SOVIET ECONOMIC ASSISTANCE TO THE COMMUNIST LDCS: REVISED ESTIMATES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90T00048R000200020001-8
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• Document Creation Date: December 27, 2016
• Document Release Date: February 25, 2014
• Sequence Number: 1
• Publication Date: February 1, 1989
• Content Type: REPORT

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Directorate of Uontidential
Intelligence r4en. te
, to
Soviet Economic Assistance
to the Communist LDCs:
Revised Estimates
A Technical Intelligence Report
Confidential
SOV 89-10016
February 1989
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04ActAt Directorate ot Confidential
Intelligence
A
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Soviet Economic Assistance
to the Communist LDCs:
Revised Estimates
A Technical Intelligence Report
This paper was prepared by the
Office of Soviet Analysis. Comments and questions
are welcome and may be directed to the Chief,
Economic Performance Division, SOYA,
Confidential
SOV 89-10016
February 1989
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contiti
Summary
Information available
as of 6 February 1989
was used in this report.
'
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Soviet Economic Assistance
to the Communist LDCs:
Revised Estimates
The drop in world oil prices, the sudden depreciation of the US dollar, and
increased availability of Soviet data have led us to revise our estimates of
Soviet economic assistance to the Communist less developed countries
(CLDCs). The main adjustment has been to account for' the oil price
subsidies that have worked in Moscow's favor since 1985. The sudden
depreciation of the US dollar, in turn, highlighted the fact that measuring
assistance in rubles provides a much more realistic picture of the real flow
of Soviet economic assistance to the CLDCs.
Our revised estimates show that Soviet assistance declined from a peak .of
5.8 billion rubles in 1985 to 4.3 billion rubles in 1987, or by almost 25 per-
cent. Because of the sharp appreciation of the ruble against the dollar, our
revised dollar measurement of assistance fell only marginally from $7
billion in 1985 to $6.8 billion in 1987:
? All of the decline came in the form of reduced price subsidies, mostly be-
cause the CLDCs have paid above-world-market prices for Soviet oil
since 1985. (Moscow's willingness to accept goods in exchange for oil and
to extend trade credits presents the CLDCs with a more attractive
arrangement than turning to hard currency markets for energy.) Direct
economic aid continued to rise slowly during the mid-1980s, although
growth virtually ceased after 1986.
? Cuba, which received about 60 percent of the CLDC assistance in 1987,
absorbed virtually all of the decline. Vietnam and Mongolia account for
almost all of the remaining assistance.
Despite Moscow's rhetoric about the excessive cost of supporting Commu-
nist client states, it has yet to cut the volume of deliveries of key products,
including oil. The Soviets have provided this assistance to the CLDCs
largely in return for political benefits such as support for Soviet positions in
the international arena and military access to port and air facilities. The
high cost of the program, however, coupled with a growing Soviet
disenchantment over meager economic returns?for both the USSR and
the CLDCs?is fueling renewed Soviet interest in constraining and
preferably cutting the levels of support to Third World clients. Moscow is
specifically pressing CLDCs to restructure their economies and find
alternative sources of support
Confidential
SOV 89-10016
February 1989
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Contents
Page
Summary iii
Scope Note
Background 1
Measuring Assistance 1
Revising the Estimates 3
Implications 5
Appendix
Soviet Net Economic Assistance to the Communist LDCs 9
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Scope Note
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This paper presents revised ruble and dollar estimates of Soviet economic
assistance to the Communist less developed countries (CLDCs)?Cuba,
Vietnam, Mongolia, North Korea, Cambodia, and Laos. These estimates
include net economic aid, the sum of any trade deficit with the USSR and
estimates of outright grants and technical services Moscow provides, and
price subsidies, the difference between world market prices and Soviet-
CLDC transaction prices for key commodities such as Soviet oil and
Cuban sugar. This definition of economic assistance differs from the
traditional Western OECD definition because of the unique economic
relationship Moscow has with the CLDCs. The revisions will be used as im-
portant contributions to analysis of Soviet policy toward the CLDCs,
including projects that assess Moscow's "cost of empire" and the USSR's
relationship with Cuba.
VI'
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Soviet Economic Assistance
to the Communist LDCs:
Revised Estimates
Background
To support its foreign policy objectives, Moscow
incurs the burden of providing the Communist less
developed countries (CLDCs) with vast amounts of
economic assistance.' In return, the Sovitts-have
received substantial "noneconomic" benefits, especial-
ly from Cuba and Vietnam, the USSR's two closest
allies in the Third World. Cuba remains the USSR's
_
most important asset in the Western Hemisphere,
while both the Cubans and Vietnamese provide the
Soviet military with port and air facilities. Politically,
the CLDCs continue to support Moscow in the UN
and other international organizations. Cuba's Presi-
dent Castro, in particular, has been aggressive in
promoting the Soviet Union's political position on
various international issues and in defending it in the
Nonaligned Movement.
Soviet aid to these countries has benefited Moscow
economically to a much lesser extent. Although Mos-
cow obtains foodstuffs, raw materials, and other
commodities in return for its economic support?some
of which is geared to facilitate the production of goods
needed by the USSR's economy?the CLDCs have
perennially failed to meet their export commitments
to Moscow. Faced with such poor repayment pros-
pects, Moscow has been forced to allow many of its
CLDCs' debts to be deferred.
Numerous signs have surfaced since the early 1980s
that Moscow is becoming increasingly dissatisfied
with these small economic returns on its assistance to
the CLDCs as well as with gross misuse of its aid by
them. For example, at the November 1984 heads of
government meeting of the Council for Mutual Eco-
nomic Assistance (CEMA), Moscow publicly insisted
1
that Cuba begin meeting its trade obligations and that
Vietnam increase those exports that better take into
account the needs of the Soviet economy. Moscow's
concerns over the costs of supporting its Third World
clients in general appeared to grow in the latter half
of the decade in the wake of its increasing domestic
economic travails and tightening financial constraints.
The Soviets' recently released economic plan for 1989,
for example, suggests that low repayments by client
states have adversely affected Moscow's financial
position.
Measuring Assistance
Our estimates of Soviet economic assistance to the
CLDCs attempt to measure the net transfer of eco-
nomic resources from the USSR to this group of
countries. They include direct economic aid on a net
basis and the indirect effect of price subsidies on
Soviet imports and exports. Soviet official trade data
converted to US dollars at the official dollar/ruble
exchange rate set by Gosbank, the Soviet State Bank,
and world commodity prices provide the bulk of the
data for calculating assistance figures for all the
CLDCs except Cuba. Some Cuban data?converted 25X1
to US dollars at the official dollar/peso exchange rate
set in Havana?are used to fill in some of the gaps in
Soviet trade figures.
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Net economic aid is defined as the sum of any
reported trade deficit with the USSR and CIA esti-
mates of Soviet outright grants and technical services.
One portion of the trade deficit, in turn, is viewed as
"economic development assistance." For the most
part, it consists of Soviet machinery and equipment
for projects such as the nuclear power plant in Cuba
and offshore oil development in Vietnam. The remain-
der of the trade deficit is assumed to be financed by
long-term trade credits.
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Figure 1
Crude Oil Prices for Communist LDCs, 1970-88
Price per barrel, US $
40
?20
1970
'Preliminary.
?
OPEC price
CEMA price
Implicit price subsidy
75
80
85
88'
The Soviets occasionally provide small amounts of
grant aid, which is not included in their trade statis-
tics, and technical services. The latter consists mostly
of services performed by engineers working on Soviet
construction projects and those provided by other
professionals such as teachers and consultants. Tech-
nical services also include the training of CLDC
personnel in the USSR.
Price subsidies are defined as the difference between
world market prices and Soviet-CLDC transaction
prices for items traded, most notably Soviet oil and
Cuban sugar and nickel:
? The petroleum subsidy reflects the difference be-
tween the value of petroleum purchased from the
USSR and the value these imports would command
Confidential
320610 2-89 .
in the world oil market. Moscow charges the
CLDCs the oil price set by CEMA. This price is
based on the average of world oil prices for the
preceding five years. This pricing scheme, which
was instituted in the early 1970s, provided the
CLDCs with low-cost oil during the period when
world oil prices were rising (see figure 1).
? The Cuban sugar and nickel subsidies are estimated
as the difference between the price Moscow pays
Havana for these commodities and their world
market value: in recent years the Soviets have been
paying about eight times the world price for sugar
and two times the world price for nickel.
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Alternative Measures of Soviet Economic Assistance
'to the Communist LDCs, 1980-87.
?,41
1980
1981
1982
1983
1984
1985
1986
1987
Old estimates (billion US dollars)
Gross economic
assistance
5.6
6.8
6.9
6.4
6.7
7.2
8.7
9.2
Economic aid
2.4
3.2
3.1
3.2
3.0
3.5
4.7
4.7
Price subsidies
3.2
3.6
3.8
3.2
3.7
3.7
4.0
4.5
New Estimate's: Accounting for Net Price Subsidies (billion US dollars)
Net economic
assistance b
5.2
6.4
6.9
7.1
7.1
7.0
6.1
6.8
Economic aid
2.3
3.1
3.0
3.7
3.2
3.4
4.6
4.9
Price subsidies
2.9
3.2
3.9
3.3
3.9
3.6
1.5
1.9
New Estimates: Accounting for Net Price Subsidies (billion rubles)
Net economic
assistance
3.4
4.6
5.1
5.2
5.8
5.8
4.3
4.3
Economic aid
1.5
2.3
2.2
2.8
2.6
2.8
3.2
3.1
Price subsidies
1.9
2.3
2.9
2.4
3.2
3.0
1.1
1.2
a Because of rounding, components may not add to the total shown.
b Net economic assistance is gross economic assistance minus price
subsidies flowing from the CLDCs to the USSR.
? We believe that Moscow also pays the CLDCs
above-world-market prices for some other goods
such as Cuban citrus. These subsidies are derived
from sketchy and incomplete reporting and are
estimated at less than $50 million annually.
Revising the Estimates
Historically, our estimates of economic assistance
have provided a reasonably good picture of the Soviet-
CLDC aid relationship.' In recent years, however, the
collapse in world oil prices, the sharp depreciation of
the US dollar, and more detailed Soviet trade data
have revealed some shortcomings in these aid figures.
In particular, our economic assistance estimates to
date have employed price subsidies figured on a gross
3
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basis, accounting only for those major subsidies that
worked to the CLDCs' favor. But the fall in world oil
prices beginning in 1982 caused the CEMA oil price
to exceed world price levels during the period 1985-
87: in effect, the CLDCs began providing an oil price 25X1
subsidy to the USSR that was not captured in our
estimates.' Past practices, which disregarded price
subsidies that benefited Moscow, inflated our recent
estimates of the Soviet burden. Using gross price
subsidies, we had estimated that Moscow's total eco-
nomic assistance rose from $6.4 billion in 1983 to $9.2
billion in 1987. Taking into account the above-world-
market oil prices Moscow charged the CLDCs, the
assistance figure for 1987 would be more on the order
of $6.8 billion (see the table). 25X1
'Remarks by a senior Cuban official as early as 1983 suggest that
Havana was aware that Soviet oil price subsidies might disappear
and that Cuba mi ht end up paying above-world-market prices for
Soviet oil
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The traditional approach of presenting the estimates
in US dollars is another area for concern, given the
fluctuations in the dollar/ruble exchange rate. Be-
cause available evidence indicates Soviet trade with
and aid to the CLDCs is transacted in rubles?at
prices fixed mostly without regard to the dollar/ruble
exchange rate?US dollar estimates of assistance will
overstate real trade flows when the dollar is falling
against the ruble and understate flows when it is
appreciating. The impact of exchange rate fluctua-
tions on our assistance calculations has been of partic-
ular concern recently, given the 30-percent apprecia-
tion of the ruble vis-a-vis the dollar during the past
two years (see figure 2). Ruble estimates therefore
provide a more accurate indication of year-to-year
changes in the contribution of Soviet assistance to the
CLDCs.
Measuring such assistance in dollar terms, however,
does have the apparent advantage of providing a
rough approximation of the hard currency earnings
that Moscow forgoes by trading with the CLDCs
rather than with the West. Even here Soviet earnings
tend to be overstated, however, because such exports
as machinery and equipment undoubtedly would fetch
less on Western markets than implied by officially set
prices converted at the official exchange rates. Dollar
measurements also can distort assessments of Mos-
cow's overall hard currency requirements (see inset).
A final justification for revising our estimates is the
recent availability of more detailed Soviet trade data.
The Soviets now provide both quantity and value data
for most commodities traded since 1986. The unit
values derived from this data suggest that the use of
annual average world spot prices in valuing a number
of goods traded, such as Soviet oil and Cuban sugar,
may not accurately reflect Soviet opportunity costs
and therefore the burden to Moscow. For example,
because only about 5 to 10 percent of Soviet oil
exports to the West are priced on a spot basis, we
believe oil prices calculated from the trade data?
which take into account both spot and term sales?
provide a better indicator of the market value of
Soviet oil. Similarly, Moscow's non-Cuban sugar pur-
chases have typically been at prices higher than the
spot sugar price, indicating that we have overstated
the value of the sugar subsidies.
Confidential
Figure 2
USSR: Net Economic Assistance to the Communist
LDCs, Dollar vs Ruble Estimates, 1980-87
Million units
8
6
4
2
0
1
1980 81 82 83 84 85 86 87
US Dollars
Rubles
320611 2.89
To better capture the net flow of real resources from
Moscow to the CLDCs, we will present estimates of
assistance in both rubles and dollars:
? Ruble and dollar estimates will be made on a
completely net basis, taking into account all major
subsidies implicit in oil and raw material prices in
transactions between Moscow and the CLDCs. Ad-
justments are made to our estimates of price subsi-
dies to account for changes in world market prices
and in Soviet pricing formulas. Even then, however,
our estimates must be viewed as approximations
because lack of complete price data prevents reli-
able calculations of possible subsidies on other
traded goods.?
' For example, research by some Western analysts indicates that
the prices of machinery and manufactured goods sold by Eastern
Europe to the USSR are relatively high compared with world
market prices for comparable equipment.
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Soviet Hard Currency Support to CLDCs
Estimates of dollar aid to the CLDCs are often
equated with actual hard currency flows and thus
enter policy debates over Western financial support to
the USSR, especially the concern over untied lending
by Western banks. In reality, however, the burden of
most of the Soviets' economic support is in the form
of their own products, especially energy, that are
provided to client states, either with overly attractive
financing terms or free of charge.
There is an element of a hard currency "opportunity
cost" with such policies, but Moscow goes to great
lengths to reduce actual hard currency outlays. For
.example, Soviet oil deliveries to these states?in
exchange for goods or very little payment, given
Moscow's continuing trade surpluses?could bring
some $2 billion in hard currency annually if sold on
the world market at today's depressed prices. In fact,
some of the oil earmarked for Cuba is never delivered
but instead sold, with the hard currency proceeds
benefiting Havana. When oil prices were high, Cuba
was able to earn as much as $600 million annually,
but revenues from oil resales have dropped in recent
years to about $200-300 million. Assessing the oppor-
tunity cost of all such transactions with the CLDCs is
'difficult. Moreover, there is a reverse flow to consider
because these countries also export to the USSR
some raw materials and agricultural products that
Moscow would have to pay for in hard currency if
purchased elsewhere.
Actual Soviet out-of-pocket hard currency outlays
for the CLDCs are small. The Soviets purchase about
$150-250 million worth of wheat from Canada each
year on behalf of Cuba, buy some sugar outside the
trade protocol for hard currency, and, on occasion,
supply Havana with small hard currency loans. On a
much smaller scale, Moscow also assumes payment
responsibility for some of Vietnam's hard currency
purchases, most notably grain. In total, we estimate
that the Soviets typically spend annually about $300
million in hard currency to support the CLDCs. Their
annual hard currency inflows from all sources, by
contrast, have averaged about $33 billion in recent
years.
5
? The number of exchange rate conversions will be
minimized to help reduce some of the distortion .
caused by using US dollar valuation of resource
flows made in nonconvertible currencies. For exam-
ple, the problems associated with fluctuating ex-
change rates are lessened by replacing the world
spot prices for oil and sugar, which are expressed in
US dollars, with the average ruble price that Mos-
cow actually uses to transact similar deals with
other countries.' The replacement of world spot
prices with those derived from Soviet trade data will
also provide a closer approximation of Moscow's
true opportunity costs in trading with the CLDCs.
Implications
The revised estimates show that the level of total
economic assistance to the CLDCs was 4.3 billion
rubles in 1987, a decline of about 25 percent from
1985 (see figure 3). (In contrast, the estimate present-
ed in dollars would show assistance decreasing by only
3 percent during this period.) In 1987 this level of
assistance to CLDCs equaled about 1 percent of
Soviet GNP:
? All of the decline came in the form of reduced price
subsidies, which have fallen about 2 billion rubles
since 1985.
? Moscow made the reduction in price subsidies some-
what less painful, however, through a combination
of increased development aid and additional trade
credits: indeed, its trade surplus with the CLDCs
has grown by almost 30 percent since 1985.6
s The average price Moscow obtains for its oil on world markets is
available for 1986-87 and is derived from official Soviet trade
statistics. The average price Moscow has paid for its non-Cuban
sugar for at least the last 15 years can also be derived from Soviet
trade statistics.
6 The increase in development aid?whether measured in rubles or
dollars?between 1984 and 1987 suggests that real flows of Soviet
material to CLDC economic projects were on the rise during this
period.
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Figure 3
USSR: Net Economic Assistance to the
Communist LDCs by Source, 1980-87
Million rubles
6,000
Figure 4
USSR: Net Economic Assistance to the
Communist LDCs by Country, 1980-87
Million rubles
82 83 84 85 86 87
Total economic assistance
Price subsidies
Economic aid
320612 2-89
The drop in economic assistance to individual CLDCs
was the most pronounced in Cuba, with assistance
falling almost 40 percent in ruble terms during 1984-
87 (see figure 4 and appendix A for country break-
downs). Moscow's willingness to provide more trade
credits?some 100-300 million rubles higher in 1986
and 1987 than the 1985 level of 360 million rubles?
helped soften the decline. Unlike the large swings in
price subsidies and trade credits, economic develop-
ment aid to Havana has remained fairly constant in
ruble terms during much of the 1980s, averaging
about 400 million rubles during the period 1983-87.
Confidential
1980 81
Laos
Cambodia
North Korea
82
83
84
85
Mongolia
Vietnam
Cuba
86 87
320613 2.89
Other CLDCs collectively receive only about 40
percent of Soviet assistance, with Vietnam and Mon-
golia accounting for most of the total:
? The revised estimate of economic assistance to
North Korea shows that the above-world-market
price for oil Moscow charged P'yongyang in 1987
outweighed the small amount of economic aid it
provided, indicating that the overall relationship
worked to Moscow's favor.'
'.The inclusion of some military trade with North Korea in Soviet-
reported trade statistics makes our assistance estimate for that
country less reliable than our estimates for the other CLDCs
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? Increases in Soviet economic aid?both project as-
sistance and trade credits?to Vietnam outweighed
the decrease in price subsidies, making overall
economic assistance levels to Vietnam higher in
1987 than in 1984.
? Mongolia, Cambodia, and Laos all received less
assistance in ruble terms in 1987 than in the recent
past, although the declines were not dramatic
Despite Moscow's rhetoric about the excessive costs of
supporting client states and the fact that net assis-
tance has fallen, it has yet to cut actual resource
flows:
? Oil price subsidies now work to Moscow's favor, but
the actual quantities of oil either delivered to or sold
on behalf of the CLDCs remain roughly the same?
about 350,000 barrels per day, or 3 percent of
Soviet production.
? Although much of the windfall has been erased
since 1985, Moscow's willingness to accept goods in
exchange for oil, as well as to extend trade credits,
still presents the CLDCs with a more attractive
arrangement than turning to hard currency markets
for energy.
Reverse Blank 7
Finally, economic aid?both developmental and trade
credits?has increased nearly 20 percent in ruble
terms since 1984, although growth essentially stopped
in 1986.
Moscow's patience is growing thin, however, and it is
likely to look harder for ways to cut assistance costs.
With Soviet oil production costs skyrocketing, Mos-
cow is demanding that CLDCs make better use of the
oil currently delivered and develop alternative energy
sources. Indeed, much of the recent increase in direct
economic aid is accounted for by Soviet efforts to
ultimately limit the CLDCs' dependence on Soviet
oil?such as construction of the Cuban nuclear power
plant and development of Vietnam's offshore oilfields.
Moreover, Moscow is pressing CLDCs to restructure
their economics and to develop the capability to earn
additional hard currency. At a time when the Soviets
are confronted with serious domestic economic prob-
lems, CLDCs probably will find that they have
reached the bottom of Moscow's pockets.
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Appendix
Soviet Net Economic Assistance to the
Communist LDCs a
Million rubles
1980
1981
1982
1983
1984
1985
1986
1987
Total
3,403
4,588
5,030
5,223
5,759
5,800
4,318
4,297
Economic aid
1,492
2,252
2,173
2,776
2,617
2,808
3,224
3,106
Development aid
882
850
1,031
1,067
1,107
1,266
1,285
1,377
Other trade credits
493
1,265
1,005
1,564
1,352
1,382
1,799
1,595
Technical services
84
101
101
109
117
118
104
102
Grants
32
36
36
37
41
42
35
32
Price subsidies
1,911
2,337
2,857
2,447
3,142
2,992
1,094
1,191
Cuba
Total
2,048
2,988
3,457
3,630
4,097
3,825
2,601
2,549
Economic aid
530
914
694
1,209
963
799
1,123
934
Development aid
352
326
323
386
398
394
374
411
Other trade credits
139
552
335
781
521
362
708
478
Technical services
39
36
36
42
44
43
41
45
Price subsidies
1,518
2,074
2,763
2,421
3,134
3,026
1,478
1,615
Sugar
758
999
1,907
1,997
2,884
3,039
2,730
2,586
Oil
754
983
753
323
171
-115
-1,359
-1,038
Nickel
6
92
103
101
79
102
107
67
Vietnam
Total
607
806
725
770
846
966
933
997
Economic aid
377
647
688
759
846
983
1,113
1,215
Development aid
116
102
136
168
185
259
297
387
Other trade credits
183
455
462
499
559
620
728
749
Technical services
45
54
54
56
61
63
53
47
Grants
32
36
36
37
41
42
35
32
Oil subsidies
231
158
36
11
o
-17
-180
-218
Mongolia
Total
542
597
641
656
638
765
637
627
Economic aid
500
550
627
652
638
774
738
748
Development aid
358
362
480
463
462
500
496
504
Other trade credits
142
178
136
178
164
262
232
235
Technical services
0
11
11
11
12
13
11
9
Oil subsidies
42
47
14
4
0
-9
-101
-121
Footnote at end of table.
9
Confidential
Declassified in Part - Sanitized Copy Approved for Release 2014/02/25: CIA-RDP90T00048R000200020001-8
Declassified in Part - Sanitized Copy Approved for Release 2014/02/25: CIA-RDP90T00048R000200020001-8
uonnaenuai
Soviet Net Economic Assistance to the
Communist LDCs (continued)
Million Rubles
1980
1981
1982
1983
1984
1985
1986
1987
North Korea
Total
169
104
94
30
45
78
4
?21
Economic aid
49
47
51
19
37
86
87
39
Development aid
49
47
51
19
37
86
87
39
Oil subsidies
120
58
43
II
8
?8
?83
?60
Cambodia
Total
0
58
51
64
71
82
90
85
Economic aid
0
58
51
64
71
82
105
101
Development aid
0
0
19
9
10
9
15
18
Other trade' credits
0
58
32
55
61
73
90
83
Oil subsidies
0
NA
NA
NA
NA
NA
-15
?16
Laos
Total
37
35
62
74
63
84
52
60
Economic aid
37
35
62
74
63
84
57
69
Development aid
7
13
22
22
15
18
16
18
Other trade credits
30
22
40
52
48
66
41
51
Oil subsidies
NA
NA
NA
NA
NA
NA
-5
?9
Because of rounding, components may not add to the total shown.
Confidential 10
Declassified in Part - Sanitized Copy Approved for Release 2014/02/25: CIA-RDP90T00048R000200020001-8
25X1
Declassified in Part - Sanitized Copy Approved for Release 2014/02/25: CIA-RDP90T00048R000200020001-8
Confidential
Declassified in Part - Sanitized Copy Approved for Release 2014/02/25: CIA-RDP90T00048R000200020001-8