SOVIET INDEBTEDNESS TO THE WEST

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP08S01350R000602020003-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 17
• Document Creation Date: December 27, 2016
• Document Release Date: April 10, 2012
• Sequence Number: 3
• Publication Date: November 1, 1970
• Content Type: MEMO

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17 DEC19~0 ~ /~
O J ~ / q
Secret XX
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Soviet Indebtedness To The rest
Secret
ER IM 70-163
November 1970
Copy No . '~ f"~
~~ J
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
November 1970
INTELLIGENCE MEMORANDUM
Soviet Indebtedness To The West
Introduction
Soviet indebtedness to the West, accrued from
medium- and long-term credits, has grown rapidly
in recent years concomitant with an upsurge in
imports of Western plant and equipment. Soviet
indebtedness reached more than US $1 billion by
the end of 1969 and will go higher this year.
This memorandum describes the developments in the
growth of Soviet trade and debt with the developed
West and examines the prospects for the near term.
The Genesis of Soviet Debt
1. Soviet use of Western medium- and long-term
credit is a recent phenomenon in Soviet history.
During the first four decades of its existence, the
USSR conducted virtually all of its international
transactions with the West on a cash basis. The
practice stemmed in large part from its treatment
as an outlaw by the Western powers in the 1920s
when the Soviet state was refused credit of any
kind. By the end of the 1920s the USSR was able
to attract some credit, but on short terms only
and at very high interest rates. In the main,
however, the USSR paid cash and exported gold to
meet its debts when export receipts were insuf-
ficient. Throughout this period the USSR was
careful to meet its commitments on time and, by
the late 1930s, it had established for itself a
reputation as a trading partner which met its
commercial obligations.
Note: This memorandum was produced soZeZz~ bz~ CIA.
It was prepared b~ the Office of Economic Research.
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2. The exclusively cash basis of conducting
international commercial transactions with the West
endured after World War II until the late 1950s.
Gold sales continued to be the basic means to
settle deficits in its international accounts with
the West. Persistent deficits, however, resulted
in a moderate drain on Soviet gold reserves which
fell from a high of about $3 billion in 1955 to
$2.5 billion four years later. With the ambitious
seven-year plan (1959-65) coming up and the decision
to purchase large amounts of Western plant and equip-
ment, Khrushchev decided that Western credit could
help bridge the gap between exports and imports.
With the easing of East-West tensions, the promise
of a growing market in the East, anal increasing
competition among Western suppliers, the time was
ripe for the USSR to elicit credit from the capita-
lists.
3. Between 1959 and 1965, trade with the West
as a whole grew at the annual rate of nearly 11~,
exceeding $5 billion in 1965; Soviet hard currency
trade with Western countries grew at a rate of more
than 19$, imports growing at a more rapid rate than
exports (see Tables 1 and 2). This growth came at
a time when almost all of the major trading part-
ners of the developed West had returned their
currencies to a convertible basis.*
4. In line with Soviet policy a sizable deficit
developed in trade with hard currency countries. in
the early 1960s, as imports of industrial goods
rose rapidly. In 1963 and 1965, however, poor grain
harvests forced the USSR to import substantial
quantities of wheat (roughly $1.2 billion in 1963-
65 alone) from hard currency countries. As a re-
sult of these unexpected imports, the hard currency
trade deficit increased to an average of $350 mil-
lion a year. In 1963-65 the USSR resorted to sales
of gold which averaged more than $500 million per.
year (see Table 3). Gold reserves, which had
continued declining in 1960-62 to a level of about
* BzZateraZ clearing arrangements with the USSR
were rapidly terminated. In the early 1960s only
Austria, Finland, Norway, and Sweden remained as
Soviet clearing partners. Norway and Sweden re-
turned to hard currency trade with the USSR in 1965
and Austria will do so in 1971.
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$2.1 billion, fell by more than $1 billion during
1963-65, reaching a low of about $1 billion by the
end of 1965 (see Table 5) .
5. To prevent even larger deficits and further
drawdowns on depleted gold reserves, Khrushchev's
successors reduced imports of industrial goods and
expanded exports at a faster rate after 1964 than
in the previous five years. Short-term borrowing
was also increased.*
6. During 1964-65 the USSR cut back its orders
for Western plants and equipment (see Table 6).
These orders had been partly financed by medium-
term credits from the West, but by 1963 mounting
repayments had more or less offset new credits (see
Table 4). The reductions in known orders from the
West in 1964-65 were made despite an increasing
Western willingness to furnish medium-term or even
longer term credit during this period. Soviet
failure to take advantage of these easier credit terms
probably stemmed from Soviet uncertainty about crop
prospects and about its ability to expand exports.
Recent Developments, 1966-69
7. The cutbacks in orders and industrial im-
ports from the developed West and the expansion of
traditional Soviet exports to that area brought
the USSR its first hard currency trade surplus in
a decade in 1967. Machinery and equipment imports
from the developed West, however, had returned to
their earlier high level in 1966 and increased to
a new high of $670 million in 1967. This trend was
more than rising exports to the area could match,
and Soviet trade with the hard currency countries
returned to a deficit position in 1968.
* Soviet use of short-term credit Baas continuous
throughout the 1960x. With the cessation of large
Soviet gold sales, hozvever, the USSR has placed in-
creasing reliance on such facilities to help finance
deficits. The USSR also has been active in the
Eurocurrency market and is typically a net borrower.
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8. In 1969 the Soviet hard currency trade
deficit rose to more than $300 million. Soviet
exports have continued to increase but at a sub-
stantially lower rate than imports. The deficit
has been financed through both short-term and
long-term credits, with the USSR continuing to
husband its gold. There have been no signifi-
cant sales of gold by the Soviet Union since 1965.
Soviet gold reserves increased each year in the
1966-69 period, reaching an estimated $1.~6 bil-
lion at the end of 1969.
Soviet Policy on Credits from the West
9. The USSR under Khrushchev financed def-
icits by drawing on gold reserves and using
only a moderate amount of medium-term credits.
Once the volume of new medium-term credits leveled
off, however, repayments soon caught up. The
sharply increased drain of hard currency brought
on by the grain crisis threatened to decimate the
Soviet gold reserves. The current leadership,
having first ended the gold drain and brought a
measure of stability to the Soviet hard currency
payments position, more recently has been able
to boost industrial imports through the use of.
long-term credits. This spurt too can only ~be
temporary, as the credits will eventually have
to be repaid.
10. Annual drawings increased from an esti-
mated $60 million in 1959 to $180 million in
1962 (see Table 4), but they then varied little
until 1966 when they jumped to about $275 mil-
lion. By 1969 they had almost doubled again,
reaching $525 million. New drawings, which were
just balancing repayments by 1963 because of the
rapid growth of repayments with the use of medium-
term credits, increased sharply in 1965 and after-
ward when .long-term credits became the principal
form of Soviet borrowing. Thus the Soviet debt
to
the West, which grew from
about
$50 million
to
$380 million in the seven
years
1959-65, rose
to
almost $1.2 billion in the
four
years 1966-69.
The
average duration of outstanding credits had
changed from five years in 1959 to eight years
in 1969.
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11. The rapid growth and present size of the
Soviet debt to the West indicates that the cur-
rent regime is willing to incur substantial
foreign debt to obtain Western equipment and
technology. At the same time, the USSR seems
intent on rebuilding the gold reserve that had
fallen to about $1 billion in 1965. The USSR
thus has added some $600 million to its reserves,
but at a cost of adding about $800 million to its
long-term debt to the West. The level of indebted-
ness is not so great as to impose a serious finan-
cial burden on the USSR. The present regime
demonstrated in 1964-65 that it will not hesitate
to curtail orders and imports from the West if it
believes that its international financial solvency
is threatened. Nevertheless, this debt does
impose an additional constraint upon the USSR,
which plans to continue to increase imports of
Western plants and equipment but which has had
considerable difficulty in meeting plans to
expand exports.
Recent Credit Activities
12. Recent Soviet credit contracts have shown
an awareness of the need to generate exports to
the West if the hard currency debt is .not to be-
come an eventual drag on imports of technology
and hence on the economy. The USSR has sought
increasingly to tie the repayment terms for
major plant and equipment orders to deliveries
of the product from the resulting installation.
An example of this type of contract has been the
Soviet-Japanese timber agreement of 1968 in which
$133 million in Japanese equipment to exploit
Siberian timberlands was to be financed by Japan
on a five-year credit, with repayment tied to
deliveries of wood products to Japan. Other
examples of this type of credit arrangement have
been the gas-for-pipe contracts the USSR has
signed with Austria, Italy, and West Germany.
Basically these contracts call for long-term
(up to 10 years) credits for some ..$650 million
in Western pipe and pipeline equipment with
repayment usually tied to Soviet sales of natural
gas to these countries. Soviet gas sales to
Austria and Italy will involve sizable hard cur-
rency earnings for the USSR over the 23-year and
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20-year periods of the gas contracts because the
pipe and equipment which made possible-these
sales will be paid for by gas delivered through
1977.*
13. The Soviet Union has also proposed a.
number of cooperative arrangements with Western
countries calling for Western long-term credits
for equipment to exploit Soviet natural resources.
How serious the USSR is about these proposals,
which have been made to Japan, the United Kingdom,
and France, is uncertain since most have-been
overly ambitious, calling for credits in the
hundreds of millions of dollars, longer terms than
usual -- some from 10 to 20 years -- and deferred
payments in the form of deliveries of Soviet
goods produced by the projects. None of these
deals seem likely to be completed until the scope
and terms become more realistic for the proposed
Western partners.
Prospects
14. Soviet hard currency imports of plants and
equipment in 1970 are expected to continue at the
high level of recent years despite the fall-off
in known Soviet orders of plants and equipment
from the West in 1969. Helping to keep these
imports at a high level are the normal lag be-
tween orders and deliveries, the delivery of
items held up on Soviet request in 1969 (mostly
items for the Soviet FIAT plant), continued large
deliveries of steel products, and the increased.
deliveries on the pipe contracts.
15. Orders for industrial plants and equipment
continue to lag in 1970, totaling only about $200
million through August. Several major proposals
in the process of negotiation have dragged on
with no decision.. Among them are a French
* Soviet earnings from gas after 1977 are ex-
pected to be about $24 million per year from
Austria and $67 million per.year from Italy.
The West German pipe contract, by far, the largest
at .$330 million, could involve some hard currency
outlay by the USSR, since it calls for repayment
in 10 years, but this would be recouped in the
hard currency earnings during the Zast 10 years
of the 20-year contract.
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pipe-for-gas proposal, a Japanese proposal for
$350 million worth of equipment in exchange for
Soviet pulpwood and wood chips, and a number of
proposals for Western chemical plants. Uncer-
tainty on the shape of the new five-year plan
(1971-75), a decision not expected before early
1971, may be responsible for this delay. Unless
orders pick up soon, plant and equipment deliver-
ies may be down in 1971. Such a development,
however, probably would have a short-term effect.
The USSR seems likely to continue its import
program and to reach agreement on many of the
above proposals. Further evidence of Soviet in-
tentions to import at a high level is a proposal
in the $500 million import range for a truck
plant on the Kama River now being discussed with
Western countries.
16. The Soviet debt to the West probably will
increase in 1970 because of the large deliveries
on the Italian and German pipe contracts, while
other plant and equipment deliveries apparently
will remain at about the same level as in 1969.
These deliveries are expected to bring drawings
in 1970 close to $800 million and to increase
both net credits and indebtedness by about $400
million. Soviet indebtedness to the West will
stand at approximately $1.6 billion by the end
of the year. Pipe and plant equipment, as well
as steel deliveries, should remain high for the
next few years -- even if deliveries dip in
1971 -- and the debt should continue to rise,
although possibly at a reduced rate. For the
longer run, Soviet ability to service this debt
will be a function of their ability to generate
and sustain increasing exports. Imports of
plant and equipment under contracts specifying
long-term exports of the ensuing products will
help to provide that capability.
17. Soviet exports to the hard currency area,
which have failed to keep pace with the rapid
growth in imports from that area since 1966,
are unlikely to show any unusual rise in 1970.
Net exports of petroleum, traditionally the
largest hard currency earner, are not expected
to increase and may decline, and there is no
indication that other traditional export items
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such as wood and cotton will rise substantially.
Exports~of diamonds, which have enjoyed a sub-
stantial growth in recent years, probably will not
grow as rapidly this year because of substantially
reduced demand. The hard currency deficit in 1970,
thus, may be on the same order of magnitude as in
1969, but it almost certainly can be financed with-
out gold sales.
Conclusions
18. More than a decade ago the USSR embarked on
a program to modernize Soviet technology by increas-
ing imports of machinery and equipment from the
developed West. Khrushchev's initial policy was to
pay for these imports by borrowing from the developed
West and by selling gold when credits were un-
available. The grain failures of 1963 and 1965
forced large gold sales and also compelled the USSR
to cut back on imports of industrial goods from the
West.
19. When the need for grain imports declined and
the Soviet hard currency trade balance was restored,
the USSR again increased industrial imports from the
West. The present Soviet leadership has chosen to
rely to a greater extent on Western long-term credit
to finance these purchases. Soviet debt to the
West rose by about $800 million from 1965 to 1969,
and will probably be about $1.6 billion by the end
of 1970. During 1966-70 Soviet gold sales will have
been negligible. Gold reserves vtill have risen from
a low of $1 billion at the end of 1965 to about
$1.8 billion at the close of 1970.
20. Soviet trade with the developed West seems
likely to continue growing in the next several
years, with the help of Western credits. Neither
the USSR nor its Western partners seem to regard the
present size of the Soviet debt to the West as un-
manageable. The USSR has sought arrangements with
the West calling for even longer term credits and
repayments in Soviet goods produced by the instal-
lations. financed by these credits. Optimistic Soviet
demands for huge credits and extended length of re-
payment have resulted in few completed contracts in
1970, but the USSR seems determined to pursue this
line of economic policy.
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Soviet Trade Turnover with the Free World a/
Million US $
1959
1965
1967
1968
1969
Total
2, 602
5, 067
5, 866
6, 543
7, 604
Hard currency countries b/
1,126
2,877
3,292.
3,900
4,531
Developed West
1,636
3,039
3,668
4,195
4,725
Hard currency countries
854
2,455
2,997
3,518
3,993
Less developed countries
845
1,756
1,768
1,833
2,287
v~
~ ~
Hard currency countries
282
481
331
410
567
~ ~
y
Unspecified
121
272
430
515
593
a. Because of rounding, components mazy not add to the totals shown.
b. Total adjusted to exclude Soviet economic aid deliveries to Zess developed
countries and aid repaz~ments from these countries made in goods.
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Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports
Total a/ 538 588 1, 331 1, 546 1, 688 1, 604 1, 896 2, 004 2, 109 2, 422
Developed West 494 360 1,169 1,286 1,580 1,417 1,737 1,781 1,893 2,100
Less developed
countries 54 228 206 275 132 199 172 238 231 336
~ ~
Ci7
C) o a. Total adjusted to exclude Soviet economic aid deliveries to Zess developed countries and aid repayments
~ ~ from these countries made in goods.
H
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Soviet Hard Currency Trade Balance, Wheat Imports,
and Gold Sales
Million US $
Year
Hard Currency
Trade Balance
Wheat a/
Imports
Goldb/
Sales
Est> cLra ~ep,~
~ ~ae.g~}Q~q
~.~ed~~~_
1959
- 50
12
303
~?
1960
-278
0
149
12S
~ ~~
1961
-193
31
310
1962
-267
0
239
~ ~?
1963
-310
187
523
~ ~0
1964
-533
570
520
/ ~
1965
~
-215
409
490
Q ~
1966
-266
495
45
r- Z~~
1967
+ 84
147
10
~~~
1968
-108
110
10
~ ~~
1969 c/
-313
10
Negl.
~~~
a. Including wheat flour; excluding transportation
eos is .
b. Minimum estimates. For de tai Zs on Soviet gold
production, sales, and reserves, see Table 5.
c. Preliminary.
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Table 4
Estimated Soviet Drawings and Scheduled Repayments
on Western Medium-Term and Long-Term Credits a/
y
Million US $
Outstanding
Estimate
Scheduled
Net
Debt at the ~r~d
/
Drawings
Repayments
Interest
Credits
of the Year
1959
60
12
0
48
48
1960
125
37
2
86
136
1961
165
70
6
89
231
1962
180
106
10
64
305
1963
140
130
14
-4
315
1964
170
147
15
8
338
1965
190
149
17
24
379
1966
275
149
20
106
505
1967
305
152
29
124
658
1968
435
206
38
191
887
1969
c/
525
248
59
218
1,164
a. Estimates of drawings are based on data derived from contracts indicating deZiverzU
and credit terms and on Soviet imports of maehinerz~ and equipment. In general,
early contracts (1959-64) involved 80%-85% credit and 5% interest. A large number
of contracts since 1965 have involved 85% credit and 6% interest. Repaz~ment
periods for the earlier credits were usuaZZz~ three to five Uears following down-
paz~ment. Tz~picaZ terms since 1965 have been eight nears following delivery of
equipment.
.b. These credits are not comparable with those- given in the NATO report series
Credits Granted by NATO Countries to Communist Countries because of the differences
in methods of calculating these totals. NATO credits are based on reported ex-
tensions rather than estimated drawings, show onZz~ government guaranteed credits,
and do not include Japan, Sweden, and Switzerland. The NATO series shows an
outstanding credit total for the USSR as of the end of .1969 of $1,545 million.
c. PreZiminarz~.
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Soviet Gold Production, Sales, and Reserves
Million US $
Year
Production
Net
Consumption a/
Other Additions Reserve
Sales b/ and Withdrawals Balance ~/
1955
101
18
70
~
+11 d/ 3,040
1956
104
20
154
,
+Negl. e/ 2,970
1957
104
21
275
+21 dj 2,800
1958
109
22
182
+14 f/ 2,720
1959
116
24
303
~
+18 f/ 2,530
1960
124
27
149
~ ~~~~~'
N.A. 2,480
1961
133
28
310
N.A. 2,270
1962
143
30
239
~
N.A. 2,140
1963"
153
30
523
N.A. 1,740
~
5 3
~
1964
164
32
520
~
N.A. 1,360
1965
176
34
490
~/
N.A. 1,010
1966
188
36
45
N.A. 1,120
1967
200
38
10
h/
-10 i/ 1,260
1968
207
40
10
N.A. 1,410
1969
219
42
Negl.
N.A. 1,590
1970
~/
233
44
Negl.
N.A. 1,780
a. Net consumption is the gold issued to the domestic economz~ for use
b~ industrz~ and the arts in excess of that returned by the domestic
economy for refining and eventual reissue.
b. Minimum estimates.
c. At the end of the near, rounded to the nearest $10 million. The range
of error is 20%.
d. Total output of North Korea and Communist China.
e. Total output of North Korea and Communist China Zess a Zoan to Poland
of $12.5 million.
f. Total output of North Korea.
g. Including a reported $180 million in Soviet and East European gold sold
to Italian banks for debt service.
h. Soviet sales of industrial gold to West Germanz~.
i. Loan to Hungary.
~. PreZiminarz~ estimates.
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Table 6
Value of Soviet Orders for Plants and Equipment from the Developed West, a/ by Category
Million
US $
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
Total
290
397
233
554
319
264
904
564
678
403
Motor vehicle manufacturing
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
462
47
78 b/
52
Chemical and petrochemical
148
101
63
175
226
118
123
94 c/
90 c/
83
Ships and marine equipment
67
111
100
313
32
35
24
75
139
2
Timber and wood processing
N.A.
70
40
10
5
19
69
6
143
21
Textile manufacturing
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
59
106
9
4
~
Food processing
4
89
5
N.A.
N.A.
N.A.
52
41
31
9
,~~
Metalworking and metallurgy
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
17
22
34
30
CrJ
~.]
Oil, gas, and pipeline equipment
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
19
12
35
132
Electronics
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
10
20
9
22
Other d/
71
26
25
55
56
92
68
142
110
49
a. Exc u ing Fin an which is on a bzlatera c caring basis. Because of roun Zng, components may not add to
the totals shown.
b. Including a plant valued at $54 million to manufacture rubber products. The plant could also be subsumed
under the category chemical and petroclaemicaZ.
c. Excluding several known contracts for which values mere not reported. Inclusion of estimated values for
those contracts, and the $54 million rubber product plant contract, mould increase the values shorn above for
chemical and petrochemical equipment to $105 million in 1967 and $145 million in 1968.
d. Including a wide variety of plants and equipment with consumer orientation -- for example, for production
of footwear, home refrigerators, and supermarket equipment. The category also includes printing, mining, and
medical equipment and other items.
Declassified in Part - Sanitized Copy Approved for Release 2012/04/10: CIA-RDP08S01350R000602020003-5
 Declassified in Part -Sanitized Copy Approved for Release 2012/04/10 :CIA-RDP08S01350R000602020003-5
Secret
Secret
Declassified in Part -Sanitized Copy Approved for Release 2012/04/10 :CIA-RDP08S01350R000602020003-5