SOVIET ECONOMIC GROWTH: ON THE ROAD TO RECOVERY?
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October 17, 1984
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CONFIDENTIAL
IWO
DIRECTORATE FOR INTELLIGENCE
17 October 1984
Soviet Economic Growth: On the Road to Recovery?
Summa ry
Soviet economic growth has improved recently from the slow rates of
1979-82. Overall 1983 growth rose to about 3 percent--roughly 0.5 to 1.0
percentage point above the average trend of our earlier projections for the
1980s. Furthermore, outside agriculture, growth through the first six months
of 1984 appears to be continuing at about last year's rate. Agricultural
performance is likely to be worse than in 1983, however, because of a
disappointing grain crop.
The upturn of Soviet economic growth in 1983-84 reflects improvement in
two major factors that contributed to the preceding slowdown. First, growth
of industries producing key basic materials rose sharply after falling for
several years and transportation rebounded from its poor 1982 performance.
This suggests that relief of supply bottlenecks played a role in the general
improvement of growth. Continued stable rates of military procurement in
recent years probably also eased demand for materials. Second, overall
productivity stabilized after a period of marked decline. We believe that
unmeasured increases in hours worked and relief of bottlenecks affected
productivity favorably. Improvements in influences like morale, efficiency,
and management also may have helped.
In our judgment, annual growth of Soviet gross national product (GNP)
could continue at about 3 percent for another year or two, provided that
short-term swings in agricultural output are not large. Growth in this case
would be faster than in 1979-82, but slower than in the early 1970s. In the
This memorandum was prepared in the Econometric Analysis Division of the
Office of Soviet Analysis. Comments and queries may be addressed
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absence of sharp agricultural swings, GNP growth could even rise above 3
percent, but probably could do no better than approach 4 percent per year. A
number of favorable conditions would have to coincide for growth to reach the
high end of this range, however, and it is unlikely that such a high rate
could be sustained.
The Soviets will do well, we believe, to average annual rates of increase
around 3 percent over the near-term. With growth in labor supply constrained
to low rates by demographic trends, the burden of sustaining output growth in
the near term would fall on productivity changes and capital growth. We
expect the most promising sources of sustained near-term growth to be the same
influences that contributed to the apparent stabilization of productivity in
1983: relief of bottlenecks and increases in hours worked. Both sources of
sustained growth probably cannot be repeated often, however, leaving
productivity to flatten out or decline again as it did in the late 1970s. In
the longer tens, growth prospects will depend heavily on whether the Soviets
develop growth strategies that lead to a return to productivity trends of the
1960s or early 1970s.
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GDW I DE NT IAL
Introduction
Soviet gross national product (GNP) grew about 3 percent in 1983--a
preliminary estimate--compared with 2.5 percent In 1982 and 1.9 percent in
1981. Soviet industry, which accounts for over a third of GNP, grew nearly
3 1/2 percent last year, a healthy gain over the 2.3 percent rate in 1982 and
the 2.4 percent rate in 1981.
The outlook for this year is for continuation of the recent improved
growth. In the first six months of 1984, industrial production appears on
track toward growth at about the rate achieved in 1983. Limited information
on the major nonindustrial sectors suggests that GNP outside agriculture also
is growing at roughly the pace of 1983. Agricultural performance, however, is
likely to be worse than last year because of a disappointing grain crop.
It is natural to ask whether the performance of the Soviet economy in
1983 and so far in 1984 marks the start of a new trend of growth at around 3
percent per year. This would mean a recovery from the rates of 1979-82--some
of the slowest since 1950. Our assessment of prospects for future growth
depends on:
? Whether our preliminary estimates for 1983 and our
early impressions of 1984 hold up as further data
become available (see annex).
? Why growth improved in 1983-84.
? Whether the favorable influences on 1983-84 growth
are likely to continue.
Why Did Growth Improve?
When considering Soviet economic growth, it is convenient to separate
agriculture from the other sectors, because it is so heavily influenced by
weather factors. Growth of GNP outside agriculture was slower in 1976-78 than
in 1971-75, and was even slower in 1979-82 (see figure 1). The apparent
improvement of growth in 1983 and so far in 1984 could represent either a
temporary recovery from the slowdown outside of agriculture in 1976-82 or a
more lasting break from the long-term trend of falling growth. To understand
the sources of this improvement, we can:
? Identify sectors of the economy and branches of
industry in which the improvement was greatest.
? Break down improved growth of output into changes
in growth of labor and capital inputs, and changes
in productivity.
3
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Figure 1
USSR: Economic Growth. 1971-83
( percent per year )
R'~
LEGEND
GNP
R NONAG GNP
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WW I UL II I IAL
Growth Patterns Show Easing of Bottlenecks
The pattern of growth changes by sector and branch is consistent with the
findings of earlier research that shortages of basic materials were a major
cause of the slowdown in industrial growth.' It also suggests that relief of
bottlenecks caused by these shortages played a role in the recovery.
All the major producing sectors outside agriculture contributed to the
slowdown of growth in 1976-82. The slowdown was less pronounced in services,
however, than in industry, construction, transportation, and trade. The
recovery of growth in 1983 also spread across the board, except that
transportation and services grew slower than their average rates for 1979-82
(see table 1).
Within industry, the most striking changes in growth during both the
slowdown and the recovery came from:
? Ferrous metals
? Chemicals
? Wood, pulp, and paper
? Construction materials
Shortages of materials produced by these branches, combined with problems in
transportation, led to bottlenecks during the slowdown of growth. It appears
likely, therefore, that relief of some of these bottlenecks contributed to the
recovery in 1983. Our estimate of little or no growth in military procurement
during 1976-82 suggests an attempt to control the military's demand for
materials, and this probably also contributed to the easing of some
bottlenecks in 1983.
Detailed information about growth so far in 1984 is limited mostly to
industry. Average industrial growth is similar to last year's, but the
pattern appears to be shifting. This suggests that different bottlenecks are
being targeted or that yearly additions to capacity are somewhat uneven.
Growth in electric power and wood, pulp, and paper is greater than in the same
period of 1983. Growth rates for ferrous metals,chemicals, and construction
materials, however, look somewhat lower than at this time last year. A
possible factor underlying the generally good performance in industry recently
is the strong growth in electric power generation which is so crucial to many
Industrial processes and operations. Based on six-month performance, growth
in other nonagricultural sectors of the economy also seems to be continuing at
about last year's rate.
4
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CONFIDENTIAL
Table 1
USSR: Patterns of Grath Outside of Agriculture, 1971-84
Average Annual Rates of Grath
(Percent)
1971-75
1976-78
1979-82
1983a/
1984b/
Nonagricultural GNP
5.1
3.3
2.3
2.9
NA
Of which:
Industry
5.9
3.8
2.4
3.4
3.5
Ferrous Metals
4.0
1.9
-0.3
4.0
1.8
Nonferrous Metals
5.9
2.3
1.8
3.0
4.0
Machinery
7.8
5.4
3.9
3.5
4.1
Chemicals
8.6
4.5
2.6
6.0
4.9
Wood, Pulp, A Paper
2.6
-0.1
-0.1
3.0
4.0
Construction Materials
5.4
3.2
-0.7
3.1
2.8
Construction
5.6
2.9
0.9
3.2
NA
Transportation
6.5
3.7
2.8
2.5
NA
Trade
4.6
3.1
2.1
3.0
NA
Services
3.4
2.6
2.5
2.3
NA
al Preliminary
b/ First six months
NA: Not Available
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CONFIDENTIAL
Productivity Stabilizes
These improvements in output performance are reflections of a complex set
of changes. This can be seen by breaking down changes in output growth into
changes in growth of:
? Labor inputs--measured as scheduled work hours.
? Capital inputs--measured as capital stock valued
at constant prices.
? Overall prods ty of combined labor and capital
inputs.
As it is generally used, the term productivity refers to influences on
production other than quantities of inputs. These influences--like
technology, efficiency, work effort, quality of labor and capital, and
managerial skill--are very difficult to measure. Because these influences are
not captured in our conventional measures of labor and capital inputs, they
are reflected only in our estimates of productivity. Material inputs, which
we do not measure directly, also affect our productivity estimates
The slowdown of output growth outside of agriculture in 1976-82 resulted
from a combination of slower growth of labor and capital inputs and decreases
in overall productivity of labor and capital. Most of the improvement of
output growth in 1983 appears to have occurred because productivity stabilized
rather than because growth of inputs accelerated (see table 2). Relief of
bottlenecks and unmeasured increases in work hours probably explain a
substantial part of this stabilization of productivity.
Prior to 1983, input growth in all sectors of the nonagricultural
economy--like output growth--slowed from 1971-75 rates, first in 1976-78 and
further in 1979-82 (see figure 2). In industry, the slowdown of input growth
was particularly sharp for construction materials and for wood, pulp, and
paper--two branches where the level of output actually declined.
Trends in productivity changed even more sharply than trends in inputs.
Growth of overall productivity in nonagricultural GNP turned negative in 1976
or shortly afterwards and remained negative, at least through 1982. Factors
in the downturn in productivity probably include:
? Supply bottlenecks--shortages of industrial
materials, transportation bottlenecks, and power
failures idled production at many enterprises.
? Shifts in the composition of investment--increased
shares of investment were allocated to extraction
of oil and other resources where productivity fell
as the best deposits were depleted and expensive
technologies were required.
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Table 2
USSR: Average Annual Rates of Growth of Output.
Inputs and Productivity. 1971-83
Percent
Labor Inputs
Capital nuts
7-1-7F'-76-78
79-82
83
71-75
76-78
79-82
83
Nonagricultural GNP
2.5 1.6
1.1
0.6
7.9
7.0
6.5
6.2
Of which:
Industry
1.5 1.5
0.8
0.6
8.7
7.9
7.4
6.9
Ferrous Metals
0.1 0.7
0.1
0.3
7.7
7.1
5.5
7.4
Nonferrous Metals
0.1 0.7
0.4
0.0
8.7
7.8
7.5
6.9
Machinery
2.8 1.9
0.6
0.5
10.6
9.9
8.8
7.7
Chemicals
2.2 1.3
0.6
0.6
10.6
8.0
9.7
6.8
Wood, Pulp, & Paper
-0.6 -0.5
-0.5
-0.2
8.3
6.7
6.3
6.3
Construction Matl's
1.4 0.6
0.3
0.4
9.7
7.7
5.5
6.0
Construction
3.1 1.1
0.3
0.0
11.9
8.9
8.7
8.3
Transportation
2.9 2.0
1.6
0.8
7.8
7.0
6.6
6.0
outputs
Overall Productivity
71-75 76-78
79-82
83
71-75
76-78
79-82
83
Nonagricultural GNP
5.1 3.3
2.3
2.9
0.0
-0.9
-1.3
-0.4
Of which:
Industry
5.9 3.8
2.4
3.4
0.7
-1.0
-1.8
-0.4
Ferrous Metals
4.0 1.9
-0.3
4.0
-1.0
-2.8
-3.7
-0.9
Nonferrous Metals
5.9 2.3
1.8
3.0
0.5
-2.6
-2.8
-1.2
Machinery
7.8 5.4
3.9
3.5
1.8
0.4
0.0
0.1
Chemicals
8.6 4.5
2.6
6.0
1.4
-0.7
-3.2
1.6
Wood, Pulp, & Paper
2.6 -0.1
-0.1
3.0
-0.5
-2.6
-2.3
0.5
Construction Matl's
5.4 3.2
-0.7
3.1
0.4
-0.5
-3.2
0.2
Construction
5.6 2.9
0.9
3.2
0.2
-0.2
-1.5
1.0
Transportation
6.5 3.7
2.8
2.5
0.4
-1.4
-1.9
-1.5
7
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Figure 2
Growth of Inputs of Labor and Capital
( Nonagricultural GNP )
LEGEND
LABOR
CAPITAL
PRODUCTIVITY
.01 -is 0o
41V 01V
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W1r1KnULFL
? Lower quality inputs of capital--capital stock
aged as growth of investment fell, retirement of
old capital slowed, and technological progress
lagged.
? Lower quality inputs of labor--as population
growth slowed in the European USSR, additions to
the labor force came from Asian regions where
levels of formal education and job training were
lower.
In 1983 for most sectors of the nonagricultural economy the major source
of recovery in growth of output was that overall productivity stabilized. In
addition, in two branches of industry--wood, pulp, and paper and construction
materials--faster growth of capital inputs added to the effect of more
favorable changes in productivity. These were two of the branches hit hardest
by slower input growth in 1976-82.
But finding that more stable productivity played a major role in the
recovery of economic growth leaves unanswered the more important question of
why the decline halted. We consider it probable that relief of bottlenecks
and unmeasured increases in hours worked by labor explain a large part of the
apparent changes in productivity. The changes in productivity in 1983 will be
hard to sustain:
? If sources of bottlenecks that developed in 1976-
82 were eased, especially by new capacity for
problem industries.
? If labor actually worked longer hours that were
not reflected in available data on changes in
scheduled hours.
In most sectors of the economy, growth of capital inputs in 1983 was not
much different from the previous few years. Growth of capital accelerated in
1983, however, in three branches of industry that played key roles in the
slowdown of output growth in 1976-82: ferrous metals; wood, pulp, and paper;
and construction materials. Shortages of products supplied by these branches
likely were among the major causes of the earlier slowdown.2 Moreover, it is
possible that new capacity directed at sources of bottlenecks raised the
impact of capital growth on output growth. The easing of other supply
bottlenecks--particularly railroads--also may have reduced the time that
capital stood idle because of shortages.
A recent statistical adjustment reported by the USSR allows us to size
roughly the gain in work hours needed to account for the improvement in output
growth. When the government released industrial statistics for January 1984,
it published an adjustment for the additional growth due to one more working
day in that month than in January 1983. Applying the Soviet adjustment to
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WRIT .NIIAL
explain the 1 to 1 1/2 percentage point gain in industrial growth last year
gives a required increase of roughly 2 percent in hours worked. An increase
of this size--about 1 hour per week per worker--would have been within easy
reach last year.
Can Growth Continue at About the 1983 Rate?
In our judgment, chances are reasonably good for near-term growth of
Soviet GNP to continue at about last year's Sate of 3 percent, in the absence
of short-term swings in agricultural output. Growth could even exceed 3
percent but probably could do no better than approach, at best, 4 percent per
year. The conditions required to sustain annual growth above 3 percent,
however, are not likely to prevail for longer than a year or so.
Continued 3-percent GNP growth in the near term probably would have to
come from the same sources as the improvement of growth In 1983. Two of the
sources we consider important, however, are difficult to sustain over time:
? Relief of supply bottlenecks.
? Increases in hours worked.
After recent favorable influences run out, we can expect a return to the
decreases in overall productivity that characterized recent history prior to
last year.
In the longer term, assuming swings in agricultural output are not large,
prospects for GNP growth will depend on changes in growth strategy such as:
? Higher growth in investment in the machinery sector.
? Faster retirement of obsolete capital.
? Success in conservation of energy and basic materials.
? Continued stability in military procurement.
Soviet economists are now proposing strategy changes, but new strategies would
require much time and careful planning to achieve the desired effects.
Uncertainty about future trends in productivity is the primary factor
that clouds our outlook for Soviet growth in the near term. Labor and capital
growth are fairly well determined by past trends in demographics and
3 We do not take short-term agricultural fluctuations into account because
our main interest is in more stable influences on economic growth.
Fluctuations in agricultural growth are frequent in the USSR, however, and
they could cause deviations from the underlying rate of GNP growth. Since the
mid 1970s annual growth of GNP has diverged from annual growth of
nonagricultural GNP by as much as 1 1/2 to 2 percentage points.
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WR?I n IAM.
investment that are difficult to alter quickly. From working assumptions
about near-term growth of labor and capital inputs, we can estimate the
changes in productivity that would be required to achieve certain levels of
GNP growth.
Near-term trends in employment can vary only within a fairly narrow range
determined by past demographic trends and labor force participation rates.
Increases in hours worked could raise growth of labor inputs for a few years,
but worktime cannot continue to rise indefinitely. Growth of labor inputs in
the near future almost certainly will not exceed the rates observed since
1979--a little less than 1 percent per year.
Like labor inputs, capital inputs have grown more slowly since 1979--
around 6 1/2 percent per year. Investment growth picked up in 1981-83,
however, after falling sharply in 1979-80. If investment continues to grow at
its 1981-83 rates or somewhat faster, in a few years growth of capital inputs
possibly could approach the rates of 1976-78--about 7 percent.
Trends in productivity, on the other hand, are subject to wider variation
than trends in inputs because productivity reflects a greater variety of
underlying influences. We can examine, however, the sear-t erm linkage between
h
GNP
fi
i
i
f
3
product
v
ty growt
and prospects
or
(
gure
).
Given input growth tending toward the high end of the range we consider
likely, annual growth of GNP could be 3 percent or even a little higher for
another year or so, assuming normal growth in agriculture. With labor growth
constrained by demographic trends, however, this would require:
? Productivity to remain about stable.
? Or capital inputs to grow faster than in 1983,
with the rates of 1976-78 probably setting a rough
upper limit.
? Or some combination of improved growth in overall
productivity and capital inputs.
But productivity gains and capital growth needed to permit GNP to grow as fast
as 4 percent per year are not very likely. The next year or two, then, could
see the Soviet economy continue to grow around the 3 percent a year rate of
the last 18 months, but a recover to the higher rates of the sixties or early
seventies appears remote indeed.
4A Cobb-Douglas aggregate production function is assumed, with weights of .56
for labor, .41 for capital, and .03 for land. 25X1
10
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W lr 1 UL M I ?AL
Annex: Did Growth Really Improve in 1983-84?
Our preliminary estimates of Soviet economic growth are updated and
revised routinely as further data become available. Both before and after
revision, our estimates are somewhat lower than official Soviet measures,
which we estimate to be overstated, largely because of disguised inflation.5
Gaps between official measures and our estimates have narrowed, however, as
growth slowed in the 1970s.
The uncertainties associated with our preliminary estimates of economic
growth in 1983 are greater than usual. Revisions usually reduce preliminary
estimates of industrial growth by drawing on a larger sample with less
emphasis on products that grow faster than average. Because the gap between
preliminary estimates for industry and official Soviet measures has become
very narrow since about 1982, revisions could lower estimates for 1983 more
than usual. But we expect even the revised estimates of 1983 growth to show
some improvement over growth in 1982.
The narrowed gap between our preliminary estimates and official Soviet
measures has at least two possible explanations. The one we consider unlikely
is that the government may be distorting official statistics for political
purposes. Revisions of early official data for 1982 did seem larger than
usual. Early data released by any statistical agency are subject to revision,
however, when more and better information becomes available. And the major
reform of industrial prices that took effect in January 1982 almost certainly
made the measurement of some data series more difficult than before the
reform.
Instead of distortion, we prefer an explanation based on problems of
deriving our estimates from official Soviet data:
? The reform of Soviet industrial prices in January
1982 probably lowered official growth rates
relative to our estimates. Official value data on
total industrial output are now being reported in
1982 prices, and preliminary figures on official
growth rates for branches of industry probably also
use 1982 prices. Products with rapidly growing
outputs and falling prices--such as autos--would
have less impact on average growth, the more recent
the prices used. This would tend to lower official
growth rates relative to our estimates, which are
based to a large extent on quantities for a sample
of products valued at 1970 prices.
5 See the papers by John Pitzer and Ray Converse in US Congress, Joint
Economic Committee, USSR: Measures of Economic Growth and Development, 1950-80
(Washington: US Government Printing Office, 19982, pp 13, 198-200).
11
CONE I UENTIAL
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? The sample of products and services used for our
preliminary estimates is smaller tnan in the past
because of the trend for fewer data series to be
reported by the Soviets. Poor growth may be a
reason for dropping products, but we can only assume
in our estimates that the excluded products grow at
the same average rate as those still reported.
12
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wnrIUtJIUAL
SUBJECT: Soviet Economic Growth: On the Road to Recovery?
Distribution:
1 - Mr. Jack Matlock
Soviet Affairs Senior Specialist
National Security Council
1 - Mr. Henry Nau
International Economics and East-West Trade
National Security Council
1 - Mr. Ty Cobb
Director, East-West Section
National Security Council
1 - Mr. John Danylyk
Chief, Communist Economic Relations Division
Office of Economic Analysis
Bureau of Intelligence and Research
Department of State
1 - Ms. Martha C. Mautner
Deputy Director, Office of Analysis for the
Soviet Union and Eastern Europe
Bureau of Intelligence and Research
Department of State
1 - Mr. Elliott Hurwitz
Special Assistant to the Under Secretary
for Economic Affairs
Department of State
1 - Mr. Donald B. Kursch
Deputy Director for Economics,
Office of Soviet Union Affairs
Bureau of European and Canadian Affairs
Department of State
1 - Mr. David Epstein
Civilian Assistant to the Director for
Net Assessment
Department of Defense
1 - Mr. Paul Berenson
Special Assistant to the Assistant Under Secretary
for Plans and Development
Defense Research and Engineering
Department of Defense
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Distribution (Cont'd):
Chief, Strategic Defense Economics Branch
Defense Intelligence Agency OB-4E
1 - Mr. Allen Lenz
Director, Office of Trade and Investment Analysis
International Trade Administration
Department of Commerce
1 - Mr. Jack Brougher
Acting Chief, Soviet Affairs Division
Office of East Europe and Soviet Affairs
Department of Commerce
1 - Mr. Barry Kostinsky
Chief, USSR Input-Output Branch
Center for International Research
Bureau of the Census
Department of Commerce
1 - Mr. Jay Stewart
Chief, Energy Supply Intelligence Division
Department of Energy
1 - Maj. General James C. Pfautz
Assistant Chief of Staff, Intelligence
Department of the Air Force
1 - Maj. General William Odom
Assistant Chief of Staff, Intelligence
Department of the Army
1 - Rear Admiral John L. Butts
Director of Naval Intelligence
Department of the Navy
1 - Mr. Henry Clarke
Economic Counselor
US Embassy
Moscow
1 - Mr. Harry Montgomery
Economic Counselor
US Mission
NATO
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Distribution (Cont'd.):
Policy Assistant for USSR-EE Affairs
DASD/ISP/EUR-NATO/Regional Policy
Pentagon - Room 1D469
1 - Mr. Jay Kalner
ACDA/SP
Department of State - Room 4495
Defense Intelligence Agency DD-4E1
Director, Office of Intell Liaison
Department of Commerce
1 - Mr. Douglas Mulholland
Special Assistant to the Secretary
(National Security)
Department of Treasury
Sanitized Copy Approved for Release 2010/08/23: CIA-RDP85T00287R001401020001-5
Sanitized Copy Approved for Release 2010/08/23: CIA-RDP85T00287R001401020001-5
CONFIDENTIAL
Distribution (Cont'd):
1 - D/SOVA
1 - DD/SUVA
1 - NIO/USSR-EE
1 - NIU/Econ
1 - DD/UG I
1 - C/SRD/UGI
1 - C/AA/SRD/UGI
1 - C/PES
1 - DDI Re istry
4 - OLL/LU
1 - CPAS
1 - C/SEO
1 - C/PAD
1 - C/TFD
1 - C/SFU
1 - C/DID
1 - C/TWO
1 - C/EAD
1 - C/EA/C
1 - C/EA/D
1 - C/EA/S
1 - C/EA/G
1 - EA/U Chrono
DUI/SOVA/EA/D
(18 Oct 1984)
Sanitized Copy Approved for Release 2010/08/23: CIA-RDP85T00287R001401020001-5