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• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T00591R000400540003-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 23
• Document Creation Date: January 12, 2017
• Document Release Date: May 12, 2011
• Sequence Number: 3
• Publication Date: December 1, 1985
• Content Type: REPORT

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Directorate of
Intelligence
in Foreign Trade
Potential Gorbachev Initiatives
An Intelligence Assessment
SOV 85-10220X
December 1985
copy 5 3 0
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Directorate of
Intelligence
in Foreign Trade
Potential Gorbachev Initiatives
An Intelligence Assessment
Economic Performance Division, SOYA,
Office of Central Reference. Comments and queries
are welcome and may be directed to the Chief,
Defense Industries Division; and
Strategic Policy Division; several analysts from
Domestic Policy Division;
Economic Performance Division;
Analysis, with contributions by
This paper was prepared by I lof the
Economic Performance Division, Office of Soviet
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Secret
SOV 85-10220X
December 1985
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Secret
Potential Gorbachev Initiatives
in Foreign Trade
Key Judgments General Secretary Gorbachev's economic modernization program will
Information available depend, in part, on expanded imports of Western technology and equip-
as of 26 December 1985 ment. Although Moscow is looking toward Eastern Europe to provide the
was used in this report.
lion's share of such imports, Western technology and equipment, particu-
larly if used more effectively than in the past, could make an important
contribution to raising the quality and efficiency of Soviet civilian produc-
tion. With the overall level of imports likely to be constrained by
limitations on Soviet hard currency earnings, the need to maximize the
impact of what is imported is critical.
Gorbachev clearly recognizes the need to improve Soviet utilization of
Western technology. Unlike the defense sector, where the priority attached
to rapidly assimilating Western technology is backed by a massive and
skilled research and development (R&D) infrastructure, the civilian sector
is not set up to take full advantage of imported technology. Some defense
industry practices, including close working relationships between end users
and R&D facilities and accountability for the assimilation and diffusion of
Western technology, could be applied to the civilian sector. Gorbachev has
stated that civilian industry should, in general, emulate defense industrial
management practices, and his announced program to substantially up-
grade civilian R&D capabilities could provide a more receptive environ-
ment for foreign technology. Addressing the resource issue, however, is
another matter. His appointment of outsider Boris Aristov as Foreign
Trade Minister could well result in a major personnel shakeup designed to
make the foreign trade bureaucracy more responsive to domestic clients'
needs, including more direct participation by end users in contract
negotiations. Already there are numerous rumors in Moscow that a major
reorganization of the Ministry of Foreign Trade is imminent.
In addition to improving the existing system, the General Secretary
apparently believes that the USSR must alter the nature of its relation-
ships with Western firms if it is to increase the effectiveness of imported
technology and equipment. past 25X1
efforts by East European countries indicate that changes could include:
? Allowing Western personnel to assist in managing Soviet production
facilities, perhaps including control over certain aspects of production.
? Permitting on-site inspection by the Western partner of joint-venture and
coproduction arrangements for quality-control purposes.
iii Secret
soy 85-10220X
December 1985
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? R&D efforts that would involve Western scientific and technical experts
working closely with their Soviet counterparts to develop new products
and processes rather than the occasional visits to exchange information
that are now the norm.
? Training facilities in the USSR that are staffed, in full or in part, with
personnel from the Western firm.
? Foreign equity in Soviet production facilities.
? Soviet equity in Western production facilities.
Soviet officials already have expressed interest in joint ventures entailing
Western profit sharing and managerial presence. They have also taken an
interest in engineering and production consultation with foreign experts in
the energy sector and foreign assistance in setting up a training school with
courses in drilling, well completion, and operation of offshore oil wells.
Gorbachev may be willing to move quickly in this direction;
Gorbachev understandably faces a number of difficulties in improving
Soviet absorption of Western technologies. Personnel changes within the
Foreign Trade Ministry will take time, and there will undoubtedly be
strong resistance to any attempts to decentralize foreign trade decision-
making. Even if agreement is reached on allowing expanded Western
participation, Soviet suspicion of a foreign presence and the repugnancy of
Western equity interests will limit the pace of contract signings. Western
businessmen, for their part, are likely to react cautiously to Soviet
proposals calling for coproduction and profit sharing.
In sum, we expect meaningful changes in the conduct of foreign trade to be
slow in coming. While innovative approaches may be adopted in high-
priority areas such as energy, Moscow is not likely to move quickly along
the lines taken by many of its East European allies. US technology is
clearly preferred by the Soviets; to our knowledge recent Soviet interest in
joint ventures has been broached mainly with US corporations. Soviet
interest, however, has been tempered by continuing concern over US export
controls and a need to guarantee against future trade and financial
embargoes. Nonetheless, Gorbachev, like Brezhnev before him, would
undoubtedly like to expand US-Soviet trade as a way to attack economic
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problems. Paradoxically, he may have to show progress in improving
economic performance if he hopes to attract Western participation in
cooperation arrangements that tie the participants' profits to the successful
operation of the venture. The Soviet leadership will also probably continue
its efforts to influence US policy through US businessmen by holding out
the possibility of expanded trade if technology and credit restrictions are
eased or arms control agreements are reached.
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Contents
Key Judgments
Past Trends in Purchases of Western Equipment
Gorbachev's Economic Strategy and the Potential Role for Trade
Gorbachev's Current Approach Toward Trade
4
Focus on Eastern Europe
Role of Trade With the West
Limitations of the Current Approach
~
Innovative Strategies
Reform of the Foreign Trade System
----------------
Changing the Methods of Dealing With Foreign Entities
Recent Developments
Changes to the Foreign Trade Structure
9
Dealing With the West
12
Obstacles to increased Western Participation
12
Prospects: A Middle Ground
13
Implications for the United States
14
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Potential Gorbachev Initiatives
in Foreign Trade
Proceeding from the tasks of scientific-technical pro-
gress, it is necessary to adopt a new approach to our
foreign economic strategy. The current world trend is
that in many countries the foreign trade is growing
twice as fast as production. This is a powerful
accelerator of the scientitic-technical and economic
development. Our country's foreign trade turnover
has reached quite a sizable volume, R140 billion, but
its rates of growth can and must be accelerated, and,
what is the most important thing in this connection,
deep structural changes must be made and both
exports and imports must be made more progressive.
M. S. Gorbachev
11 June 1985
Recent statements by General Secretary M. S. Gor-
bachev, coupled with the sweeping personnel changes
he has made in the party and government bureaucra-
cy, hint that major changes in the management of the
civilian economy are in the offing as part of his
modernization program. While specific details of
what role foreign trade will actually play are un-
known, the naming of a new foreign trade minister
and Moscow's recent interest in new types of coopera-
tion with Western firms raise the possibility of sub-
stantial changes in Soviet foreign trade policy as it
applies to the civilian economy.
Past Trends in Purchases of Western Equipment
Throughout most of its history, the USSR has looked
to the developed West to provide key technologies to
help establish (during the late 1920s and early 1930s)
and modernize (since the 1960s) priority sectors of the
economy. This policy led to a rapid expansion of
Soviet imports of Western machinery and equipment
in the mid-1970s (see figure). While the share of
machinery and equipment from hard currency coun-
tries is, according to our estimates, currently less than
10 percent of total machinery investment, purchases
USSR: Hard Currency Machinery and
Equipment Imports, 1970-84
I I I I I I I
0 1970
I I I I I
80 84
of Western equipment have been particularly impor-
tant in improving production in the defense, chemical,
metallurgical, oil and gas, and automotive industries.
While Western technology has made an appreciable
difference to both civilian and defense industries, the
USSR has not been particularly successful in assimi-
lating and diffusing imported technology in the civil-
ian sector (see inset for a description of the inadequa-
cies of the foreign trade bureaucracy).'
'Assimilation is the mastering of new technology by a single end
user. Diffusion is the use of it throughout the economy. In this
paper the phrase "assimilation and diffusion" refers to all of the
stages from initial Soviet interest in a technology to its economy-
--.:,_ -1 -
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Current dollars
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Inadequacies of the Soviet
Foreign Trade System
The monopoly of foreign trade, established by Lenin
and concentrated mainly in the Ministry of Foreign
Trade, has caused a number of inefficiencies that
prevent the USSR from obtaining the most benefit
from its foreign economic ties. The system separates
the end users of imports and the producers of exports
from their foreign counterparts and provides few
effective incentives to encourage domestic enterprises
to either rationally utilize imports or produce for
export. While attempts have been made to overcome
these problems, especially in the middle and late
1970s, the Ministry of Foreign Trade has effectively
fought off any efforts to dilute its authority over
foreign trade. In addition, many of the structural
inadequacies of the foreign trade system are a reflec-
tion of deeper problems within the economic system
itself.
Soviet foreign trade organizations (FTOs), most of
which are under the Ministry of Foreign Trade, are
the legal entities authorized to negotiate and sign
contracts with foreign entities for imports and ex-
ports. Judging by the emphasis given to select aspects
of commercial negotiations, FTO officials are held
responsible for (1) demonstrating that they have met
the technical demands of the industrial ministry,
longer than similar negotiations in the West, thus
delaying the installation of needed technology. The
long negotiation time combined with Soviet insistence
on purchasing only "proven" technology guarantees
that equipment will be less than state of the art by the
time it is installed.a Furthermore, Soviet demands
that extensive documentation be provided and ad-
hered to allow for little flexibility in changing the
contract to adapt to new circumstances.
In addition, the criteria on which the performance of
FTOs is judged do not necessarily take into account
the requirements of the end user. Although industrial
ministries and production associations (groups of
enterprises-including factories, research institutes,
and design bureaus-that are centrally managed to
produce a product line or several related product
lines) have been represented on FTO boards of direc-
tors since at least 1967, often there is still little
contact between the FTOs and the end user, who is
usually not represented on the negotiating team.
Furthermore the FTO officials typically are not well
versed in the needs of the end user. Consequently,
purchases have been made that do not reflect the
specific requirements of the end user and at times
cannot even be used. This problem is complicated by
which includes guarantees from the Western exporter the FTOs' desire to cut costs at the expense of
on delivery and on-site performance of imported quality.
equipment; (2) obtaining the "best" terms available
(that is, lowest price and availability of long-term
loans carrying a low nominal rate of interest) when
negotiating purchases of machinery and equipment.
Attempts to negotiate price reductions can lead to
protracted negotiations, often two to three times
Soviet
performance of Western equipment and technology is managers were generally only as capable as managers
often below levels that would be expected in a West- in non-Asian developing countries in using foreign
ern setting; Soviet manning of such equipment is technology. Moreover, because of the time-consuming
excessive compared with similar situations in the negotiation process and long delays in installing
West; and the frequency and duration of breakdowns
are much greater. Indeed,
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The Soviet system also provides few incentives to
encourage end users to effectively use imported tech-
nology. In fact, pressure to meet production targets
discourages the use of imported machinery and
equipment (as well as innovations in general) because
of the potential for disrupting current production. In
addition, imported equipment is frequently delivered
long before the facility where it is to be installed is
ready (because of chronic construction delays) and
may sit outside unprotected for a considerable length
of time, resulting in damaged equipment.
On the export side, the Soviet system provides little
incentive for manufacturers to produce for export.
While the domestic enterprises are paid a higher price
for goods produced for export to compensate for the
extra costs required to meet export specifications,
factory managers argue that the price differential is
not sufficient to cover the costs incurred. More
important, the need to meet export specifications that
differ from domestic standards interferes with the
ability to meet output targets. The FTOs, on the
other hand, prefer to keep the price paid to the
producers as low as possible since their performance
is measured by their profitability, that is, the differ-
ence between the price they pay the domestic produc-
er and the price they receive from the foreign custom-
er. Thus the Foreign Trade Ministry tends to resist
efforts to increase the producer's incentive to expand
production for export.
for the purchase of Western equipment and materials.
This law, however, has frequently been ignored. The
Bank for Foreign Trade (Vneshtorgbank) often drags
its feet and even refuses to allocate the hard currency
(technically owned by the enterprises) when requested.
Moreover, the enterprises are limited to purchasing
machinery, licenses, and raw materials with their
foreign exchange. They cannot purchase consumer
goods that could be used as incentives to increase
their workers' productivity.
Finally, bureaucratic rivalries among the Ministry of
Foreign Trade, the State Committee for Science and
Technology (GKNT), and Gosplan further complicate
and prolong foreign trade decisionmaking. The For-
eign Trade Ministry and GKNT, for example, have
overlapping responsibilities in license trade and com-
pensation agreements-a situation that can lead to
disruptive departmental and personal wrangling.
Such problems have been compounded by an en-
trenched aging leadership that has been resistent to
change. Both former Foreign Trade Minister Patoli-
chev, who had served since 1958 and had a close
relationship with Brezhnev, and former Gosplan
Chairman Baybakov, who held high-level posts in the
economic bureaucracy since 1940, probably were
regarded by the new leadership as obstacles to
change.
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As an incentive for producers to expand export
production, enterprises have been allowed to retain
since 1964 a portion of their hard currency earnings
imported equipment, the technology is often effective-
ly dated by the time operation commences.
In the late 1970s, the Soviets themselves started to
express their disappointment over the failure of im-
ports from the West to make the expected contribu-
tion to industrial output. For example, Leonid Brezh-
nev questioned the reflex action of Soviet managers
who instinctively cry "Buy Foreign Technology" the
minute they encounter a problem. Even as recently as
this spring, the President of the Soviet Academy of
Sciences, Anatoliy Aleksandrov, complained in an
article that not only is imported technology badly
used but also that "the blind copying of the latest
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scientific and technical ideas (or frequently what was
the latest) is often what leads to our falling behind."
He further stated that, by importing machinery in-
stead of producing it domestically, Soviet enterprises
are denied the R&D support they would otherwise
have.
This dissatisfaction, combined with a growing backlog
of imported but uninstalled equipment, played a role
in the subsequent slowdown in equipment orders.
Other contributing factors include:
? A rapid runup in debt in the early 1970s that led the
Soviets to limit new hard currency borrowings.
Moscow's conservative borrowing policy probably
has been reinforced by the debt problems of its East
European allies.
? Concern over becoming overly dependent on West-
ern equipment, which was heightened by Western
sanctions of the late 1970s and early 1980s.
As a consequence of these concerns, Soviet imports of
machinery and equipment fell steadily in real terms
(measured in constant 1970 dollars) from the peak
1976 level, with the exception of a temporary upswing
in 1982 and 1983 as deliveries of equipment for the
Siberia to Western Europe pipeline were made.=
Gorbachev's Economic Strategy
and the Potential Role for Trade
Since Gorbachev became General Secretary in
March, official pronouncements emphasizing the im-
portance of employing new technologies to modernize
industry have become more urgent. Gorbachev has
emphasized that it is the same high-technology indus-
tries that are leading modernization programs in the
West-machine tools, robots, microelectronics, com-
puters, and telecommunications-that must now lead
the way in the USSR. He made it clear that scientific
and technological (S&T) progress in these industries is
critical to the production of better machinery, and
that, when spread throughout industry, such progress
will spur economic growth to levels where "adequate
living standards, defense capabilities, and investment
can be maintained."
Gorbachev has declared industrial modernization to
be the 12th Five-Year Plan's (1986-90) highest priori-
ty.' By 1990 he has promised that one-third of the
Soviet capital stock, including half of all machinery,
will be new. This ambitious goal is to be accomplished
through investment shifts benefiting high-technology
industries, management and organizational reforms to
speed innovation, and programs to change the atti-
tudes and work habits of managers and workers.
Gorbachev also has stressed the need for the civilian
sector to emulate the practices of the defense indus-
tries. The successes of Soviet defense industries in
assimilating Western technology, however, have re-
sulted primarily from priority access to scarce re-
sources-a condition that cannot be applied econ-
omywide (see inset for a description of the defense
sector's use of imported technology).
The ambitious targets set by Gorbachev, especially
for increases in the machine-building sector, will be
difficult, if not impossible, for the Soviets to meet
without increased imports of machinery and equip-
ment, as well as a more effective use of such imports
than is currently the case. To achieve his announced
goal that 50 percent of all machinery will be new by
1990, for example, the Soviets must accelerate the
annual output of producer durables to rates un-
matched since the early 1970s. Additionally, the
machines must be tailored to meet the unique needs of
plants being remodeled-a difficult task for an indus-
try accustomed to manufacturing large lots of a small
variety of equipment for use in plants being construct-
ed under highly standardized designs.
Gorbachev's Current Approach Toward Trade
Focus on Eastern Europe
Gorbachev is undoubtedly expecting that Eastern
Europe will supply the USSR with most of the
machinery and equipment that domestic producers
are not able to supply. For over a decade, the Soviets
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Drawing From the Defense Experience
The USSR has generally been quick to capitalize on
Western technological advances when it comes to
defense applications, although there are numerous
cases of problems or even failures. Soviet designers
have successfully applied Western military technol-
ogy and design concepts in several hundred military
R&D programs, thereby reducing engineering risk
and shortening weapons development and production
leadtimes. Similarly, manufacturing equipment and
know-how acquired for specific military production
programs have significantly improved the quality and
efficiency of defense production and enabled the
Soviets to bring manufacturing processes on line
years earlier than domestic technology would sup-
port. Several factors account for the superior perfor-
mance of defense industries:
? Defense, with its priority claims on skilled techni-
cians and advanced equipment, maintains a massive
R&D establishment equipped for both indigenous
technology development and the exploitation and
reverse engineering of Western technology.
? Defense R&D institutions usually specialize in rela-
tively narrow areas, usually working closely with
production facilities. Industrial ministries within
the defense sector also maintain lead technology
development organizations designed to aid in indus-
trywide assimilation.
? Assimilation goals are focused, clearly defined, and
closely monitored. In the process of targeting acqui-
sitions, defense requestors must specifically identify
planned applications and later assess how the
acquisitions were handled through a formal report-
ing system that is pervasively and aggressively
Performance in civilian industries is poorer because
they have fewer resources and incentives to improve
products through technological advance and are un-
der less pressure to reduce development leadtimes.
Their efforts to acquire and exploit foreign technol-
ogies suffer further from looser integration into the
R&D and production planning process and less strict
accountability in exploitation:
? Civilian R&D institutes are underequipped and
understaffed relative to their defense counterparts;
they are less concerned with the acquisition and
effective application of new technologies; and they
work less closely with production enterprises.
? Industrial ministries often acquire individual items
of equipment and technology without adequately
assessing how they are to be used in specific
production programs; imports, as a result, are often
found to be unsuitable by the actual end users.
Followup reporting on how-or even if-acquisi-
tions are actually used is, at best, haphazard.
? Equipment and technology imports are often ac-
quired as part of integrated turnkey projects; this
makes it difficult to adapt specific equipment and
processes to Soviet industrial standards and techni-
cal support capabilities, which impedes diffusion.
have pushed hard within the Council for Mutual
Economic Assistance (CEMA) to integrate more
closely the Soviet and East European economies and
to raise the quality of the goods they produce to world
standards. The creation early this year of a CEMA
committee for machine building and the conclusion of
specific long-term S&T agreements serve these goals.
Gorbachev's statements suggest that he plans to pur-
sue these longstanding goals with renewed vigor with
an eye to Eastern Europe's ability to contribute
significantly to his industrial modernization program.
Recent appointments of two men with substantial
East European experience-Boris Aristov as Minister
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of Foreign Trade and Nikolay Talyzin as Chairman
of Gosplan-reflect the importance Gorbachev
attaches to the region. Under Gorbachev's tenure, the
leadership has made it clear in public speeches and
private negotiations that continued access to past
levels of Soviet oil and raw materials hinges on
Eastern Europe's ability to supply larger amounts of
high-quality goods. In Soviet eyes, increased imports
of high-quality East European machinery and equip-
ment could provide an important supplement to inter-
nal resources for capital improvements.
Eastern Europe's well-developed and relatively sophis-
ticated scientific and industrial base is clearly impor-
tant to the Soviets as a source of industrial technol-
ogy. In many types of numerically controlled machine
tools and microelectronics equipment, East Germany,
Czechoslovakia, and Hungary are technically equal or
superior to the Soviet Union. The East Germans and
the Czechoslovaks, in particular, have done much
R&D on computerized flexible manufacturing sys-
tems. As part of the division of labor in CEMA's
industrial specialization scheme, East Germany, Bul-
garia, and Hungary have developed computer peri-
pherals and software industries and are the USSR's
primary source of supply for such products as tape
and disk drives. Meanwhile, East Germany, Bulgaria,
and Czechoslovakia are at least on a par with the
Soviets in producing simple "pick and place" industri-
al robots and are very active in R&D on more
advanced sensory-controlled robots. East Germany
dominates in the microprocessor technologies that
robots and advanced machine controllers require,
while its optics industry is at least equal to the
USSR's.
Eastern Europe's technological progress relative to the
USSR's probably reflects a combination of a well-
developed and sophisticated scientific and engineering
base and better access to Western technology. East
European machine tools often use Western controller
designs produced on license, and several East Europe-
an countries have imported large amounts of micro-
electronic production equipment. East European sci-
entists and engineers enjoy a level and frequency of
interaction with their Western counterparts normally
unavailable to the Soviets and can participate in and
even sponsor industrial research projects in the West.
Opportunities for improving the quality of technology
in Eastern Europe or the amount obtainable by the
Soviets are, however, limited over the next few years
by a number of factors. Paramount are the competing
Soviet demands that Eastern Europe do more for
defense and that it adjust its energy demands to cope
with diminished supplies of Soviet oil and raw materi-
als. But there are also a number of technological
limitations:
? The USSR already absorbs large shares of East
European production in most high-technology in-
dustries, and large increases in exports probably
would require expanded East European production
capacity, which would take several years to achieve.
? The Soviets are pressuring the East Europeans to
modernize capital goods industries, and this gener-
ally entails a standdown in established production
operations.
? Dramatic increases in the quality of East European
equipment would better enable manufacturers to
market their products in the West, thereby earning
hard currency and creating incentives for the East
Europeans to divert high-quality exports from the
USSR.
Role of Trade With the West
Imports of advanced Western technology, especially
in machine building, electronics, and computers,
could provide a boost to Gorbachev's modernization
program. Limits on Soviet exports through the re-
mainder of the decade, however, should severely
constrain the level of imports for the period (see inset
for an analysis of Soviet export prospects). On the
basis of our estimates, the USSR would have to let its
debt service ratio rise to between 25 and 40 percent by
1990 just to maintain real import capacity at the 1983
level.' Thus even a less conservative borrowing policy
would give Moscow little or no room to substantially
step up imports.
' These estimates are based on a range of potential export scenarios.
principal and interest on Soviet debt in total hard currency receipts.
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Prospects for Exports
During the balance of the decade, the USSR-which
counts on oil, gas, and arms sales for over 80 percent
of its hard currency exports-is likely to face serious
constraints on its ability to generate hard currency.
Already this year, Soviet oil export revenues are
expected to be down some $3-4 billion, as a result of
both last winter's severe weather and continuing oil
production declines. While the potential exists for
expanding gas exports, soft demand in Western Eu-
rope makes sizable increases in sales unlikely over
the medium term. Even Soviet arms exports, which
have been a lucrative hard currency earner, will face
a tight market, making increased earnings from arms
sales unlikely and reduced earnings a possibility.
Western businessmen generally consider the quality
of most Soviet manufactured goods substandard and
the availability of spare parts and servicing for such
goods deplorable. Nevertheless, many Western busi-
nessmen who were recently interviewed stated that
the best Soviet export possibilities within this catego-
ry lie in the area of medium-technology machinery
and commodities-such as construction materials
and rubber products-that do not require a high
degree of sophistication, if quality and servicing
problems can be resolved. Gorbachev seems intent on
improving the overall quality of manufactured goods,
in part to make them more competitive on world
markets and thus provide a base from which to
expand exports of such items. Any of these efforts,
however, could take five to 10 years to have any
sizable effect and therefore would not have much of
an impact on increasing exports through 1990.
In the interim, the Soviets may attempt to expand
marketing of machinery and equipment in the less
developed countries (LDCs), offering generally reli-
able although less sophisticated equipment at lower
prices than Western competitors with attractive fi-
nancing terms. The Soviets also could increase their
efforts to participate in LDC development projects
with Western firms, piggybacking their technology
and services on more advanced Western offerings.
Despite these financial constraints, the Soviets are
moving ahead in negotiations with a number of
Western firms for large projects in priority sectors
such as energy, chemicals, and steel as the start of the
1986-90 Five-Year Plan approaches. Gorbachev, how-
ever, has put foreign trade officials on notice that
massive imports are not in the cards and that the
focus of the modernization efforts will fall on domes-
tic resources and new ways to marshal those re-
sources. This theme was reiterated in his recent
TIME magazine interview (9 September 1985, pp. 22-
Limitations of the Current Approach
Gorbachev must take some action to make the foreign
trade bureaucracy more efficient if he is to make
more effective use of Western technology in his
modernization effort. Past Soviet disappointment with
the gains from imported equipment and technology
are attributable, in part, to Moscow's highly central-
ized and compartmented approach to trade. Soviet
firms and ministries seeking Western assistance must
go through a lengthy competition process to secure a
foreign currency allocation and subsequently work
through a foreign trade bureaucracy that jealously
guards its legislated authority to conduct negotiations
with foreign enterprises.
topics of mutual interest.
With the Ministry of Foreign Trade's focus on getting
the best commercial terms for any acquisition and the
limited contact between Soviet end users and foreign
suppliers, equipment and technology acquisitions do
not always meet Soviet needs. For example, some of
the equipment purchased for the Kama River truck
facility would not fit into the buildings designed to
hold it. Moreover, the controlled nature of the Soviet
system makes it extremely difficult to seek out and
conclude deals calling for sustained and detailed
dialogue between the Soviet importing enterprise and
its Western supplier. With some notable exceptions-
such as the Kama River truck facility-purchase of
Western technology is currently limited to the
straight acquisition of licenses and equipment. Even
scientific and technical cooperation agreements be-
tween Western firms and the USSR generally involve
only occasional exchanges of delegations to discuss
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These failings are particularly critical in the high-
technology area, where detailed documentation can-
not fully substitute for continuing face-to-face dia-
logue, nor can it deal with all the problems that can
develop during production. Moreover, the lack of
continual contacts prevents routine updating of pro-
duction processes that the Soviets have acquired from
abroad and makes it difficult for Western firms to
develop products and processes specifically suited to
To overcome such limitations, Gorbachev may opt for
a more innovative strategy on importing from the
West. While Gorbachev has yet to unveil major new
approaches, it is worth remembering that several of
the major actors for establishing foreign trade poli-
cy-notably the foreign trade minister and the Gos-
plan chairman-have only been in office a short time.
Once a strategy is developed, it may well include
changes in both the USSR's internal and external
economic policy.`
Reform of the Foreign Trade System
Efforts to improve the foreign trade system could
range from minor tinkering to broad structural re-
forms. Judging from Soviet writings and past initia-
tives, minor changes might include:
? Increasing the price differential between commod-
ities produced for the domestic market and those for
export.
? Permitting domestic enterprises to retain a larger
share of the hard currency earned from their exports
and/or taking additional steps to ensure that the
enterprises actually have access to these earnings.
Any changes that Gorbachev may make to the foreign trade
system will undoubtedly be tied to his overall efforts to improve the
efficiency of the Soviet economy. Moreover, success in increasing
the effectiveness of foreign trade will be intrinsically linked to
Moscow's ability to improve the performance of the economy as a
whole. Unless sufficient incentive is provided to domestic producers
to successfully incorporate imported technology in domestic manu-
factures and to produce high-quality goods, the impact of any
improvement in the handling of import and export transactions will
? Changing the criteria by which FTO performance
in negotiating import contracts is evaluated, giving
greater weight to timeliness and satisfying the quali-
ty specifications of the end user.
? Improving the mechanism for planning foreign
trade through greater use of quantitative analysis of
the efficiency of exports and imports.
? Providing sufficient incentives to construction orga-
nizations to complete facilities and install equip-
ment in a more timely fashion, especially imported
equipment.
Changes of a more structural nature would most
likely involve granting end users a much greater say
in negotiations for imports and greater contact be-
tween the export-producing enterprises and their for-
eign customers. Reforms could range from represen-
tatives of the end user being allowed to be present at
all purchase negotiations with some form of approval/
veto power to transferring control over the FTOs from
the Ministry of Foreign Trade to the relevant indus-
trial ministries or even to production associations. At
the extreme, individual enterprises, at least selective-
ly, could be given control over all foreign trade
operations, including the flexibility to set their own
export targets and conclude their own sales.
Changing the Methods of Dealing
With Foreign Entities
To increase the flow of technology and offer condi-
tions that would make Soviet manufactures more
attractive to Western firms, the leadership could
expand the forms of its cooperation with the West.
Industrial cooperation arrangements between East
and West have been in existence for quite some time,
but the Soviets have limited their participation in such
arrangements largely to the acquisition of equipment,
often for complete plants, technical know-how, and
some provisions for joint R&D. They have used these
arrangements to a much lesser extent than the East
Europeans to obtain Western managerial services,
quality control, and coproduction provisions-all of
which would require much closer contacts than the
Soviets have been willing to accept. To broaden these
arrangements, the Soviets would have to allow for
increased ties between foreign firms and Soviet pro-
duction enterprises and at least a de facto reduction in
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the role of the Foreign Trade Ministry over the
Recent Developments
conduct of trade.'
If the Soviets were to expand the scope of industrial
cooperation arrangements or, to quote Gorbachev, "to
develop new forms of economic ties," Soviet contracts
with Western firms might incorporate new elements
such as:
? Allowing Western personnel to assist in managing
Soviet production facilities, including perhaps con-
trol over certain aspects of production. Management
of oilfield development in remote areas might be
suitable to this type of arrangement.
? Coproduction arrangements permitting on-site in-
spection by the Western partner for quality-control
purposes.
? R&D efforts that would involve Western scientific
and technical experts working closely with their
Soviet counterparts at either the Soviet or the
Western partner's facilities for an extended period
(months or even years) to develop new products and
processes rather than the occasional visits to ex-
change information that are now the norm.
? Training facilities in the USSR that are staffed, in
full or in part, with personnel from the Western
firm.
? Foreign equity in Soviet production facilities.
? Soviet equity in Western production facilities.
The Soviets also might expand the role of their
companies in the West in packaging, marketing, and
servicing Soviet-manufactured exports through great-
er use of Western marketing techniques such as
market surveys. As a way to improve their marketing
and economic management skills, they could increase
the number of students studying such subjects in
Western business schools.
' The Soviets are already encouraging such ties between Soviet
enterprises and those in other CEMA member countries. The
recent creation of scientific-production associations with the Bul-
garians and Czechoslavaks appears to be a new step in this
direction.
Changes to the Foreign Trade Structure
Even though a clear-cut policy is not yet evident,
Gorbachev has made some moves to put his mark on
the foreign trade system that suggest that he may be
willing to adopt some of the innovative policies just
discussed. Since August he has replaced many key
personnel responsible for the formation and conduct
of Soviet foreign trade. Boris Aristov, the new Foreign
Trade Minister, has no previous connection with the
Ministry and is likely to be receptive to wide-scale
reform of the foreign trade apparatus (see inset for
more details on Aristov). Likewise, the appointments
of Nikolay Ryzhkov as Chairman of the Council of
Ministers and Nikolay Talyzin as Gosplan Chairman
presumably have removed major bureaucratic impedi-
ments within the upper levels of the government
hierarchy to potential changes in the planning and
implementation of more innovative foreign trade ac-
Already there are numerous rumors in Moscow that a
shakeup of the Ministry of Foreign Trade is immi-
nent. A Soviet foreign trade official recently told the
US Embassy in Moscow that a major reorganization
of the Ministry of Foreign Trade is likely early next
year. While there are several proposals being consid-
ered, the one currently favored calls for greater
centralization. It would reduce the number of FTOs
from 47 to 10, bring FTOs now outside the Ministry
under its jurisdiction, and reduce by half the number
of deputy ministers. The proposal, however, does not
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siveness of FTOs to the needs of the end users.
In addition, the Soviet leadership under Gorbachev
has made some minor changes in the foreign trade
system. A recent Central Committee decree is de-
signed to encourage the production of goods for
export. In general, the decree calls on ministries,
associations, and enterprises to improve the competi-
tiveness of Soviet exports by raising the technical level 25X1
and quality of exportable products. Specific measures
included in the decree were:
? An additional price supplement of up to 20 percent
on current supplements to the wholesale price for
machinery, equipment, and related spares that are
exported to hard currency countries, starting in
1986.
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Boris Ivanovich Aristov,
the New Foreign Trade Minister
Deputy Minister of Foreign Affairs responsible for
relations with socialist countries. With his back-
ground, Aristov could be expected to actively pro-
mote trade strategies oriented toward Eastern Eu-
rope.
Before his posting to Poland, Aristov had workedfor
25 years in the Leningrad party apparatus, rising to
the status of heir apparent to then first secretary of
the Leningrad obkom Grigoriy Romanov. In 1971,
Aristov became a full Central Committee member,
probably with Romanov's backing. Friction reported-
ly developed, however, as Romanov came to view his
Aristov, 60, was named on 19 October to succeed the
ailing Nikolay Patolichev, 77, who had held the
position for 27 years. Aristov's appointment is anoth-
er move in Gorbachev's campaign to replace the aged
party and government leadership with energetic, pro-
gressive younger men whose loyalties are to Gorba-
chev rather than to the organizations they have been
selected to manage. Aristov can be expected to imple-
ment foreign trade policies consistent with any efforts
by Gorbachev to reform the Soviet economic system.
An East European specialist with no formal foreign
trade experience, Aristov was ambassador to Poland
from 1978 to 1983. Since 1983, he had served as a
? Assurances that Soviet enterprises will have access
to foreign currency that they have earned from
delivery of export products.
Whether these changes will have the intended impact
of boosting the quality and quantity of exportable
goods remains to be seen. On the basis of past reform
efforts, the decree may not contain sufficient incen-
tives to induce producers to be more responsive to
export demands (see inset on previous reform efforts
of the foreign trade structure). It remains to be seen
whether the leadership can resolve the key problem of
conflicting goals facing enterprise managers, the most
protege as too ambitious;
it was Aristov who "blew the whistle" on
Romanov after the notorious 1978 wedding reception
for Romanov's daughter at which antique china from
the Hermitage was broken. Aristov's posting to Po-
land, which Romanov may have engineered, was
viewed by many as a demotion. According to a Soviet
embassy official in Eastern Europe, Aristov was
highly regarded by former General Secretary Andro-
pov, who may have been responsible for Aristov's
return from Poland and appointment to the Foreign
Ministry post in July 1983.
important of which are the output targets (measured
in quantity). In addition, by assuring enterprises they
will have access to the foreign currency they have
earned, the Soviet leadership is basically admitting
that access to these earnings has been circumscribed
in the past. Whether enterprises will now have easier
access to hard currency-as judged by their ability to
spend it as they see fit-depends largely on the
willingness of the Bank for Foreign Trade-which
authorizes hard currency expenditures-and the
Ministry of Foreign Trade-which does the actual
buying-to abide by the decree.
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Reform of the Foreign Trade Bureaucracy
in the Mid-1970s
Every Soviet regime has been confronted with serious
bureaucratic problems in approaching foreign trade,
but it was at the height of detente and its burgeoning
East-West trade that the need to address the situa-
tion was acknowledged to be particularly acute. By
1976, a debate of several years' duration on the need
for reform aimed at improving the USSR's export
performance culminated in a Politburo decree on the
management of foreign trade. Although the text of
the decree has never been made public, the speeches
of General Secretary Brezhnev and Premier Kosygin
to the 25th Party Congress indicated that a general
decision had been made to enlarge the role of the
industries in foreign trade decisionmaking and to
make other changes to increase the responsiveness of
the FTOs and the ministries to foreign markets.
According to Soviet economists, specific provisions
included putting FTOs on a strict cost-accounting
basis, establishing a board of directors in each FTO
with equal representation from the Ministry of For-
eign Trade and branch ministries, and reorganizing
FTOs' trade offices as export-import firms with the
power to negotiate for their respective FTO.
These changes in the foreign trade system were
delayed, however, primarily because of opposition
from the Ministry of Foreign Trade to what it
regarded as attempts to encroach on its turf. A
directive was finally issued by the Council of Minis-
ters in early 1978 that required the Ministry to
reorganize the FTOs according to the Politburo
decree by the end of the following year. The extent of
the reform, however, was later reported to have been
far less than what was envisioned in the early 1970s.
At present, the Soviet system remains the closest in
the Soviet Bloc to the highly centralized "classical"
model of foreign trade in a planned economy.
Perhaps a more far-reaching development is the an-
nouncement of a novel and ambitious economic man-
agement experiment at the Fiat-built Tol'yatti Auto-
motive Plant. According to Izvestia, managers will be
given greater responsibility in planning and control
over earnings and spending. Under the terms of the
experiment, the plant will be allowed to retain 40
percent of its hard currency earnings and, according
to a businessman who has had dealings with the plant,
will be allowed to sign its own contracts with foreign
suppliers without the intervention of the central min-
istries or the FTOs. Thus, on a very limited scale, this
experiment decentralizes foreign trade decisionmak-
ing away from both the Foreign Trade Ministry and
an industrial ministry and ties the enterprise much
closer to the international market.
While the Tol'yatti experiment represents efforts to
decentralize some aspects of decisionmaking, it is
uncertain whether the central planners will be willing
to delegate sufficient authority to the plant managers
to make the experiment work.' Even if it succeeds,
conducting it on a broad scale would meet strong
resistance. Both party and government officials may
fear that a large number of enterprises engaging
independently in foreign trade would wreak havoc
with the centralized planning system as well as the 25X1
monopoly of the foreign trade bureaucracy. Certainly,
any effort to decentralize foreign trade would run into
strong opposition from the Foreign Trade Ministry,
the Bank for Foreign Trade, and Gosplan.
tion-about 5 percent-is available for export to hard currency
countries. Thus in reality there would be little foreign exchange
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Dealing With the West
There is increasing evidence that the Soviets may be
considering proposals to expand the types of their
economic dealings with Western firms.
Soviet think tanks are study-
ing joint-venture arrangements that, while not equity
arrangements, would give Western firms many of the
same advantages. In return for selling, or possibly
leasing, technology and equipment for a particular
plant, the Western participant would receive royalties
on production distributed in the USSR and would
share in the profits from production that is exported.
In a recent article on Soviet-Japanese economic rela-
tions, former Deputy Foreign Trade Minister Sushkov
raised the possibility of construction or modernization
of Soviet facilities to produce goods for sale in Japan
or of joint production of certain types of machines.
While these proposals give no indication of the
amount of access that the USSR would be prepared to
grant, these types of arrangements would require a
long-term relation with the firms involved.
The Soviets also have raised more concrete proposals
with Western firms that could point to new directions
in Soviet trade, including the possibility of joint
ventures that could entail Western managerial pres-
ence and profit sharing.
Soviet officials also have become more interested in
seeking contracts that would tap into Western mana-
gerial expertise. Soviet
officials in the gas and petroleum ministries recently
expressed interest in some "soft" technology packages
that would include engineering and production con-
sultation for oil and gas field development.
have expressed interest in having a Western petro-
leum equipment firm set up a training school in
Murmansk and conduct classes in the drilling, com-
pletion, and operation of offshore wells.
Obstacles to Increased Western Participation
To successfully implement an expanded range of ties
to the West, Gorbachev would have to overcome
considerable resistance. A new approach to trade
would require reform of the foreign trade structure
along the lines discussed above. Moreover, the Soviets
would have to overcome their deeply rooted suspicion
of foreign presence in the USSR if they are to grant a
greater degree of access than is currently the case. Of
the various proposals that the Soviets could consider,
the least likely to be adopted would be equity ven-
tures, either in the USSR or abroad-especially in the
LDCs. Although a number of East European coun-
tries have entered into joint-equity ventures with
Western firms, these types of cooperation arrange-
ment go against the ideological underpinnings of the
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Soviet state.' Capitalist ownership-even if only very
small-is apt to be repugnant to most Soviet officials.
Similarly, Soviet equity in the LDCs would go against
the principles of "nonexploitive" assistance to these
countries (that is, ownership remains in the hands of
the recipient country), which Moscow espouses. Even
nonequity joint ventures at a minimum would require
that such terms as profits and royalty be changed to
ones that are ideologically acceptable.
While some Western firms would be willing to consid-
er Soviet proposals involving coproduction, especially
those producing machinery and equipment, all would
approach such ventures with considerable caution.
On-site inspection would be a must for most of these
firms, and few, if any, would be willing to rely on the
Soviets to be the sole supplier of key components.
Joint-equity ventures or other profit-sharing arrange-
ments, if offered, would likely attract only the larger
multinational companies, at least initially, and Soviet
law would first have to guarantee that profits earned
by the Western participants could be repatriated and
ensure that taxes were not onerous.
ers appear to be the most reluctant to participate in
either coproduction arrangements or joint-equity ven-
tures. According to the US Embassy in Bern, Swiss
bankers would only underwrite joint-equity ventures
in the USSR if they could get government export risk
guarantee insurance or if the Swiss firms involved
would accept the financial risks themselves.
The businessmen interviewed cited a wide array of
problems within the Soviet system that would impede
the successful implementation of cooperative ven-
tures. They expressed considerable skepticism that the
Soviets would grant them the amount of access to
domestic producers that they consider necessary.
They complained of poor Soviet production and the
' Several of the East European countries have legislation permitting
joint-equity ventures with Western firms on their territory. To date,
there are only a limited number of such jointly owned companies,
and, while some ventures have been successful, the arrangement
has not yet proved to be particularly profitable for either Western
firms or the East European participants. Some East European
countries are currently exploring new joint-venture legislation to
make these arrangements more attractive to Western investors.
unreliability of the USSR as a supplier. It was almost
universally believed that at the heart of the matter
was the lack of motivation on the part of Soviet
managers and workers to efficiently produce goods of
acceptable quality. Substantial improvements in the
operation of the domestic economy would probably be
necessary before large numbers of firms would agree
to cooperation arrangements that closely tie the West-
ern participant's profits to the successful operation of
The Soviets appear to be caught in a vicious circle.
Better use of Western technology and equipment,
which can best be achieved through closer cooperation
with the West, is needed to improve economic perfor-
mance. Sizable and sustained increases in Western
participation may not be forthcoming, however, be-
cause of the very gaps in economic performance
Moscow is seeking to correct.
Prospects: A Middle Ground
Gorbachev's current efforts to break this circle appear
to be twofold: he is attempting to improve economic
performance through better incentives and greater
discipline while broaching the possibility of new forms
of cooperation with Western firms. To be successful,
new initiatives must be bold enough to attract West-
ern firms but staid enough to be politically acceptable.
Because of domestic political constraints, any changes
in foreign trade policy are likely to be slow and
incremental. New proposals will probably be limited
at present to critical sectors where the payoff is clear.
At the same time, Gorbachev may try over time to
develop (largely through personnel changes) a political
environment receptive to bolder changes than the
system is now prepared to make. Indications that he is
moving in this direction would include:
? More decentralization of foreign trade decisionmak-
ing coupled with a reorganization of the Foreign
Trade Ministry.
? Relaxation of joint-venture rules.
COCOM restrictions also will prevent the sales of some advanced
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? Press coverage of the potential benefits from joint
ventures or favorable analysis of joint ventures in
Eastern Europe.
? Signing of cooperation agreements with Western
firms-including joint ventures-that would expand
the role of Western firms in Soviet production.
Alternately, Gorbachev could permit innovative ar-
rangements on a very selective basis to solve narrowly
defined problems. Such a policy would allow the
Soviets to address specific problems in handling im-
ported technology and expanding exports without
entailing broad structural changes in the economy.
Turnkey projects, for which the Soviets have shown
considerable interest, accomplish this goal by assign-
ing to the Western firm all the responsibility for
construction and equipment installation. Other ac-
tions that would be indicative of this approach
include:
? Establishment of enterprises specializing in export
production that would have greater access to inter-
national markets. Such a policy was under discus-
sion in the mid-1970s, but rising energy prices in the
late 1970s temporarily lessened the need to expand
exports of manufactured commodities. Perhaps the
experiment at the Tol'yatti factory is a step in this
direction.
? A joint venture in the USSR for the fabrication of
imported equipment that would be managed by the
foreign partner. Such a setup would assure that
basic tools needed for fabrication of Western equip-
ment would be available.
? Contracts with Western companies for the mainte-
nance of inventories of spare parts for imported
equipment at regional distribution centers inside the
USSR
Implications for the United States
A step-up of Soviet purchases of machinery and
equipment would probably lead to increased sales by
US firms. Already this year Soviet orders from US
firms have picked up as overall Soviet purchases from
the West have surged. If Gorbachev's plans include
wide-scale use of Western technology coupled with
new approaches to trade with the West, prospects for
US sales would be brighter. Several West European
businessmen felt that joint-equity ventures would be
more attractive to US firms than to most West
European firms. Some US businessmen also feel that
US firms are better suited than other Western firms
to offer the "bigness" in both projects and money that
the Soviets may desire. To the best of our knowledge,
recent Soviet interest in joint ventures has been
broached mainly with US firms. Soviet officials also
continue to express-at least to US businessmen-
their preference for US technology.
The Soviet leadership may view expanding trade with
the United States as a way to improve overall bilateral
relations. A recent US business delegation to the
USSR was treated royally. The overriding message to
the delegation was that the Soviets were very interest-
ed in doing business if obstacles to technology sales
could be removed. There was, nonetheless, a tacit
acceptance on the Soviet part that some limitations to
technology trade would remain. In contrast to experi-
ences of other US businessmen who have been told
that movement on arms control issues was essential,
little reference was made to the need for improvement
on other bilateral issues. While the Soviet message
probably was geared toward setting the atmosphere
for the Reagan-Gorbachev meeting, the delegation
was originally invited by the Soviets prior to a deci-
sion on the meeting.
Soviet views concerning the long-term prospects for
bilateral political relations are likely to temper Mos-
cow's expectations for expanded trade ties and initia-
tives aimed at encouraging them. Although recent
movement on sanctity-of-contract issues will be some-
what encouraging to the Soviets, their experience with
US sanctions in the past probably has left them
permanently wary of becoming heavily dependent
upon US supply of essential commodities, and their
purchasing decisions will continue to be influenced by
the need to maintain diverse sources.'?
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The Soviets doubtless hope that, over the longer term,
relations could improve to the point where they would
be granted most-favored-nation status, but they real-
ize that for now this is not a likely prospect. They also
are unlikely to harbor any hope that the present US
administration will soon ease restrictions on export of
goods deemed strategically significant, although they
probably believe that the influence of the US business
community eventually will work to their advantage on
this issue." Indeed, the Soviets have at times been
quite transparent in their efforts to influence govern-
ment policy through the business community on issues
such as technology restrictions and arms control by
promises of increased trade.
" In fact, few of the projects now under consideration with US
corporations fall into the strategically significant category.
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