GRAIN EMBARGOES: OPPORTUNITIES FOR CIRCUMVENTION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83M00914R002700090020-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 6
• Document Creation Date: December 20, 2016
• Document Release Date: March 21, 2007
• Sequence Number: 20
• Publication Date: January 1, 1982
• Content Type: REPORT

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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
Grain Embargoes: Opportunities for Circumvention
Summary
As evidenced by the 1980 economic 'sanctions against
the USSR, a grain embargo is difficult to ma-intain and
limited in its effectiveness. The complexity and secrecy
associated with the international grain market provide
ample opportunity for circumventing an embargo. During
the last embargo,, the Soviets were able to replace half of
the denied US grain through direct pur bases from the
major non-US grain exporters. 25X1
This paper was prepared byl 25X
esources Division, office of Global Issues and
coordinated with the Office of Soviet Analysis and the Office
of Europe. Research for this paper was completed on
5 January 1982. Comments and queries are welcome and should
the Chief, Agriculture Trade Branch, OGI,
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The complexity and secrecy associated with the inter-
national grain market provide ample opportunity for circum-
vention of embargoes. The amount of leakage during an.,
embargo depends on:
o Length of the embargo. The longer the
embargo, the greater the erosion in the
agreement; time facilitates the adoption
of deceptive measures.
o Price premium. The greater the premium
the embargoed country is willing to pay,
the greater the circumvention.
o Cooperation among foreign governments.
Failure of any exporter government to control
grain sales will substantially weaken an
embargo. Importing countries.can facilitate
circumvention by a myriad of schemes such as
swapping. contracts, falsifying destination,
and arranging transshipment or reexport.
o Cooperation of international grain companies
and brokers. Cooperation depends largely on
company perception of self-interest, including
exposure to loss from violation of the regu-
lations versus the prospective profits from
circumvention deals.
o World market conditions. Circumvention is
easier when large stocks of surplus grain
exist in the world.
The Marketplace
Grain, like many other commodities, is traded via a
long-established international network of government trading
agencies, large multinational trading firms, and small
independent firms. The Canadian Wheat Board (CWB) and
Australian Wheat Board (AWB) are the two premier government
entities., although the European Community (EC), Argentina,
South Africa, Thailand, and Brazil also have centralized
export agencies. Large multinational trading firms such as
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Continental, Cargill, and Dreyfus handle most of the world
trade in grain because of their dominant position in the
United States, the largest exporter. Primarily of European
origin, each of these firms is diversified and vertically
integrated, giving them wide influence here and abroad.
Smaller firms in Europe and Asia often specialize in trade
within a certain region and/or in a particular product.
Foreign Government Control Mechanisms
Canada. The CWB maintains control over the destination
of Canadian wheat by selling directly to foreign buyers and
handling or closely coordinating delivery. On the other hand,
a large portion of barley is sold to private firms (at
Canadian Ports and little control has been exerted on desti-
Australia. 'The AWB has always kept very close control
over wheat sales--either dealing with foreign governments or
requiring sales to private firms (at Australian ports) be
made only with named destinations. Barley and other coarse
grains are handled by state boards and privat firms, and,
as with-Canada, less control results. 25X1
nation.
to make sales without disclosing the grain's destination.
Argentina. The Argentine Grain Board plays a minor
role in controlling grain exports and allows private fir
EC. The EC Grain Management Committee decides how much
of each type of grain will be offered for export and what
subsidies will be paid in order to sell its higher cost
product in the world market. Through export rebate certifi-
cates, the EC can require proof of destination for payment
of the export subsidy to the exporting firm. Following
the 1980 embargo, the USSR was excluded from the list of
destinations eligible for export rebates. The Soviets were
still free to purchase unsubsidized EC grain--but the price
differential of up to $100 per ton over the world price made
such transactions highly uneconomic. 25X1
Other exporters. South Africa and Thailand each have
centralized selling agencies; however, most of their respec-
tive corn crops is sold to private firms at the loading ports
at which time all government control ceases. Brazil also
uses centralized selling agencies but a large part of its
soybea can meal continues to move via private
firms. I al 25X1
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 Various devices are available to circumvent an embargo:
o Swapping (or shifting) contract destinations.
Under this scheme, grain sold to a nonembargoed
country is repurchased by the supplying firm
and sold to the embargoed country. The firm
then purchases more grain for the nonembargoed
country.
o Direct buying. An embargoed country can arrange
for private firms to buy grain from various
exporting countries, load it on vessels chartered
by the firm, declare a non-embargoed destination,
change destinations in transit, and proceed to an
embargoed port. In the cases of Argentina and
Brazil, no falsification of destination would be
required.
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agencies that provide nearly instantaneous information on all
factors affecting the grain market. This affords them a
strong position in dealing with exporting or importing
country governments. Indeed, sometimes they will act as the
agent of a government for a set fee per ton. However, they
much prefer to act as the principal, or position taker
(taking ownership of grain), consummating both purchases and
sales. Firms have been made exclusive agents by government
diversification, and integration, the firms can offer the
buyer a complete packa ge of a delivered commodity, financing,
and related services. 25X1
In addition to the several large multinational firms,
a host of small firms-participate in the market. Often their
business rests on one individual's trading expertise, access
to particular markets, or knowledge of a local region or type
of--commodity. Another important actor in the market is the
broker, who acts as an agent between buyer and seller for a
fee but never takes ownership of the commodity. Use of a
broker facilitates secrecy, which may be politically or
economically important. 25X1
Methods of Circumvention
The large multinational trading firms dominate world
trade in grain and oilseeds, handling the bulk of exports
from the United States, Argentina, Brazil, the EC, South
Africa, Thailand, and other smaller suppliers. They take
part also in a large portion of Canadian and Australian
shipments.
Each firm maintains a worldwide network of offices and
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o Transshipment or Reexport. The embargoed country
could use a private firm to buy grain at a foreign
transshipment port or could have the firm buy
grain in an exporting country for transshipment
or reexport. Northern European ports--Antwerp,
Rotterdam, or Hamburg--are the most likely to
be involved. Large quantities of grain have
moved to the USSR via these ports during years
of heavy Soviet grain imports; a substantial flow
in circumvention of an embargo probably would be
detected within several weeks. Reexports from
ports not normally looked on as centers for the
grain trade would be harder to monitor. East
European-ports are less likely to be use
because of limited throughput capability
An Example: The US Embargo of Grain to the USSR
In response to the Soviet invasion of Afghanistan, the
United States unilaterally suspended US agricultural exports
to the USSR on 4 January 1980. That action immediately denied
the USSR 17 million tons of US grain, 1.2 million tons of
soybeans and meal, and smaller quantities of poultry scheduled
for delivery in the year ending 30 September 1980.F 2X1
The Soviets were able to make up about half-of the 17
million tons of embargoed US grain. We estimate that Soviet
grain imports in the 1 October 1979-30 September 1980 year
totaled nearly 28 million tons, 8.4 million tons short of
preembargo expectations. Imports included 8.4 million tons
of US grain and 19.2 million tons from other origins. Without
the suspension, we had expected the United States to export
about 25 million tons and other suppliers 11 million tons to
the USSR. I 25X1
The USSR was able to increase its share of imports from
major non-US grain exporters and to buy substantially more
grain from a number of non-traditional suppliers. None of the
principal grain exporters--Argentina, Australia, Canada, and
the EC-- had agreed to cut back grain sales to the Soviets
although. most stated they would not replace directly or
indirectly the 17 million tons of US wheat and corn denied.
.Argentina soon made it clear that it was not going to cooperate,
and the other exporters could not be pinned down to specific
export ceilings but only to "traditional or historic levels."
About 75 percent of the estimated 8.6 million tons of grain
replacement came from Argentina, Canada, and Australia.
Indeed, shipments to the USSR in 1979/80 were a record for
all of the major exporters except Canada. The other 25 percent
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was imported from a number of other exporters, including
Sweden, Thailand, Eastern Europe, and France.
Because the USSR was able to obtain overtly grain from
these sources, it did not need to take recourse to other
means of circumvention of the embargo. We have no evidence
that large amounts of US grain were diverted through third
countries to the USSR. (Based on incomplete information
we estimate that 500,000 tons of US grain could have been
shipped by such a route--divided between Romania and northern
European transshipping operations. Similar quantities of US
soybeans and meal were probably transshipped through northern
European ports.) And reports from Western Europe claiming
large amounts of US grain were transshipped through Eastern
Europe are exaggerated and unsubstantiated. Larger East
European imports were needed to support livestock production
goals because of a shortfall in their 1979 harvests. We
estimate that less than a million tons out of Eastern Europe's
total import of 17 million tons--3 million more than 1978/79--
were used to replac ts of domestic grain and transship-
ments to the USSR. I 25X1
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