Berlin's estimated 1984 financing requirement
of $3.6 billion, this is the first medium-term loan since 1981 and the reopening
of the market represents a major accomplishment. The loan reflects Western
bankers' appreciation of East Germany's improved trade performance; the
East Germans reported a $1.3 billion hard currency trade surplus for 1983 and
ran a roughly $160 million surplus with West Germany in the first quarter.
Despite its reentry into medium-term credit markets, East Berlin will remain
interested in securing another loan guaranteed by the West German Govern-
ment. 25X1
15 Secret
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Eastern Europe: Adjusting
to the Debt Crisis
Eastern Europe's economic decline seems to have
bottomed out. Although some growth in trade and
GNP is likely in the near term., it will not approach
the rapid gains of the 1970s. It is still too soon to
predict a sustained recovery; the region has done
"little to solve several basic problems that cloud
prospects for long-term growth.
Improved Financial Performance
Eastern Europe's financial position improved in
1983 following the severe difficulties of the previ-
ous two years. The region posted a hard currency
trade surplus of $4.2 billion, more than double the
surplus of 1982 and a sharp reversal of the $3.7
billion deficit recorded in 1981:
? Yugoslavia accounted for much of the improve-
ment, paring $1.7 billion off its 1982 trade deficit
of $3.5 billion. Belgrade continued large import
cuts and boosted exports 13 percent as a result of
its devaluation and the redirection of sales away
from CEMA markets.
? Romania ran a trade surplus slightly in excess of
$1.5 billion for the second consecutive year. The
large decline in imports appears to have ended,
while exports nearly reached the 1982 level
thanks to a surge in oil product sales late last
year.
? Poland almost tripled its trade surplus to about
$1 billion. Imports were about the same, while
exports increased 10 percent, mostly increased
coal sales and reexports of Libyan oil.
? Czechoslovakia increased its trade surplus to
$770 million by maintaining tight import policies.
Prague failed to boost exports as planned because
of difficulties in meeting production targets.
? The Hungarian trade surplus climbed $100 mil-
lion to $880 million. Budapest ran another sizable
convertible currency surplus with its CEMA
partners and managed a slight improvement in
hard currency trade elsewhere, also the result of
increased exports of oil and oil products.
? East Germany's trade surplus dropped $200 mil-
lion to about $1.3 billion. The regime boosted
imports about 8 percent and took advantage of its
special relationship with West Germany to obtain
needed imports without spending hard currency.
? Bulgaria's trade surplus shrank from $640 mil-
lion to $460 million because of trade problems
with LDCs. Sales were off significantly to Iran,
Iraq, and Libya, which are among Sofia's largest
trading partners outside the Communist bloc.
Hard currency trade surpluses for six of the coun-
tries along with lower interest payments helped
steer current accounts into the black. The region as
a whole ran a nearly $1.8 billion current account
surplus-a significant improvement over the $2
billion deficit recorded in 1982. Even Yugoslavia
was in the plus column for the first time since 1976
as tourism, worker remittances, and other service
earnings offset outflows.
The current account surpluses helped a majority of
the regimes to reduce their net hard currency debt
for the second consecutive year. Bulgaria, Czecho-
slovakia, East Germany, Hungary, and Romania
cut net debt ~by an average of 14 percent. In
addition, foreign exchange reserves grew by 25
percent regionwide, nearly offsetting the precipi-
tous drop that occurred in 1982 at the height of the
credit crunch. Only the large increase in Poland's
net debt, largely the result of arrearages to West-
Secret
DI IEEW 84-018
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Eastern Europe: Hard Currency Trade, 1979-83
-Exports
-Imports
1979 80 81 82 83
0 1979
I I I I I I I I I I
0 1979 80 81 82 83 0 1979 80 81 82 83
I I I I I I I I I I
0 1979 80 81 82 83 0 1979 80 81 82 83
0 1979 80 81 82 83
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Eastern Europe:
Net Hard Currency Debt .
3.4
3.3 ~
2.8
12.3
10.7
8.6
7.0
6.6
6.3
24.7
23.8
26.4
9.8
9.4
8.8
16.3
16.8
17.9
ern official creditors rather than new credits, pre-
vented more than a marginal decline in the region's
net hard currency debt.
Eastern Europe's financial position was helped by
support from international institutions and general-
ly improved relations with Western creditors.
Loans from the IMF and World Bank encouraged
Western bankers to provide nearly $500 million in
syndicated loans to Hungary. A $,400 million gov-
ernment-guaranteed bank loan from West Germa-
ny helped revive lending to East Germany. Czecho-
slovakia's leading creditors arranged a $50 million
loan as a symbolic move to get Prague back into the
Euromarkets. In contrast to 1982, Romania quickly
negotiated rescheduling agreements with Western
banks and governments. Negotiations proved more
difficult for Poland and Yugoslavia last year, but
both countries eventually obtained favorable re-
scheduling terms from Western banks. Yugoslavia
also obtained a package of new credits from the
banks, Western governments, the IMF, and World.
Bank. Although still at loggerheads with its official
creditors, Poland obtained de facto debt relief
through its self-imposed moratorium on payments
to Western governments.
Less Help From the East
The hard currency trade performance was even
more surprising, given the economic pressures ap-
plied by the Soviet Union. The terms of trade
continued to rise in Moscow's favor last year,
forcing the East Europeans to export a greater
volume of goods to the Soviet Union just to main-
tain existing import volumes. In addition, Moscow
apparently stepped up its pressure on some of its
Warsaw Pact allies to cut their persistent trade
deficits, a means by which the Soviet Union has
implicitly subsidized these economies over the past
decade. Last year's aggregate trade deficit with
Moscow for Poland, Bulgaria, and East Germany
dropped by $1.1 billion to $1.5 billion.
Adjusting to severe external constraints continued
to take its toll on the domestic economies in 1983.
Although growth picked up for some countries,
spurring claims that the region has turned things
around, the' rebound was limited to the northern-
tier countries, and their spurt in growth was neither
large nor necessarily sustainable:
? Poland's GNP grew nearly 4 percent-its first
growth since 1978. Given the depths to which the
economy had plunged, an increase in output was
not surprising once some domestic stability was
achieved. The regime's efforts to increase work-
ing hours helped industry grow 4.8 percent, while
good weather boosted agricultural output by 3.8
percent. Warsaw's failure to pay its Paris Club
creditors allowed it to devote more resources to
the domestic economy.
? The East German economy recovered from
1982's dismal showing of no growth, with GNP
increasing 2.0 percent. Industry remained a
strong performer, growing at about 2.3 percent,
while agricultural growth of 3.1 percent was its
best showing since 1979. East Berlin appears to
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have relied on tough management rather than
systemic reforms to boost productivity and con-
serve raw materials. Even so, last year's achieve-
ments would have been difficult without the West
German trade and financial umbrella.
? Czechoslovakia's GNP rose 1.7 percent in 1983,
up marginally from 1982. Good weather not only
boosted agricultural output, but helped keep a lid
on energy demand. Moreover, another large trade
deficit with the Soviet Union suggests Prague felt
little pressure to divert scarce goods eastward.
Economic performance in the southern-tier coun-
tries lagged behind 1982 growth rates by a substan-
tial margin. Adjustment burdens weighed heavily
on some of these countries, while severe drouglit
depressed agriculture:
? Bulgarian GNP increased by only 0.5 percent
compared with a 3-percent average annual
growth rate in 1981-82. The economy was slowed
mostly by a 5-percent drop in.agricultural output
as growth in other sectors was generally on
target.
? Hungary's GNP fell slightly-about 0.5 per-
cent-because of a bad harvest and maintenance
of its economic stabilization efforts. A relatively
good performance in the private and semiprivate
sectors prevented growth from dropping further.
? GNP declined at least 1 percent in Romania as
drought cut agricultural output at least 6 percent.
Given last year's adversity, Bucharest's rather
optimistic claims of strong economic performance
cast doubts on the reliability of Romanian
statistics.
? Yugoslavia's GNP dropped 1.5 percent, the first
decline since the 1960s. Belgrade reined in the
domestic economy as agreed to in its IMF-
supported adjustment programs.
At best, consumers experienced marginal gains
even in those countries that recorded economic
growth. Poor harvests kept food supplies down in
Eastern Europe: Percent change
Domestic Economic Indicators
GNP
3.0
3.2
0.5
Industry
2.7
2.8
2.6
Agriculture
5.0
5.7
- 5.0
Consumption
3.4
1.1
2.0
Investment
9.0
-5.3
5.0
Czechoslovakia
GNP
- 1.5
1.5
1.7
Industry
1.9
0.8
1.6
Agriculture
- 10.3
8.5
3.1
Consumption
1.4
1.3
1.6
Investment
-4.6
3.2
0
East Germany
GNP
2.1
0
2.0
Industry
3.2
1.1
2.3
Agriculture
2.9
- 1.5
.3.1
Consumption
1.6
1.3
1.0
Investment
2.7
-6.4
1.5
Hungary
GNP
0
1.5
-0.5
Industry
-0.9
0.3
0.7
Agriculture
-0.9
5.8
-2.9
Consumption
1.8
0.9
-0.5
Investment
- 5.6
- 2.6
- 5.0
Poland
GNP
-5.3
-0.6
3.8
Industry
-12.5
- 2.2
4.8
Agriculture
4.3
4.5
3.8
Consumption
- 3.6
- 9.3
1.0
Investment
-22.7
-19.0
5.0
Romania
GNP
0.4
2.4
- 1.0
Industry
0.3
1.4
1.5
Agriculture
0.4
8.0
-6.0
Consumption
2.1
-0.4
-2.0
Investment
-7.1
-2.5
1.0
Yugoslavia
GNP
1.5
0.3
- 1.5
Industry
3.9
-0.5
-1.3
Agriculture
1.5
7.4
- 2.1
Consumption
-1.0
0.5
-1.7
Investment
-9.3
-6.3
-7.0
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some countries. Some regimes used increased pro-
duction to direct goods to export markets and to
resume investment, both at the expense of personal
consumption:
? Consumption growth remained positive in Bul-
garia, Czechoslovakia, and East Germany, al-
though increases were far less than those of the
1970s. Because of their less pressing financial
problems, Sofia and Prague have not been forced
to lower living standards; the West German
financial cushion has helped East Berlin protect
consumption levels through the period of finan-
cial strain.
? Poland boosted consumption marginally last year
after a 9-percent drop in 1982. The Jaruzelski
regime is making an effort to protect living
standards in the hopes of staving off unrest.
Nonetheless, consumer problems remain acute
with rationing continuing for many staples. War-
saw is only postponing its problems because the
marginal gains to consumers are not enough to
help boost productivity or resolve the regime's
political problems.
? Budapest has had some difficulties restraining
demand because of the active underground econ-
omy. Consumption may have dropped marginally
last year because of stronger government auster-
ity measures and price boosts in the second half
of the year. Consumer grumblings remain few,
however, given Hungary's relatively high stand-
ard of living vis-a-vis the rest of Eastern Europe.
? Consumers were hit hardest in Romania and
Yugoslavia as both economies suffered from se-
vere energy problems and downturns in agricul-
ture. The Ceausescu regime continued to bear
down on consumers in order to keep factories
running and to maintain exports. Yugoslavs were
confronted with serious shortages of some. import-
ed goods and an inflation rate running at an
annual rate of slightly more than 100 percent at
1984 Prospects
The slight momentum generated by some East
European economies in 1983 probably carried over
to 1984. Most of the region appears to have turned
the corner regarding the debt crisis. Excluding
Poland, Eastern Europe's foreign financing require-
ments will drop 20 percent this year. Moreover,
prospects for new borrowing seem better than at
any time in the last four years. Eastern Europe's
standing with bankers appears to be rising largely
because of its trade and current account surpluses.
Nonetheless, bankers remain cautious and are lim-
iting most lending to short-term, trade-related
credits, preferably with Western government guar-
antees. The East Europeans remain equally cau-
tious about resuming borrowing. Some countries=
Bulgaria, Czechoslovakia, and Romania, in partic-
ular-intend to run current account surpluses to
reduce debts. Trade credits and project financing
are sought by all the countries, but on a much more
limited scale than in the past. Any untied money
secured this year is expected to come almost entire-
ly from the IMF. Because the net inflow of credit
probably will be small this year, we expect the
region .again to run sizable trade and current
account surpluses-around $3 billion and _$4.1
Trade turnover with the West will pick up for a
second straight year, aided by the economic recov-
ery in Western Europe. Even so, hard currency
trade is unlikely to increase at the double-digit pace
common in the 1970s. Hard currency sales proba-
bly will increase by less than 10 percent while
import growth will be slower, possibly around 5
percent. ~~
The domestic economic performance may fare
slightly better this year:
? Bulgaria and East Germany-the region's most
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growth of around 2 percent. East Berlin could
generate. further productivity gains, while Sofia
will continue to benefit from its financial pru-
dence and extensive Soviet support.
? Czechoslovakia's modest recovery is likely to
continue with GNP growth again slightly in
excess of 1 percent. Prague, like Sofia, feels few
external pressures at the moment, but this could
change should Moscow press for reduced trade
deficits.
? Both Hungary and Yugoslavia could see some
resumption of growth this year after last year's
declines. Both countries appear to have secured
sizable amounts of financing already this year,
which will help ease external financial
constraints.
? Poland's economy will grow again this year but
probably not at last year's rapid pace. Growth of
industrial production was already tapering off at
the end of last year as the one-time gains made
from increased work hours ended. Agriculture is
unlikely to experience another bumper harvest.
Warsaw's bankruptcy will preclude a significant
inflow of new credits to finance imports needed
by industry and agriculture.
? Romania's economy may decline again this year
as energy shortages and erratic management
hobble industry and agriculture. Ceausescu's pre-
occupation with resolving Romania's financial
problems quickly will continue to plague domestic
economic performance.
Longer Term Outlook
Eastern Europe's economic prospects over the long-
er term remain poor. The present rebound in some
economies stems, in part, from an improving exter-
nal environment, including Western economic re-
covery; reduced interest rates; and less volatile
world prices for energy and other raw materials. In
addition, the usually cumbersome and awkward
centrally planned economic networks responded
more effectively than anticipated. Administrative
Secret
4 May 1984
directives enabled these countries to slash imports
and investments, sharply cut domestic allocations
of scarce resources, and redirect goods to export
It is doubtful, however, that current conditions will
lead to a strong, sustainable economic recovery.
Economic growth on the order of 1 to 2 percent a
year, as is now the case, is probably the best
Eastern Europe can hope for over the next few
years. Too many obstacles lie ahead to allow for
attaining the annual growth rates of 3 to 4 percent
common in the 1970s:
? Despite improving financial indicators, bankers
remain reluctant to plunge back into Eastern
Europe. Lending is likely to increase, but the
amount of loans will not reach the levels of the
1970s. Lending also remains heavily influenced
by the political climate, and any perceived diffi-
culties-whether in US-Soviet relations or inter-
nal instability-could well limit activities by
Western banks.
? Overall trade with the West will pick up slightly.
Without sizable new credits, East European im-
ports will be constrained by export earnings,
which remain hampered by poor quality and
growing LDC competition. Last year's export
growth was primarily due to reexports of OPEC
oil, and this opportunity is unlikely to continue
indefinitely. Moreover, some Western economists
already project that the West European economic
recovery could end as early as 1985, limiting a
rebound in East European sales.
? The East Europeans will find it difficult to turn
to the Soviets for additional economic support.
Moscow will continue to press its CEMA allies to
deliver more and better quality goods to reduce
deficits, and another round of oil cuts in the near
future is not out of the question.
Unlike the 1970s, Eastern Europe will have to rely
primarily on its own resources and management to
sustain economic growth. Annual increments to the
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sustain economic growth. Annual increments to the
labor force are slowing, and energy reserves are, for
the. most part, meager. With respect to manage-
ment, the regimes must go beyond the quick fixes
of the past few years and seek ways to boost
productivity. But with the exception of Hungary,
no country has undertaken meaningful, structural
changes that could improve efficiency. East Ger-
many has benefited from recentralization to some
extent, but its measures cannot easily be trans-
ferred to other East European countries. Even if
systemic changes were made immediately, the pay-
offs could not be felt anytime soon, and, indeed, the
short-run costs would slow growth. Productivity is
likely to suffer a further setback once the full
effects of recent import and investment cuts are felt
by an aging, and in some cases obsolescent, capital
stock. Moreover, labor productivity will suffer from
serious morale problems. Workers accustomed to
steady improvements in living standards in the
1970s can expect few rewards over the remainder
of the decade.
23 Secret
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EC-Eastern Europe: Limited Trade
Dialogue
Despite attempts by countries in Eastern Europe to
secure greater access to West European markets,
the European Community so far has negotiated
only limited bilateral trade agreements--largely
for political purposes-and has avoided making
concessions that would weaken Western Europe's
already troubled industrial sector. Hungary and
Czechoslovakia last year approached the European
Community (EC) to negotiate bilateral trade agree-
ments that would expand their sales to Western
Europe. They did this despite the meager results of
Romania's agreement with the EC. With EC-
CEMA talks stalled since 1979, the Hungarian and
Czechoslovak efforts apparently signaled a soften-
ing of Moscow's opposition to bilateral agreements
between East European countries and the EC.
Limited Progress in the Past
Trade agreements between the EC and Eastern
Europe date from the early 1970s, when the Com-
munity negotiated nonpreferential agreements that
extended MFN status to Yugoslavia. By the late
1970s, Yugoslavia and the EC Commission saw the
need for a comprehensive preferential agreement.
Negotiations on a new pact bogged down, however,
because West European industries pressured the
EC Commission to retain tariffs and quotas on
many important Yugoslav exports.
Discussions between the EC Commission and the
CEMA Secretariat began in the mid-1970s. The
talks proved fruitless because Moscow and the EC
had little common interest in an agreement. The
EC insisted on a very limited agreement with
CEMA and bilateral trade pacts with individual
countries. The EC saw no economic gain in the
umbrella agreement proposed by CEMA and
judged that such a pact would only strengthen
Moscow's hand in managing East European trade
with the West. Moreover, the West Europeans
contended the CEMA Secretariat lacked the legal
authority and believed an umbrella agreement
would unduly enhance the Secretariat's stature.
The USSR, whose main exports of energy and raw
materials were not burdened by EC trade restric-
tions, had little reason to make concessions in order
to obtain an agreement.
Only the East Europeans saw economic advantages
in a trade pact. Several East European countries
had negotiated marketing agreements that ensured
access to the EC for steel, textiles, and chemicals,
but only under very tight quotas. The East Europe-
ans believed that a more general lifting of the EC's
discriminatory import restrictions was needed to
reduce rising trade deficits. By the end of the
1970s, several East European countries had grown
impatient with the slow pace of the CEMA-EC
negotiations and lobbied unsuccessfully in EC capi-
tals and in Moscow for more flexible approaches to
the discussions.
The Romanian and Yugoslav Agreements
Hoping to improve its sales in Western Europe,
Romania broke with the CEMA negotiating posi-
tion in 1979 to pursue an industrial products
agreement. The negotiations proved difficult be-
cause Romania pressed for maximum liberalization
of quotas on industrial products and for developing
country status that would entitle it to preferential
tariff reductions. In 1980 the EC and Romania
reached a compromise and signed the first sectoral
trade pact between a CEMA member and the EC
Commission. The agreement reduced EC restric-
tions on roughly 100 Romanian industrial products
and obligated Bucharest to maintain, if not in-
crease, Western Europe's share of Romania's hard
currency imports.
Secret
DI IEEW 84-018
4 May 1984
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Eastern Europe: Trade With the EC
~
Million us $
Commodity
1980
1981
1982
1983 e
Exports
17,188
14,452
14,128
13,978
Agricultural products
2,058
1,831
1,749
1,578
Raw materials
1,936
1,440
1,387
969
Fuels
3,430
2,971
2,827
2,931
Manufactured goods
9,553 _
8,060
8,018
8,500
Chemicals
1,253
1,269
1,253
NA
Semifinished goods.
2,769
2,186
2,299
NA
Machinery
1,336
1,071
1,014
NA
Transport equipment
641
539
449
NA
Consumer goods
3,554
2,995
3,003
NA
Other
211'
150
147
NA
Imports
20,719
17,368
14,578
13,749
Agricultural products
1,979
2,248
1,436
1,393
Raw materials
988
747
612
542
Fuels
798
855
624
583
Manufactured goods
16,574
13,102
11,541
11,231
Chemicals
3,937
3,340
2,995
NA
Semifinished goods
4,363
3,299
3,065
NA
Machinery
6,055
4,641
3,964
NA
Transport equipment
1,145
961
742
NA
Consumer goods
1,074
861
775
NA
Other
380
416
365
NA
In 1980 the EC made major concessions to Yugo-
slavia to conclude a preferential agreement. This
agreement went beyond the earlier accords in
lifting restrictions on nearly all industrial products
and some agricultural goods. The pact also includ-
ed financial measures and provisions concerning
Yugoslav guest workers in Western Europe,. tech-
nology, and energy.
At the time, Tito's health was failing and West
European governments were concerned that an
economically troubled Yugoslavia lacking strong
leadership might look to the Soviet Union for
assistance. The EC also was troubled by the shift
Secret
4 May 1984
during the 1970s in Yugoslavia's trade away from
Western Europe toward Communist countries. The
Nest Europeans reasoned that a comprehensive
trade pact would help Yugoslavia by increasing its
hard currency exports and would demonstrate
Western Europe's interest in orienting Yugoslavia
toward the West.
The EC agreements with Yugoslavia and Romania
have had mixed results. Yugoslavia's trade position
in the EC showed little improvement in 1981-82
despite the EC trade accord..Following asmall
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Eastern Europe: Exports to the European Community,
1977-83
Agricultural goods Total
I hiker /'~
Manufactured goods
Other
Total
increase in 1981, exports fell nearly $400 million
the following year. Manufactured goods accounted
for most of the decline in exports, but Yugoslavia
also lost nearly $80 million in 1982 in meat sales to
Greece after Athens joined the EC in 1981. Yugo-
slavia's poor export performance-particularly at a
time when Belgrade was struggling with severe
debt payment problems-convinced both sides that
the 1980 agreement was not working well. In early
1983, the Yugoslav-EC Cooperation Council met
to seek ways to increase Yugoslavia's exports.
Although the EC delegation expressed a willing-
ness to identify trade barriers that could be low-
ered, no firm concessions were made.
Even without new concessions, Yugoslavia recorded
a substantial improvement in trade with the EC in
1983. Exports rose about 40 percent compared with
1982, largely as a result of increased sales of
manufactured goods. Belgrade's large devaluation
of the dinar and diversion of goods from CEMA
Secret
4 May 1984
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A Comparison of the EC Agreements With
Yugoslavia and Romania
Yugoslavia obtained a much more favorable agree-
mentfrom the EC than did Romania. The Yugo-
slavs received reductions in discriminatory trade
barriers for nearly all their industrial products
and some reductions for agricultural goods. The
EC granted improved treatment for roughly 100
Romanian industrial products, but refused to con-
sider quota reductions for agricultural products,
claiming this sector was too sensitive. Yugoslavia
was given the status of a developing market econo-
my, which allowed it to introduce limited restric-
tions on EC exports. Romania was placed in the
state trading country category, which gives the EC
Commission greater powers to prosecute anti-
dumping cases and to impose protective measures.
Romania, moreover, agreed to increase imports
from the EC at a rate no less than that of other
countries belonging to the General Agreement on
Tariffs and Trade (GATT). The Cooperation
Council established-with Yugoslavia was to meet
at the ministerial level, and its decisions would be
binding in resolving disputes. The EC turned down
Romania's demand for a joint ministerial council,
and the EC-Romanian commission obtained only
limited powers to enforce solutions to trade dis-
putes. The Yugoslavs, but not the Romanians, were
allowed to borrow from the European Investment
Bank. One common element in the two agreements
was the scjfeguard clause permitting the EC to ban
without prior notice goods deemed a serious threat
to EC industries.
markets underlie the surge in exports. to Western
Europe, but the quota increases and lower tariffs
granted in the 1980 agreement presumably facili-
tated Yugoslavia's export drive as well. The strong
performance has eased pressures for new conces-
sions from :the Commission and in fact prompted
charges that the Yugoslavs were dumping some
chemicals and metal products in Western Europe.
Secret
4 May 1984
Romania's performance has not been as good.
Exports to the EC fell from $2.6 billion in 1980 to
$1.7 billion in 1983. Reduced sales of oil prod-
ucts-the result of Romania's own energy problems
and softer world prices-accounted for much of the
decline, but exports of manufactured Qoods also fell
despite the increased quotas.
In response to the poor export performance, the
Romanians unsuccessfully petitioned the EC for
greater liberalization of trade barriers on industrial
products, an easing of restrictions on agricultural
goods, and endorsement of countertrade and joint
ventures. The Romanians also complained about
antidumping procedures initiated by the EC and
requested the formation of a cooperation council.
The EC responded that, in addition to dumping
goods, Bucharest had ignored its obligation to
facilitate West European sales to Romania. The
EC asserted that the Romanian request for a
cooperation agreement was nothing more than a
ploy to get financial credits.
Hungary and Czechoslovakia Come Calling
After atwo-year hiatus in talks between the EC
and the CEMA Secretariat, Hungary and Czecho-
slovakia approached the EC in early 1983 about
negotiating bilateral agreements. The Hungarians
requested a pact that would eliminate discrimina-
tory import quotas on industrial and agricultural
goods-particularly on beef-and establish prefer-
ential tariffs for Hungarian exports. Budapest
stressed that it did not want an agreement limited
to the industrial sector, such as the Romanian pact,
but a comprehensive agreement at least as favor-
able as the Yugoslav pact. The Hungarians in
effect wanted to be removed from the category of
state trading country and to be given all the
advantages available to other GATT members.
Czechoslovakia's request was more modest: a re-
duction in EC restrictions on a number of industrial
goods such as shoes, glassware, cars, tractors, wood
products, and chemicals. Shrinking export earnings
and the prospect of tougher competition in West
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European markets explain the interest of Budapest
and Prague in trade agreements with the EC.
The Hungarian and Czechoslovak efforts apparent-
ly signaled a softening of Moscow's opposition to
bilateral agreements between East European coun-
tries and the EC. The Hungarians claimed that
they had to keep discussions secret from the Sovi-
ets, but EC officials believe Budapest consulted
with Moscow. Moreover, the Hungarians never
complained about the publicity given to the discus-
sions. Hungary's warning may have been a ploy to
strengthen the EC's belief that an agreement would
work against the USSR's interests. The Czechoslo-
vaks stated that they cleared their initiative with
Moscow.
the Soviets have placed the EC-CEMA issue on the
back burner, and the individual East European
countries may pursue bilateral discussions with the
Commission. Moscow probably has given the East
Europeans more latitude because the financially
strapped region needs to boost exports in order to
service hard currency debts.
A Lukewarm Reception
The EC received Hungary's request with only
slightly more interest than Czechoslovakia's. We
believe the EC chose to pursue Budapest's initiative
for political reasons-to show support for the most
liberal Warsaw Pact regime and possibly to loosen
Hungary's ties to the East. On economic grounds,
however, the West Europeans oppose the conces-
sions requested by Hungary. For example, a whole-
sale lifting of import restrictions would add to
problems faced by troubled sectors in Western
Europe-agriculture in particular-and would es-
tablish aprecedent for dealing with other East
European countries. Although signaling a willing-
ness to talk with the Hungarians, the EC rebuffed
the Czechoslovaks because it could see neither
political nor economic advantages in an agreement
with Prague.
29
The preliminary discussions between the EC and
Hungary moved at a snail's pace through 1983. 25X1
Italy, Ireland, and France, whose economic inter-
ests would be most affected by more generous
treatment for Hungary, dragged their feet on au-
thorizing the Commission to begin formal negotia-
tions. In an attempt to move the discussions for-
ward, the Hungarians lobbied the Germans and the
British, who showed the most interest in the politi-
cal ramifications of an agreement and seemed less
concerned about the economic costs. In early 1984,
the EC foreign ministers' council authorized the
EC Commission to begin formal negotiations, but
only if Budapest accepted the EC's general terms of
reference for an agreement.
The EC's proposed terms fell far short of Hunga-
ry's goals, and Budapest sharply rejected the EC
proposal in March 1984. For example, the EC
insisted upon maintaining: quantitative restrictions
on most goods; preferential tariff treatment only on
products for which Hungary is the major EC
supplier; a safeguard clause by which the EC can
halt imports posing a serious threat to West Euro-
pean industries; and a commitment by Budapest to
reciprocal treatment of EC exports. Moreover, the 25X1
EC's chief negotiator stated that the Commission
could not agree to terms that would remove Hunga-
ry from the category of a state trading country and
give it a status comparable to that of Yugoslavia.
Despite Hungary's rejection of the EC proposal,
the dialogue will continue at a working-level meet-
ing in Brussels on 15 May. The EC chief negotiator
indicated that some Commission officials and
member governments wanted to drop the effort, but
West Germany and the United Kingdom probably
persuaded other EC members to continue low-level
discussions. The Hungarians remain interested in
an agreement, but Budapest's apparent unwilling-
ness to compromise may reflect sensitivity to recent
criticism by its allies about its increased contacts
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4 May 1984
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Secret
with the West. The Hungarians probably anticipate
that in time the EC will offer some concessions and
that the climate in the East will become more
favorable to negotiations with the West Europeans.
But even if the exploratory talks advance to formal.
negotiations, conclusion of a final agreement would
be likely to take at least two years
The stalling of the EC-Hungarian talks precludes
any expansion of contacts between the Commission
and Eastern Europe. The West Europeans show no
sympathy for Romania's complaints about its rela-
tions with the EC, and the Commission's quick
rebuff to the Czechoslovaks indicates little interest
in talks with other CEMA countries. Poland appar-
ently has been following the Hungarian develop-
ments closely, and EC officials speculate that a
generous agreement for Hungary would soon pro-
duce aPolish demarche.
Secret
4 May 1984
Even if a trade agreement is eventually concluded
with Hungary or another CEMA country, the
economic payoff for the East Europeans would be
limited. We believe the EC would maintain tight
restrictions on most agricultural products, textiles,
clothing, steel, and chemicals-Eastern Europe's
most competitive exports. The Commission would
monitor closely East European export performance
under any agreement and would move to stem any
surge in sales that threatens a troubled industry in
Western Europe. Indeed, with the exception of
Yugoslavia, the West Europeans probably will con-
tinue to give more favorable treatment to LDCs
with which they have already concluded preferen-
tial trade agreements than to East European coun-
tries.
25X1
25X1
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Eastern Europe: Declining
Soviet Support
Trade results for 1983 show that Soviet economic
support for Eastern Europe declined significantly
for the second consecutive year. Moscow's insist-
ence on reduced trade deficits-coupled with dete-
riorating terms of trade-forced the East Europe-
ans to ship larger quantities of goods in exchange
for Soviet energy and raw materials. With Soviet
oil prices to Eastern Europe now at OPEC levels
and trade moving toward balance, the Soviet subsi-
dy to Eastern Europe will probably decline further
this year. The East Europeans hope to slow this
trend at the upcoming CEMA economic summit,
In 1983, Eastern Europe pared its deficit with the
USSR from nearly 2.0 billion rubles to just over 1.6
billion rubles by boosting exports 13 percent while
keeping the growth of imports to 11 percent.' This
reduction in the trade deficit, following a 1.2-
billion-ruble cut in 1982, has reversed the trend of
generally rising deficits between 1974 and 1981.
Eastern Europe's deficit had increased through
1981 as the Soviets extended trade credits to cover
the rising cost of energy deliveries and special
assistance to Poland during the 1981 crisis. Re-
duced economic aid to Warsaw accounted for most
of the decline in the region's 1982 deficit.
East Germany, whose deficit fell from a record 644
million rubles in 1982 to 202 million rubles last
year, recorded the largest reduction,'followed by
Poland and Bulgaria. Although Romanian and
Hungarian imports grew more than exports, trade
remained nearly balanced for both countries.
' The USSR valued the ruble at $1.38 in 1982 and $1.35 in 1983
for computing hard currency trade statistics. The exchange rates
have little relevance to the valuation of infra-CEMA trade. ~
Czechoslovakia is the only exception to the trend
toward balanced trade. Prague's deficit rose for the
third consecutive year and totaled 452 million
rubles. This.development may be explained by
growing shipments of natural gas the Czechoslo-
vaks receive as transit fees for conveying Soviet gas
to Western Europe. According to the Czechoslovak
press, this fee is approximately 2 billion cubic
meters of gas a year, worth an estimated 250
million rubles.
The trend toward smaller deficits with the USSR
parallels the shift in Eastern Europe's trade with 25X1
the West from large deficits prior to 1982 to sizable
surpluses over the past two years. The process of
adjustment, however, has been different. Although
the East Europeans have boosted exports more than
imports in trade with the USSR, the region slashed
Western imports to offset slumping hard currency
sales and reduced credits.
Deteriorating Terms of Trade
Deteriorating terms of trade. for Eastern Europe
have compounded the decline in Soviet assistance
through trade deficits. The East Europeans have
had to deliver a greater volume of goods to the
USSR not only to reduce trade deficits, but also to
offset the faster increase in the prices of Soviet 25X1
energy and raw materials. According to Polish and
Hungarian statistics, import prices rose 4 to 6
percentage points more than export prices in trade
with the USSR in 1983. This adverse price move-
ment, combined with lower trade deficits, reduced
the net flow of real resources from the USSR to all
countries except Romania.
Secret
D! IEEW 84-018
4 May 1984
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East European exports
8,600
21,151
24,322
27,528
Bulgaria
1,426
3,697
4,288
5,053
Czechoslovakia
1,518
4,105
4,732
5,420
East Germany
2,151
5,155
5,776
6,596
Hungary
1,148
3,300
3,746
4,007
Poland
1,745
3,221
4,097
4,787
Romania
612
~ 1,673
1;683
1,665
East European imports
8,705
24,299
26,297
29,153
Bulgaria
1,479
4,374
4,885
5,511
Czechoslovakia
1,511
4,382
5,048
5,872
East Germany
2,165
5,526
6,420
6,798
Hungary
1,134
3,307
3,707
4,058
Poland
1,838
4,931
4,813
5,274
Romania
578
1,779
1,424
1,640
East European balance
-105
-3,148
-1,975
-1,625
Bulgaria
-53
-677
-597
-458
Czechoslovakia
7
-277
-316
-452
East Germany
-14
-371
-644
-202
? The volume of goods shipped from the USSR in
1983 fell 6 percent for East Germany, 3 percent
for Hungary and Poland, and increased 2 to 3
percent for Romania and Czechoslovakia. Bul-
garia received. roughly the same quantity of
goods.
? The volume of goods shipped to the USSR grew 8
to 11 percent for Bulgaria and Poland, 6 to 8
percent for Czechoslovakia and East Germany,
and 2 to 4 percent for Romania. Hungary shipped
nearly the same volume of goods.
Trade Prospects in 1984
The bilateral trade protocols for 1984 provide only
limited insight into the likely trend for Soviet-East
Secret
4 May 1984
European trade. The negotiation of these annual
agreements has been made more difficult by the
economic problems facing both sides:
? The USSR is increasingly reluctant to supply
Eastern Europe with fuel and raw materials that
are needed domestically or that can be sold for
hard currency. Moscow is demanding increased
deliveries of higher quality manufactured goods
and food in exchange.
? The East Europeans are urging Moscow to main-
tain current levels of energy and raw material
deliveries and are hoping that the USSR can help
cushion the impact of debt and other problems
hindering trade with the West.
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Eastern Europe: Share of Imports and Exports,
1980 and 1983
1980
Imports
Other socialist
countries
28.6 9.7
Developed countries
1983
Imports
The 1984 bilateral protocols indicate that increases
in nominal trade turnover will range between 8 and
12 percent, in line with the growth of the past few
years: We estimate that about one-fifth of the
increase in turnover for countries other than Roma-
nia will result from.higher CEMA oil prices. When
adjusted for inflation in nonoil goods, real trade
with the USSR will increase 6 to 8 percent for
Romania, 4 to 6 percent for Bulgaria and Czecho-
slovakia, and 3 percent or less for East Germany,
Hungary, and Poland.
Eastern Europe will probably remain in deficit to
the USSR but at a reduced level from 1983. The
Polish protocol, which is the only one to provide
export and import targets, envisions a continuing
Polish deficit, but exports are to grow nearly twice
as fast as imports. The USSR reportedly has
pressed East Germany and Bulgaria to make fur-
ther cuts in their trade deficits.
Secret
4 May 1984
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Eastern Europe: Terms of Trade
With the USSR, 1976-838
70 -1976 77 78 79 80 81 82
Oil Prices Catch Up
Eastern Europe: Crude Oil Prices, 1975-85
83 0 1975 76 77 78 79 80 81 82 83 .848 85a
markets, thus eliminating the oil price subsidy the
Soviets were granting the other CEMA countries.
The East Europeans, however, still receive oil from
the USSR on better terms than could be obtained
in world markets because-except for Romania-
they pay for Soviet oil largely with manufactured
goods that could not be sold in the West and that
are probably overpriced. 0
Oil is the pivotal commodity in trade between
Eastern Europe and the Soviet Union. Eastern
Europe relies heavily on imported Soviet oil, both to
satisfy domestic energy demand and to obtain hard
currency by exporting oil and oil products to the
West. After reducing exports to several East Euro-
pean countries in 1982, the Soviets maintained
deliveries in 1983. We believe the Soviets will
supply Eastern Europe in 1984 at last year's levels
with the exception of Romania, which will receive
more oil in exchange for agricultural goods and
possibly oil equipment.
Because intra-CEMA oil prices are determined by
the five-year moving average of world prices, the
price of Soviet oil to CEMA countries was consid-
erably below the price the Soviets could obtain in
world markets until this year. With the drop in
world oil prices, however, CEMA prices have
caught up and now probably exceed those in world
Secret
4 May 1984
Trade relations are likely to be discussed at the
CEMA Summit in June. Soviet and East European
leaders could consider several issues affecting trade
relations: pricing arrangements, trade balances,
deliveries of Soviet energy and raw materials, and
the quality and quantity of East European exports.
East European leaders undoubtedly will want to
focus discussion on the adverse impact on their
34
25X1
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Secret
economies of current trends in intra-CEMA trade
and on their need for a stable supply of energy and
raw materials. The Soviets, on the other hand, will
want to concentrate on broader structural issues
such as closer integration of planning, increased
industrial specialization, and East European invest-
ments in Soviet energy and natural resource devel-
opment.
The East Europeans are unlikely to achieve signifi-
cant economic relief at the Summit. With trends
moving in Moscow's favor, the. Soviets have little
incentive to alter trading arrangements. Moreover,
the Soviets may well believe that the East Europe-
ans will soon be able to begin reducing their debts
to the USSR.
Although the East Europeans are unlikely to re-
verse the trend toward less Soviet subsidization,
they still obtain .important benefits from trade with
the Soviets. Trade deficits with the USSR, al-
though smaller, are likely to persist at least through
the current five-year plan, while the region will still
have to run large surpluses with the West. More
important, the East Europeans will continue to pay
for vital Soviet imports mainly with goods that
cannot be easily marketed in the West.
Nonetheless, the decline in Soviet economic support
shows that Eastern Europe cannot count on the
USSR to cushion difficulties in trade with the
West. Reorienting trade to the East offers scant
help for dealing with the region's economic prob-
lems. The USSR cannot provide substitutes for the
Western technology and investment goods needed
to revive the East European economies, nor can the 25X1
Soviets supply the food and consumer goods de-
manded by the East European populace. ~~ 25X1
Secret
4 May / 984
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USSR-Finland: Economic Ties
Moscow has turned increasingly to Finland as a
source of advanced machinery and equipment. For
their part,, the Finns find the USSR a stable market
for manufactures exports and a source of petro-
leum. Further growth of this trade, however, will be
constrained by Finland's limited capability to pro-
duce high-technology goods.
The Special Trade Relationship
Finland's special political relationship with the
Soviet Union has given birth to a special economic
relationship. Finnish-Soviet trade is essentially a
barter arrangement whereby Moscow can pay for
imports in rubles on the understanding that, at the
end of each five-year interval, its purchases and
sales are to be equal in value.' Even when allow-
ance is made for the impact of oil price increases,
the economic relationship has enjoyed impressive
growth. Two-way trade grew almost sixfold from
1973 to 1982, according to Soviet data. Moscow's
trade with Finland now ranks a strong second to
Soviet-West German commerce and exceeds Sovi-
et trade with Japan, France, Italy, and the United
States. In 1981 Finland ranked second only to
Japan among Western suppliers in the value of
manufactured goods sold to the Soviet Union.
Finnish manufactured exports to the Soviet Union
rose ninefold from 1972 to 1981, compared with an
increase of only 3.5 times for the rest of OECD.
Although Soviet exports to Finland consist mostly
of raw materials, especially petroleum, Finnish
sales to the USSR include a wide variety of
machinery and equipment. ~~
Bents to Moscow. The USSR's primary benefit
is access to high-quality Finnish machinery and
' The commodity composition and value of the trade are established
by 15-year cooperation agreements, five-year trade accords, and
equipment. Although high-technology goods repre-
sented only 4 percent of the country's total 1981
sales to the USSR-compared with 15 percent for
West Germany, 12 percent for Italy, and 11 per-
cent for Japan and France-the USSR puts a
premium on the equipment that Helsinki does
provide, especially lumber processing machinery, 25X1
merchant ships, offshore drilling vessels and plat-
forms, and capital goods needed to expand extrac-
tion of nonferrous metals, particularly copper. The
Soviets also purchase Finnish products that incor-
porate technology from other Western countries.
For example, Finnish shipyards often outfit the
drilling rigs they sell to the USSR with Western
drilling tools and electronic gear.
The Finns undertake large construction projects in
the Soviet Union. The Soviets have awarded con-
tracts for a broad range of facilities, including a
goods terminal at one of Moscow's airports, a
railroad car depot near Leningrad, expansion of
grain-handling facilities at the Tallinn harbor, and
several raw materials processing projects.
because its imports do not have to be paid for in
hard currency. 25X1
Othe Soviets preferred purchasing oil rigs from
their Nordic neighbor in 1982 because the bilateral 25X1
barter arrangement eliminated the need for signifi-
cant hard currency financing. The advantage to
Moscow of trading under a soft currency barter
regime is lessened in periods such as the present,
however, when the Soviet hard currency payments
position is relatively strong. In addition, although 25X1
the USSR does not pay for Finnish goods directly
with convertible currency, it does provide Helsinki
with oil and other "hard goods" that could earn
hard currency if they were sold on other Western
Secret
D/ lEEW 84-0l8
4 May ! 984
25X1
25X1
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11SSIl8-?]E~IID: Trade Tlarnover
Triennial, Averages, 1971-g2
West Germany
Japan
France
United States
Italy
Netherlands
Others a
1971-73
1974-76
1977-79
1980-82
1971-73
1974-76
1977-79
1980-82
1971-73
1974-76
1977-79
1980-82
1971-73
1974-76
1977-79
1980-82
1971-73
1974-76
1977-79
1980-82
1971-73
1974-76
1977-79'
1980-82
1971-73
1974-76
1977-79
1980-82
1971-73
1974-76
1977-79
1980-82
a Australia, Austria, Belgium,
Luxembourg, Canada, Denmark,
Greece, Ireland, Norway, Spain,
Sweden, Switzerland, and
United Kingdom.
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The Soviets have political motivations for trading
with the Finns as well. Given Finland's special
political relationship with the USSR, Soviet plan-
ners probably believe that Helsinki is less likely to
go along with Western sanctions against the USSR
than NATO governments. Moreover, although
Helsinki has not been shown to be a transit point
for shipments of controlled technology to the
USSR, Moscow presumably values its neighbor's
Throughout 1982 and 1983, the Soviets attempted
to solve the problem by pressing the Finns to
purchase more Soviet arms and natural gas and to
buy a 1,000-megawatt nuclear power plant.
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25X1
refusal to adhere formally to COCOM.
Bents to Helsinki. The main benefit the Finns
obtain from trading with the USSR is the guaran-
tee of an assured market for their goods. This
market grows especially important during times of
weak Western demand. Moscow has bought an
increasingly large share of Finland's exports over
the last decade-12 percent in 1972, 21 percent
three years. later, and 25 percent in 1981.
Helsinki's dependence on the Soviet market, how-
ever, is potentially risky. Any cutback in sales to
bring trade back into balance probably would cause
unemployment in the affected sectors. Soviet media
have cited estimates by "Finnish economists" that
Soviet orders account for 150,000 Finnish jobs.
Recent Trade Strains and Soviet Responses. In
1981, when Finland used the Soviet market to buoy
its economy during the Western recession, a large
Finnish trade surplus started to accumulate. This
surplus amounted to an interest-free loan and was
resented by the Finns. As the value of oil-the
Soviets' largest export-fell, the USSR's bilateral
trade deficit grew even more. By 1982 the two
countries had agreed to increase the maximum
allowable imbalance in the clearing account (the
account through which the barter is handled) to
.300 million rubles. When the Finnish surplus ex-
ceeded even that limit, they decided to transfer 300
million rubles from that account into a special
interest-bearing account owned by Finland.
Throughout much of 1983, the USSR's total trade
deficit with Finland was around 600 million rubles
($825 million); a little more than half this amount
was in the interest-bearing account.
Soviet pressure, and Moscow failed to make good
on its ultimatum. Helsinki's reluctance to increase
its gas purchases centered around the high price
offered and the cost of building the required pipe-
line extension. Concern that energy supplies would
exceed demand was an important factor for both
the gas and the power plant, and political pressure
from Finnish environmentalists added to official
coolness toward the power plant:
An even bigger factor in correcting the trade
imbalance was the Soviet decision to maintain
large petroleum sales. In 1982 the USSR sold the
Finns 20,000 b/d of Libyan crude oil, which the
Finns resold on the West European market. (In
addition, the Soviets have been delivering around
200,000 b/d of domestically produced petroleum to
Finland annually.) Last year the Finns had con- 25X1
tracts to deliver 26,000 b/d of crude oil, probably
of Libyan origin, to the international market, and
for 1984 Moscow has again acceded to its neigh-
bor's request for more Libyan crude. The current
deliveries, which will probably allow the Finns to
continue hard currency resales, are intended to
produce a modest Soviet trade surplus that will
improve the ov.?,rall 1981-85 trade balance. ~~ 25X1
This year's trade agreement also gives Finland an
option to increase its nonoil imports beyond the
protocol level by accepting less oil,. but this proba-
bly represents wishful thinking on Moscow's part.
Helsinki will have little incentive to accommodate
the Kremlin's drive to sell more manufactured
goods if it is permitted to meet its import obligation
primarily through oil purchases. In early February,
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4 May / 984
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lower prices apparently clinched the deal.
However, Helsinki and Moscow did come to terms
on gas sales, with Finland's agreeing to quadruple
its purchases by the year 2000. A Soviet decision to
Prospects
Moscow's willingness to make concessions to the
Finns on the trade imbalance issue reflects its
recognition of the importance of its commercial
relationship with Finland. The Soviets' main gain
from the trade-access to high-quality manufac-
tured goods-has become even more important now
that they are giving preference to non-US suppliers
in order to reduce vulnerability to sanctions. ~
readily be marketed in Finland. billion.
Leading Commodities in
Soviet-Finnish Trade, 1982
Soviet exports
3,306
100
Crude petroleum and oil products
2,479
75
Coal
132
4
Natural gas
107
3
Wood and paper products
99
3
Other
489
15
Soviet imports
3,861
100
Wood and paper products
696
18
Ships
581
15
Clothing and fabrics
205
5
Equipment for processing timber
and paper
168
4
Food products
150
4
Soviet side, sales are likely to be constrained by developing the Barents Sea oil deposits will provide
potential shortfalls in the quantity of oil available considerable impetus to bilateral trade. Finland
for export and a continuing inability to produce would probably win some contracts under this
goods other than fuels and raw materials that can project, which is estimated to cost at least $10
With energy comprising 80 percent of the USSR's
exports to Finland, uncertainties in international oil
and gas markets cloud the medium-term outlook
for maintaining growth in the bilateral trade. Possi-
ble fluctuations in future energy prices.will make it
difficult for Moscow and Helsinki to fine-tune their
trade accord.
Over the longer term, there may be more basis for
optimism. Both sides are likely to be willing to
make the sacrifices needed to prevent a downturn
in trade because each perceives advantages in
maintaining strong economic and political ties.
Moreover, a Soviet decision to move forward with
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4 May 1984
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Chile's Military:
The Impact of Economic Crisis
Chile's domestic political crisis and the depressed
economy are eclipsing the armed forces' traditional
concerns about the military balance with rival
forces of its neighbors, particularly Peru and Ar-
gentina. The armed forces, who prefer a purely
military role, have been strained in recent years by
their political role in supporting President Pinochet
and the ruling military junta. The development of
broad, active opposition to the regime has aggravat-
ed that strain, and the armed forces face critical
choices in the coming months. In contrast with
some Latin American democratic governments that
feel compelled to accede to demands by politically
powerful militaries for new weapons, Pinochet has
used his dual government/military leadership role
to tightly control defense expenditures, in part to
comply with guidelines on government spending
under Chile's IMF-supported economic adjustment
program. Selected weapons purchases continue, but
the determination to maintain fiscal discipline-
combined with the continuing international arms
embargo against Chile-will limit Santiago's abili-
ty to modernize its arsenal and we believe will
degrade operational effectiveness.
The Military's Role
Defense of Chile's long, vulnerable frontier from
external attack remains the military's preeminent
responsibility. Chile's armed forces-victors in a
series of wars in the 19th century and trained by
successive European military missions-have a
long tradition of professionalism and are perhaps
the most competent in Latin America. Although
they have not engaged in combat since crushing
Peru and' Bolivia in the War of the Pacific (1879-
1883), periodic border tensions between Chile and
its neighbors-most recently in 1978 when Chile
and Argentina almost clashed over the Beagle
Channel-have encouraged high professional
standards. Strategic planning still centers on a
perceived need to field forces simultaneously
against Peru, Argentina, and Bolivia. To this end,
the armed forces are almost exclusively trained and
equipped for conventional warfare.
During 1973-80, Chile contracted for over $1
billion worth of arms and military services, includ-
ing jet fighters, warships, armor, and air defense
equipment. The size of the armed forces increased
as well during this period, with the Army growing
from 32,000 to 53,000. Despite this effort, Chile's
military remains underequipped and heavily out-
numbered by the combined forces of Peru, Argenti-
na, and Bolivia. Peru and Argentina, Chile's princi-
pal rivals, each have spent more than Santiago,
giving them a growing qualitative edge as well. The
international arms embargo against the Pinochet
regime for human rights violations-adhered to by
the United States, which had been Chile's principal
supplier-has denied the Chileans access to many
modern weapons and occasionally forced Santiago
to purchase less satisfactory equipment from
sources such as Israel.
The military is reluctant to assist the National
Police (Carabineros) in maintaining internal securi-
ty. Unlike most Latin American police forces,
however, the Carabineros are relatively well
trained and only rarely do they require direct
military assistance. Moreover, the armed forces are
mindful of jeopardizing the respect still accorded
them by many middle-class Chileans and recognize
their own lack of internal security training. In
August 1983, for example, inexperienced troops
reinforcing the hard-pressed police in Santiago
fired on demonstrators and inflicted heavy civilian
casualties. The military's major involvement in
internal security matters is through the National
Information Center-a military intelligence orga-
nization attached to the Interior Ministry that has
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Boundary representation is
not necessarily authoritative.
FALKLAND ISLANDS
(Islas Malvinas)
(administered by U. K.,
' claimed by Argentina)
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acquired a brutal reputation-and through the
occasional deployment of special farces troops
against isolated terrorist elements.
The Chilean military until recently had usually
avoided direct involvement in domestic politics. The
quality of civilian leadership has been generally
high since independence was achieved in 1818, and
the Armed Forces usually have stepped in only
when they have completely lost confidence in the
civilians' ability to maintain control. Even then it
has occurred only after extensive debate within the
military. The reluctance and indecision that beset
the high command prior to overthrowing President
Allende in 1973-the military's first direct inter-
vention in over 40 years-are illustrative. A con-
tinuing lack of confidence in the competence and
judgment of Chile's current political party leaders
underlies the military's support for Pinochet's deci-
sion to delay the return to democratic rule until
1990.
The Political and Economic Backdrop
The crippling recession that struck Chile in late
1981 prompted the first broad-based opposition to
Pinochet in his 10-year rule. After afive-year boom
period, Chile's economy suffered a serious reversal
in 1982 when GDP plummeted 14 percent, the
unemployment rate nearly doubled to 25 percent,
real wages dropped, and hundreds of businesses
failed. The regime's reluctance to adjust its policies
despite declining foreign demand and a liquidity
crunch induced by the drying up of foreign credit
gave impetus to the opposition movements
By mid-1983, opposition groups had drawn wide
support from political and labor circles. These
groups demanded an accelerated transition to civil-
ian rule, and this gave the movement a political
dynamic independent of economic grievances. Pino-
chet opened a dialogue with the opposition last
August and granted a number of concessions that
appeared to represent limited moves toward demo-
cratic government. The failure of the government
to continue in this direction, however, has contrib-
uted to the resurgence of protests this-year. ~~
The military, as Pinochet's primary power base,
holds the key role in the political crisis. Recogniz-
ing this, moderate opposition forces are attempting 25X1
to persuade officers that the President would jeop-
ardize the institutional interests of the armed forces
to keep himself in power. Some officers, particular-
ly in the Air Force and Navy, have expressed
concern that Pinochet's unwillingness to speed up
the political transition will fuel domestic turmoil
and aggravate political polarization, creating op-
portunities for the radical left. According to the US
Embassy, the Army, the most important service, 25X1
still stands behind Pinochet, but the high command
is sensitive to military interests and almost certain-
ly monitors events closely.
Impact on the Military
The economic decline has had a serious impact on
the military. Advised by his economic team to
curtail sharply government expenditures, mindful
of limits on military imports under Chile's IMF
program, and probably hoping to show the public
that the armed forces are not exempt from fiscal
austerity, Pinochet has tightly controlled the mili-
tary budget. As head of the junta and the military,
Pinochet has accomplished this without provoking a
backlash in the armed services. The US Embassy
estimated last year that programed defense expen-
ditures in 1983 equaled $600 million, representing
roughly the same percentage of the overall budget
as the previous year. In addition to budgeted
expenditures, the Chilean military receives by law
10 percent of the receipts from CODELCO, the
government-owned copper company. The US Em- 25X1
bassy estimated that this provided the armed forces
an additional $190 million in 1983, bringing total
military appropriations to about $800 million or
about 5 to 6 percent of GNP. Preliminary figures
published by the government in early 1984 suggest
that defense will, at best, maintain its share of the
budget this year
The government's tight rein on military expendi-
tures over the past two years has prevented Chile
from matching the military buildups of Peru and
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Chile: Major Arms Orders
Service
Item
Source Quantity Approximate
Cost
(million US $)
Status
Army
Armored vehicles
Domestic 200 Unknown
100 licensed-produced Swiss-Mowag vehi-
cles reportedly in service at present.
Air defense equipment
Unknown, Unknown Unknown
possibly United
Kingdom
Army has longstanding requirement for'
air defense equipment. May have evaluat-
ed UK Rapier system. No firm orders yet.
Navy
Guided-missile destroyer
United Kingdom 1 20
Second "County"-class DDG due in 1984.
Type 209 submarine
West Germany 2 130
Ordered in 1980, both due in 1984.
ASW helicopter
United Kingdom 6 Unknown
United Kingdom offering six Westland
Lynx originally ordered by Argentina-
reportedly generous terms. .
Landing ship
Domestic 1 10 (at least)
Chile plans to build a third French-
designed "Batral"-class landing ship.
Air Force
'
Fighter-bombers
United Kingdom 14 70 to 100
Negotiations continuing for 14 Jaguar
fighter-bombers. Contract expected in
1984. Will replace aging Hawker Hunters.
Option to buy 26 more.
Jet trainers/light attack aircraft
Spain-domestic At least Unknown
assembly 16
12 Casa C-101 (T-36) now operational.
Three more due by June 1984.
Prop-driven trainer
Domestic Eventual- Unknown
assembly ly up to
At least eight to 10 T-35 Pillan trainers
have been assembled. Progress delayed
100
because of technical problems. DAO esti-
mates Chileans can assemble ]0 to 15 a
year.
Argentina. We believe that this would have been
the case, however, even if Santiago were-not under
an embargo by some major weapons suppliers.
to retain Chilean
support following the Falklands war, the United
Kingdom offered Santiago a wide range of weap-
ons-including air defense equipment and air-
craft-at substantially reduced prices. Although
Chile has purchased shoulder-launched surface-to-
air missiles, Hawker-Hunter fighter bombers, Can-
berra reconnaissance aircraft, and electronic sur-
veillance equipment .from the United Kingdom,
budgetary considerations apparently have kept
Chile from buying other British equipment, such as
the aircraft carrier Hermes and armored vehicles.
Purchases from other major foreign military suppli-
ers have been minimal.
Secret
4 May 1984
Training likewise has suffered because of budget
constraints. The US defense attache's office report-
ed last March that the Navy had received authori-
zation for only 30 days of at-sea operations per ship
this year. Although high-priority training, such as
an amphibious exercise later this year and the
annual UNITAS regional naval maneuvers, will
proceed as scheduled, the' high cost of fuel and
munitions will probably preclude other major exer-
cises.
Military pay has been hit by the economic squeeze.
Early last year, for example, US defense attache
sources reported that grumbling by junior Army
officers over low pay and inadequate housing was
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beginning to concern senior commanders. We be-
lieve, however, their circumstances would have to
deteriorate considerably before the junior officers
in this strictly hierarchical and disciplined military
would confront the high command with their griev-
ances.
The development of Chile's domestic arms indus-
try, initially spurred by the arms embargo, has
been boosted by Santiago's need to reduce foreign
weapons purchases. Chile now produces a wide
range of materiel, including grenades, mines, gen-
eral purpose and cluster bombs, small arms and
ammunition, several types of armored vehicles,
antitank missiles, and light antiaircraft guns.
Chile's factories have produced about 100 license-
produced Swiss Mowag armored vehicles for the
military spending. Continued cutbacks in training,
however, risk the loss of Chile's qualitative advan-
tage over its traditional military rivals.
We believe the government will authorize some
improvement in military pay and living conditions
to minimize discontent within the officer corps.
Despite a commitment to promote an arms indus-
try, Chile will remain heavily dependent on foreign
sources for its military needs, including imported
parts for domestic arms plants. Thus, we anticipate
that the government will purchase weapons selec-
tively from non-Communist countries, such as the
United Kingdom, which offer reasonably modern
equipment at advantageous terms.
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The Chileans
a so ave egun to assemble light training aircraft
from imported parts-including the Spanish C-101
jet trainer (designated T-36 by Chile) and the
domestically designed, prop-driven T-35 Pillan-to
replace aging US-built trainers. The Navy has
recently completed construction of two French-
designed landing ships.
The government also hopes to export locally pro-
duced arms. Extensive coverage in trade journals,
an aggressive export campaign by the primary
private producer (Cardoen Industries), and displays
at military exhibitions in the United States, the
Middle East, and Southeast Asia a ear to be
achieving results.
(press releases by Cardoen
in~c icate of er countries in the Middle East and
Latin America are also interested in these devices.
We believe Chile's economic difficulties will pro-
hibit substantial modernization or expansion of its
armed forces over at least the next two years.
Unless faced with an unambiguous threat of war,
the Pinochet government will continue to limit
The armed forces could assume a more active
political role if civil unrest and terrorism escalates. 25X1
Should this occur, members of the high command
are likely to urge the President to adjust economic
policies to speed recovery and to accelerate the
transition to democratic rule. Although the armed
forces' tradition of acting by consensus and their
doubts about civilian political leadership mean that
military pressures on Pinochet would build only 25X1
gradually, we judge thaf serious discussion about
replacing Pinochet could occur if the Army believes .
his leadership is harming both national security and
the military's institutional interests.
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4 May 7984
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Summit Issues: Oil Emergency Response
Programs
The escalation of the Iran-Iraq war and threats to
Persian Gulf oil shipping have heightened concern
about a disruption of oil flows. Industrial countries
have a number of measures to reduce the impact of
Major Foreign Industrial Countries:
Oil Import Dependence, 1983
a disruption. Although the International Energy Million b/d
Agency (IEA) emergency sharing plan could be
used to mitigate a major disruption, oil stocks and
the response of the Summit countries will be
principal factors influencing the impact of an oil
supply interruption.
?Imports from Persian Gulf
Oil consumption
Energy consumption
The IEA-Coordinated Emergency Planning
The IEA was established by the industrial coun-
tries in 1974 to develop an oil-sharing scheme,
provide a forum for the exchange of information on
energy markets, and reduce dependence on import-
ed oil through conservation and substitution. All
OECD countries except France, Finland, and Ice-
land are members of the IEA.
The IEA's sharing scheme-the International En-
ergy Plan (IEP~requires participating countries
to maintain emergency oil reserves equal to 90 days
of net imports and to have contingency plans to
reduce oil demand by 7 or 10 percent depending on
the size of the supply shortfall. Specific methods for
meeting the required reduction, however, are left to
the discretion of each country.
Emergency Response Programs
Japan. Japan imports nearly all of its oil, making it
particularly vulnerable to supply disruptions. In
1983, Japan imported roughly 60 percent of its oil
from Persian Gulf countries. Strict conservation
efforts have been under way since the early 1970s,
and substantial progress has been made in reducing
oil use. Japan still relies on imported oil for about
60 percent of total energy needs, however, and
Note: Some 1983 data are still preliminary.
a The United Kingdom and Canada are net oil exporters.
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Major Industrial Countries: Oil Stock Situation,
Yearend 1983
Oil Con-
sumption
Million Barrels
Days of Consu
mption
1983
Total Stocks Government Minimum
Usable
Total
Government
Usable Stocks
(million
b/d)
Owned Operating e
Stocks n
,
Owned
(Includes
Government
Owned)
Japan
4.4
446
94 220-260
186-226
101
21
42-51
West Germany
2.2
245
55 100-135
110-145
111
25
50-66
Italy
1.7
149
6 75-105
44-74
88
4
26-44
France
1.8
150
0 80-110
40-70
83
0
22-39
United Kingdom
1.5
113
8 65-90
23-48
75
5
15-32
Canada
1.4
118
0 84-88
30-34
84
0
21-24
United States ~
15.2
1,453
379 900-950
503-553
96
25
33-36
a Minimum operating inventories equal stocks needed to maintain
smooth operation of distribution systems. Japanese, Canadian, and
West European ranges are based on IEA and industry estimates.
b Usable stocks defined as total stocks less minimum operating
stocks.
US data provided as acomparison-source is DOE.
could have extreme difficulty reducing consump-
tion quickly in the event of a disruption. The
Petroleum Industry Law of 1962 centralizes crisis
management control and responsibility for long-
term energy planning in the Ministry of Trade and
Industry (MITI). Additional legislation gives MITI
the authority to allocate products and regulate oil
prices.
In a recent simulation of the IEA oil-sharing
scheme, MITI met the required Japanese oil con-
sumption reduction by ordering an across-the-
board cut in the supply of oil products while
reducing oil stocks to 60 days of supply. There is no
set procedure for use of inventories in a crisis,
however, and we believe Tokyo generally plans to
use stocks as a last resort. Japanese policies require
commercial firms to hold inventories equal to 90
days of the previous year's consumption, and the
government plans to assume responsibility fora 30-
day equivalent stockpile by 1990. Japanese oil
stocks totaled 101 days of supply or 446 million
Secret
4 May 1984
barrels at yearend 1983, including 94 million bar-
rels or 21 days of government-owned inventories.
According to IEA and industry estimates, stocks
above minimum operating levels would meet about
40 to 50 days of supply at current rates of con-
sumption.
West Germany
The West German emergency program emphasizes
market responsiveness, flexibility, and cooperation
with industry to cope with a supply disruption.
Policies are designed to minimize government in-
tervention.~In the event of a supply disruption, the
-government probably would pass higher oil prices
to consumers to limit consumption
If tougher measures are required, Bonn plans fo
encourage fuel switching by industrial consumers,
appeal for private-sector demand restraint, and
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increase public-sector conservation. In addition to
these measures, the 1975 Energy Security Plan
gives the government extensive powers to regulate
oil production, distribution, and prices and to im-
pose speed limits and ban weekend driving. As a
last resort, Bonn would consider rationing. ~
West German petroleum stocks totaled 245 million
barrels or 111 days of supply at yearend 1983,
including about 55 million barrels of government-
owned stocks. About half of current total stocks are
considered minimum operating inventories. Bonn
has stated that the government-owned stockpile is a
final reserve.and would not be drawn down initial-
ly. Other stocks under government control include
those held by EBV, a stockpiling association estab-
lished in 1978 to hold 65 days of compulsory stock
levels and financed through government loans.
EBV presently holds about 117 million barrels of
oil inventories. The oil industry participates directly
in the corporation through an advisory board and
industry representatives constitute two-thirds of the
members. The balance of West German oil stocks
are held primarily by refineries.
private commercial stocks in
West Germany in late February were close to
operating minimums. EBV and other compulsory
stocks can be released by decree of the Minister of
Economics to prevent an imminent disruption or to
remedy supply shortfalls.
Italy
The Italian emergency response program is partial-
ly outlined in the Energy Plan of 1982 but has not
yet been approved by the Parliament. Although
Rome still plans to establish a number of special-
ized committees for dealing with energy emergen-
cies, the Ministry of Industry remains responsible
for energy policy and has the authority to direct
domestic supplies. Rome also can resort to a legal
decree to establish a domestic committee to coordi-
nate and carry out emergency policy. Italy's de-
mand restraint measures focus mainly on gasoline
and include lower speed limits, increased taxes, and
limited driving hours on Sundays and holidays.
Italy also plans to increase the use of fuel-switching
capacity and, in the event rationing becomes neces-
sary, to allocate oil supplies away from "nonessen-
tial" users.
Italian oil inventories totaled 149 million barrels or
88 days of supply at yearend 1983, including 6
million barrels of government-owned stocks. The
current law requires oil companies to maintain
stocks equal to 90 days of the previous year's inland
oil consumption. After allowing for minimum oper-
ating levels, only about 44 to 74 million barrels or
26 to 44 days of supply of Italian stocks would be
available in an emergency, including government- 25X1
owned and compulsory stocks.
commercial oil inventories approximat-
ed compulsory levels at the end of 1983. Use of
compulsory oil stocks requires the approval of the
Ministry of Finance
Although France is not a member of the IEA, it
participates in EC emergency planning. France has
attempted to insulate its economy from oil supply
disruptions by reducing use of oil-particularly in
electricity generation through an advanced nuclear
program-and by securing new supplies through
government-to-government deals. France relies on 25X1
imported oil to meet about 90 percent of total oil
consumption, but an increase in the use of North
Sea oil has reduced dependence on Persian Gulf
supplies to about one-third of total oil needs. All
French oil stocks are held by commercial firms and
totaled 150 million barrels-about 83 days of
supply-at yearend 1983. Industry estimates indi-
cate that about 80-110 million barrels are required
to meet minimum operating levels. Stocks available
to the government in an emergency would thus
approximate 40-70 million barrels or 22 to 39 days
of supply. Although we cannot predict with certain-
ty how the French would respond, during past
disruptions Paris has controlled product prices and
maintained high compulsory stock requirements.
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4 May 1984
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United Kingdom
Because the United Kingdom is a net exporter of
oil, British policies and options vary slightly com-
pared to the major net importing countries. In
general, London aims to provide a framework to
ensure free market operation with minimum distor-
tion. The Energy Act of 1976 empowers the gov-
ernment to regulate or prohibit the production,
supply, acquisition and use of crude oil and petro-
leum products during an energy emergency. Be-
cause UK. oil production is essentially at productive
capacity, however, there would probably be little or
no increase in production during a disruption.
London's initial emergency response measures are
outlined in the .Emergency Management Manual.
It emphasizes restraining demand for gasoline and
heating oil. Other measures include the Oil Product
Allocation Scheme (OPAS), which allows London
to direct oil products to consumers whose needs are
deemed essential-for example, the military. For
the most part, residential and small commercial
consumers are not subject to reallocation under
OPAS.
At yearend 1983 British oil stocks approximated
113 million barrels or about 75 days of supply
including 8 million barrels of government-owned
stocks. Some 65-90 million barrels of this total are
considered minimum operating inventories. As a
result, stocks available for use in an emergency-
including government-owned inventories-would
cover about 15 to 30 days of consumption at
current rates. Measured in days of supply, the
United Kingdom has the lowest level of inventory
coverage of all major West European countries.
Nevertheless, in the most recent test of the IEP,
London chose to apply less stringent demand re-
straint measures and substituted a drawdown of oil
The British favor a coordinated early release of
government-held petroleum stocks in a crisis. Lon-
don has approached the United States, Japan, West
Germany, and Canada on this issue. We believe
that British support for an early release of inven-
tories is influenced in part by the fact that as a net
Secret
4 May 1984
exporter the United Kingdom has no IEA emergen-
cy reserve commitment or obligation to draw down
inventories under the IEA oil-sharing scheme.
The Canadian National Energy Plan (NEP) seeks
to insulate the economy from supply interruptions
by maintaining oil self-sufficiency. Due to sharp
declines in consumption from 1980 to 1983, Cana-
da returned to a position of a net oil exporter in
1982, but it is unclear whether this position will be
maintained. Restrictions on the export of light
crude oil kept Canadian oil production below ca-
pacity in the first half of 1983, but by yearend
output was close to available capacity. As a result,
little incremental oil production would be available
from Canada in the event of a disruption. In
addition to the longer term goals of the NEP,
Canada created the Energy Supplies Emergency
Board, which can regulate prices, imports, exports,
distribution, allocation, and rationing once Parlia-
ment has decreed that an emergency exists.
All Canadian oil stocks are held by commercial
firms and totaled about 118 million barrels or 84
days of supply at the end of 1983; only about 34
million barrels of this total are considered available
stocks, assuming minimum operating inventories
approximate 60 days of supply. Although Canada
has a low inventory measured in days of supply, its
position as a net exporter exempts Ottawa from the
IEA obligation to maintain inventories equal to 90
days of net imports and~eliminates Canada's emer-
gency reserve drawdown obligation under the IEP.
As a result, Canada, like the United Kingdom, is
able to be more flexible in deciding policy on the
use of inventories than some other major consum-
ing countries.
Coping With Oil Supply Disruptions
Despite the existence of individual country pro-
grams and the IEA oil-sharing scheme, industrial
countries will face difficult decisions on specifically
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when to carry out emergency plans in the event of a
supply disruption. Governments of most major oil-
consuming countries,. particularly the net oil im-
porters, rely heavily on demand restraint measures
in emergency planning.
In our judgment, government policies on inventory
use have become increasingly important in recent
years because compulsory inventory requirements
and IEA emergency reserve obligations have effec-
tively transferred control of stocks in excess of
minimum operating requirements from commercial
firms to governments. We believe cooperation
among IEA members could promote the effective-
ness of both demand restraint measures and inven-
tories under some supply disruption scenarios. A
mechanism does not yet exist, however, for a
coordinated response by governments in the event
of a supply shortfall that is less than IEP trigger
levels.
51 Secret
4 Mny / 984
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