THE IMPACT OF LOW OIL PRICES ON THE INDO-SOVIET RELATIONSHIP

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T01017R000302400001-1
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 7
• Document Creation Date: December 22, 2016
• Document Release Date: January 27, 2011
• Sequence Number: 1
• Publication Date: May 21, 1986
• Content Type: MEMO

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SUBJDCT: The Impact Of Low Oil Prices On The Indo-Soviet Relationship
Internal Typescript
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DATE
DOC NO (JE$/-1 M /2
OCR .3
P&PD
(21 May 1986)
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Central Intelligence Agency
21 May 1986
The Impact Of Low Oil Prices On The Indo-Soviet Relationship
SUMMARY
Moscow is in the process of significantly
reducing its oil prices to New Delhi, probably to
near world market levels. Much lower oil prices
would enable India to more easily meet its
payments to the Soviet Union for arms, which will
grow rapidly over the next 10 years. To offset
lower prices, we believe Moscow will put pressure
on New Delhi to buy more Soviet goods, including
military items. An Indian refusal to substan-
tially step up imports from the USSR could cause
serious strains in the relationship. The
political importance of the relationship to both
sides, however, probably will induce them to work
out a payments settlement.
This memorandum was prepared byl Ithe Office of
Near Eastern and South Asian Analysis, with contributions from
Office of Pakistan-Bangladesh Branch, and
of Soviet Analysis in response to a request by the
Department of State. Information as of 16 May 1986 was used in
its preparation. Comments and queries may be addressed to the
Chief, South Asia Division, NESA,
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The Economic-Military Relationship
The Soviet Union is India's largest commercial trading
partner after the United States with total two-way trade of about
$3.7 billion in 1985. The trading relationship consists largely
of an exchange of Soviet petroleum for Indian agricultural
products and consumer goods. In addition we estimate India paid
the Soviets about $600 million last year for military imports.
India's economic relations with the Soviet Union are
governed by an agreement to balance all bilateral payments for
imports, exports, and debt service. All transactions, whether
commercial or military, are handled in Indian rupees through the
Indian banking system; neither party has any need to pay nor
opportunity to earn hard currency. ::1 25X1
Over the last three years, the bilateral trade balance has
deteriorated from New Delhi's perspective. The Indians have met
or exceeded the level of imports specified in the trade protocol
while Moscow has fallen below its quota in accepting Indian
exports. A continuation of this trend would make it difficult
for India to meet its payments for military imports. We believe
the Indo-Soviet trade relationship calls for an Indian surplus in
commercial trade to be used to cover New Delhi's debt for imports
of Soviet military equipment. 25X1
Paying for the expansion and modernization of the Indian
armed forces seems likely to become a more serious concern for
India over the next decade. Indian officials were worried in
mid-1985 about the growing burden of payments for arms supplied
by the USSR. India has purchased over $7 billion in Soviet arms
since 1980, and its annual payments to Moscow for arms already
purchased will probably increase from $600 million in 1935 to as
much as $1.8 billion by 1994. 25X1
The Importance of Oil
Crude oil and petroleum products have accounted for about 70
percent of Moscow's commercial exports to India over the last
three years. Our analysis of Indian and Soviet trade statistics
indicates petroleum exports have averaged about 115,000 b/d,
roughly 40 percent of India's net oil imports. A large share of
the products have been of Soviet origin, but most of the crude
oil is delivered primarily from the Middle East on Soviet
In December, India and the Soviet Union signed a trade and
payments agreement that extends the trade relationship through
1990, and in addition set a two-way trade target for this year at
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an estimated $4.5 billion. The US Embassy in New Delhi indicates
the oil import target for 1986 is 120,000 b/d--70,000 b/d of
crude oil and 50,000 b/d of products. We have no information on
what, if any, provisions this agreement made for Soviet oil
export prices; at the time of the agreement world oil prices were
about double today's prices. The Soviets have charged the
Indians an average of $32 per barrel for deliveries of crude oil
and products over the last three years--roughly the world market
price. 25X1
Status of the Oil Relationship
The Soviets and Indians probably are still negotiating this
year's overall contract for crude oil and products, but we
believe a settlement is near. The Soviets probably will lower
the price of crude oil to roughly $12-$16 per barrel.
Moscow has already lowered the price of crude oil for Finland,
its other major non-communist soft currency trading partner to
$15 per barrel from $27 per barrel last year. 25X1
Soviet product prices likely will average about $20 per
barrel. In late April, India had arranged for the purchase of up
to 50,000 b/d of petroleum products from the Soviet Union. No
formal agreement has been signed, but some products have already
been delivered. 25X1
The Indian press reported in late March that New Delhi had
decided to buy crude oil on the spot market instead of renewing
contract purchases from the the Soviet Union, but we do not
believe New Delhi was serious. Rather, it probably used the
threat to get a better price. The Indians do not want to use
more of their hard currency to buy oil in the West; Soviet oil,
even if more expensive, is paid for with Indian goods. Some
Indian press analysis indicates only 20-25 percent of these goods
could be sold readily in Western markets. 25X1
Implications for the Relationship
A lower oil price could lead to strains in the Indo-Soviet
relationship. New Delhi would try to maximize its gains while
Moscow would try to minimize its losses.
Cheaper Soviet oil would change the bilateral trade balance
dramatically in India's favor and reduce significantly the burden
of arms payments through the remainder of the decade. If, f-r
example India can buy oil at $15-$20 per barrel, it would save
$500-$700 million annually at the 1985 level of deliveries. F
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Under these circumstances, the Soviets, probably would out
greater pressure on India to increase purchases of Soviet
manufactured goods and military items, or threaten to reduce
imports of Indian goods. India, however, would continue to
resist both major increases in imports of Soviet manufactured
goods--because of their poor quality--and a cut in Soviet imports
of Indian goods--which could lead to more Indian unemployment and
factory closings. 25X1
We also believe it unlikely that New Delhi will purchase
large amounts of additional Soviet military hardware, although,
it might accept offers of expensive high technology items, such
as nuclear attack submarines and AWACS aircraft. Indian defense
modernization plans call for reducing dependence on Moscow in
favor of increased imports of Western arms and defense production
technology. By 1990 the Indians will have completed a major
force expansion program and are not likely to be in the market
for large quantities of new weapons. New Delhi, however, may
offer to accelerate the payment schedule for military equipment
already purchased.
Both countries have sufficient political, economic, and
military interests at stake to work out a payments balance. For
Moscow the political benefits of retaining India as a friend will
probably outweight the economic costs of making concessions on
the trade relationship. New Delhi also has too much at stake in
the defense relationship to reduce significantly relations with
the USSR. Nonetheless, we believe lower oil prices will reduce
India's economic dependence in Moscow and limit the importance of
Indo-Soviet economic ties. 25X1
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2000
tax
Ie00
1400
1200
1000
e00
600
,00
200
INDIA'S ESTIMATED ANNUAL PAYMENTS
FOR MILITARY IMPORTS FROM THE USSR
INDO/SOVIET COIRCIAL TRADE (a)
1980-1985
? Indian Imports
Pstroloue share of
Indian Imports
Indian Exports
ION
ieoo
1200
loon
G00
Goo
100
200
0
0
a. Includes croft and govoucts
~. Inelwaa talyd putty awd
dollwr d an Dowlet account
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SUBJECT: The Impact Of Low Oil Prices On The Indo-.Soviet Relationship
External Distribution
Dr. Stephen P. Cohen
Policy Planning Staff,
Department of State, Room 7303
Mr. Charles W. Greenleaf, Jr.
Assistant Administrator for Asia and Near East Bureau
Agency for International Development
Department of State, Room 6212
Mr. Ronald D. Lorton
Chief, South Asia Division
Bureau of Intelligence and Research
Department of State, Room 4636
Mr. Grant Smith
Director, INS
Office of Bureau of Near Eastern and
South Asian Affairs, Room 5251
Department of State
Mr. Robert Knickmeyer
Director, NEA Economic Affairs
Department of State, Room 5253
Mr. Dennis P. Murphy
Chief, Regional Economic Division
Office of Economic Analysis
Bureau of Intelligence and Research
Department of State, Room 8662
Mr. Douglas Mulholland
Special Assistant to the Secretary
Department of the Treasury, Room 4324
Mr. Byron Jackson
Office of Intelligence Liaison
Department of Commerce, Room 6854
Mr. Michael MacMurray
Special Assistant for South Asia
International Security Affairs
Department of Defense, Room 4D765, Pentagon
Mr. Marc Palevitz
Special Assistant for South Asia
International Security Affairs
Department of Defense, Room 4D765, Pentagon
Mr. Darnell Whitt
Intelligence Adviser to the Under
Secretary of Defense for Policy
Department of Defense, Room 4D840, Pentagon
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