THE CIA'S GOOF IN ASSESSING THE SOVIETS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP95M00249R000801110013-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 6
• Document Creation Date: December 23, 2016
• Document Release Date: August 9, 2011
• Sequence Number: 13
• Publication Date: March 2, 1977
• Content Type: MEMO

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ECONOMICS
-.Thke MA's g o in assessing the 3ovie s
The agency seriously
miscalculated how defense
fits into Russia's economy
Through three decades of the cold var.
U. S. policy planners have repeatedly
faced crises in which it was vitally
important to gauge both the size of the
Soviet defense effort and the nature of
its military capabilities. Their security
blanket at such times was the reputation
of a group of Central Intelligence
Agency analysts-including hundreds of
economists=who were presumed to have
an unmatched degree of expertise an
how defense fits into the Soviet econ-
omy-Each of the armed services always
had-and still has-its own intelligence
a-tahlishment. But the CIA's Sovietolo-
gists steadily gained ground at the
expense of other intelligence agencies
mainly because only the CIA had the vast
store of data and sheer analytic man-
power needed to integrate jigsaw bits of
information into a coherent picture of
the war-making capabilities of the
Soviet economy.
For at least a decade, there have been
critics who argued that the CIA's model
of the Soviet economy was a hopelessly
complex superstructure that bore little
relation to reality-an example of secret
research gone wild. Yet for years the
sheer weight of the resources devoted to
the CIA's Soviet project allowed the
agency to carry the day.
But as Admiral Stansfield Turner-
President Carter's second nominee for
the sensitive position of CIA director-
approaches his confirmation hearings, a
pall has fallen over the agency's
presumed Soviet expertise. The CIA's
Soviet picture has now been found to be
incredibly distorted, to an extent far
beyond agency's admissions thus far.
The hearings. With the Carter Adminis-
tration trying to move beyond existing
nuclear arms treaties with the Soviet
Union, toward both nuclear and conven-
tional arms reduction, it now appears
that at least four congressional cnmmit-
tees sill soon examine the intelligence
communities' views on Soviet defense.
Some of the most disturbing points
raised will center on the CIA's economic
analysis.
By the agency's own admission, it has
seriously underestimated the level of
Soviet defense spending. During his
May, 1976. presentation to Congress.
y a ou
y
George Kush. the atfencv's director at previous years- hillinn rnihloa Rn1 h., L,.,~ 1 1975-the
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the time, acknowledged that the CIA's
current estimate of 50 billion to 55
billion rubles for Soviet defense outlays
in 1975 was "about twice" the agency's
earlier estimate. But throughout the
hearings, the joint subcommittee on
priorities, headed by Senator William
Proxmire (D-Wis.), accepted agency as-
surances that virtually the only error
had to do with the Soviet Union's effi-
ciency in producing military hardware,
and not with the quantity or quality of
that hardware.
What the CIA has not yet disclosed,
however, is that the agency's earlier esti-
mate of Soviet weapons spending was
'ar worse than its estimate of overall
Soviet defense spending (chart). The
current CIA figures for Soviet military
investment outlays are about 400% of
their previous level. During the agency's
congressional presentation in 1974-the
last one prior to the agency's massive
revision of the Soviet figures-William
E. Colby, then CIA director, told the
Proxmire subcommittee that "expendi-
tures devoted to [military] investment
[procurement of hardware and construc-
tion of facilities] have dropped from
about 40% of total defense expenditures
in 1960 to about 20% in 1972." But the
CIA's current revision says: "Since 1970,
investment outlays have taken about
40%" of total Soviet defense spending.
Thus, the agency has not only doubled
its total estimate of Soviet outlays
during the 1970s, it has doubled procure-
ment's share of that total.
The agency's explanations so far are
not adequate to account for the fourfold
increase in the estimated cost of Soviet
weaponry. This creates a strong pre,
sumption that the error was not limited
to the CIA's underestimate of ruble prices
in the Soviet defense sector. Quite possi-
bly, more fundamental errors are
involved, such as underestimating the
quantity or performance capabilities, or
both. of Soviet weapons systems. .
The Soviet pattern. The current CIA data
also suggest a pattern of Soviet behavior
that is strongly at odds with earlier
dews. Until the recent revision of Soviet
defense spending, CIA figures showed a
marked decline in the share of Soviet
gross national product devoted to miii-
tary purposes-to about 64,+ in the mid-
1970s from about 12% in the mid-1950s.
The CIA now says this military "burden"
has been flat or declining within the
l1%-to-13%0 . range between 1970 and
1975, although the agency has not had
time to produce consistent figures for
But critics suspect that the agency's
inability to reconstruct earlier Soviet
defense data reflects methodological
problems that continue to produce
underestimates. And some experts sug-
gest that the Soviet military burden has
actually continued on a steadily rising
course-to a 1975 GNP share of 147o to
15% from a 1960 level of So to 9%. This
would mean that the Soviets have been
plading an increasingly high priority on
military strength at the very time when
the superpowers were supposedly usher-
ing in a new period of detente.
The evidence. Little is known about the
reasons for the CIA's abrupt about-face
in its assessment of the Soviet defense
e,Tort, but BUSINESS WEEK'S investigation
suggests that two distinct adjustments
were involved. 7 ..
In late 1974 or early 1975 the CIA's
adamancy began to erode under the
weight of mounting evidence advanced
aggressively by outside critics and top
officials of competing intelligence agen-
New proof that Russia
boosted military spending
while talking detente
cies in the State Dept. and the Pentagon.
This evidence included cost data ob-
tained covertly for specific defense
items, including shipbuilding, that were
at variance with the CIA's figures:
unexpected sophistication of Soviet
weaponry captured by the Israelis dur-
ing the 1973 Mideast war; and state-
ments made to undisclosed official
Soviet bodies by Communist Party
Secretary General Leonid I. Brezhnev
and by Premier Alexei Kosygin.
At this point, a joint CIA-Defense
Intelligence Agency (DIA) task force was
convened to review all available infor-
mation, including some culled from the
intelligence services of other NATO coun-
tries. The resulting consensus appears to
have involved a massive upgrading of
the presumed quantity or quality of
Soviet weaponry, since the procurement
share of total estimated military outlays
was doubled back to the 407o level of
1960. At the same?time, figures for other
outlays were trimmed, so the total
defense figure remained at about 6-M of
t:NP, with the agency conceding that if a
variety of estimation factors had all
tended toward the low side, the true
figure could range as high as 8"
.
The breakthrough. So as matters rested
in early 1975. t'ie CIA's assessment for
total Soviet defense outla
s was bt 27
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opening of the CIA's annual presentation
to Congress--the agency's estimates of
the percent of Soviet CNP devoted to the
military were in total disarray, and the
agency was excused from discussing
them. What had happened was that an
analyst from the CIA and one from the
DiA had wangled permission to "go into
the field" in a long-shot attempt to get
classified Soviet assessments of their
own defense costs. Ghat they came up
with was irrefutable evidence that the
CIA's overall figure for 1970 had been
only about half as high as it should have
been.
Even then, according to Lieutenant
General Daniel 0. Graham, a former DIA
director, it was only through the inter-
cession of former Defense Secretary
James R Schlesinger that the CIA's SCAM
1
Even before latest revisions,
their dollar estimates showed that the Soviet
military effort was bigger and growing faster than that of the U.S.
(Soviet Costing Analytic Model) was,
iaally called to task. "They all wanted
to squelch the evidence," he says, "and
impugn the credibility of very good
theirown defense costs to be." But
Schlesinger, an economist and former
Kano corp. specianst on rnauonai aecu-
`"
insisted on the review procedure -
Tlit
1
y,
that ended by certifying the authority of But now, the CIA has drastically increased its estimate
the covertly obtained documentation. "If
it wasn't for that," Graham says, "we'd
still be stuck with the same ridiculous
figures."
Once certified as trustworthy, the new
--evidence, which amounted to an unprece-
dented intelligence breakthrough, struck
the CIA like a thunderbolt. "I doubt we
could ever have caught this by economic
analysis," one analyst says. But another
agency official reacts defensively: "You I.
don't make a change every time you get
a small piece of evidence. If you change
every year, people are going to start
criticizing. That's a bureaucratic norm."
The. question remains, however,
whether the agency's analysts have any
deeper understanding of Soviet develop-
ments than they did prior to the revi-
sion. BUSINESS W'EEK'S findings do not
preclude the possibility that agency esti-
mates were, in essence, just doubled
across the board to achieve agreement
with the overall defense figure obtained
by the two analysts who went covert. In
other words, the agency may have no
firmer grasp on the proportions of
Soviet defense costs than it did in 1974,
when it thought procurement accounted
for only 20% of the total. And it may
have no sounder conception of the
dynamics of Russia's military burden
than it did two years ago, when it said it
accounted for only VIc of Soviet GNP.
'The eivifian sector. This kind of uncer- r
tainty is troubling not only to experts in
strategic studies but also to those whose t
interests span the entire Soviet economy.
The whole point of the military "bur-
Alan" wo1n..1~Nn.. is lknf w1.kfnvar nnna
'After revision
Billions of rubles
And more than 60% of the total 1975 error arose from undershooting
the estimate for weapons procurement and construction
?, Before revision After revision
Billions of Billions of Percent
rubles rubles Increase
Research, development,
testing, and evaluation ....... 92........ 10.0........ 8.7%
Troop pay, food, and ' .
personal equipment ......... 8.5........10.5........ 23.5%
Replacement, maintenance.
and operating costs ......... 4.3........11.0........155.8%
Weapons procurement and
j
construc:ion of military
installations
Total ...................... 27.5 ........ $2.5 ........ 90.9%
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that ;would otherwise be available for production of individual products, using may be that neither program is larger
? uses such as consumption or civilian these to create indices of real GNP by from both points of view. But the
investment. With defense investment up, industry. . reasons that make such confusion possi-
?it is probable that civilian investment is But the Soviet national accounts are Me are not military, they are economic.
down, so GNI' itself appears to be in for based on a Marxian concept, net mate- The threat assessment and the burden
.trimming in both absolute level and riat product, which is narrower than the assessment will precisely coincide only
growth rate, according to State Dept. Keynesian framework of GNP familiar in when the two nations being compared
economist Herbert Block. He suspects the West. Earnings of military person- have identical GNPs and identical relative
that this adjustment will trim annual nel and those in many of the personal price structures. In all other cases, each
CNP growth by 0.5% to 17r. service industries do not enter into the approach provides its own bleTid of mili-
In addition, the 25 billion rubles of Russian concept. To fill the gaps, the OER Lary and economic considerations.
additional defense spending that the CIA must obtain data on ruble outlays for The "threat assessment" is simply an
has discovered is equal to nearly 25% of such sectors and then deflate them with estimate of how much it would cost the
previous estimates for total capital its own price indexes. U_ S. to duplicate every aspect of the
expenditures in the Soviet economy. So But the OER's acts of approximation Soviet military establishment, while
pale beside the feats of statistical daring paying all personnel U. S. wage rates
A covert operation to get performed by the agency's Office of and itaking all purchases at U. S. prices.
classified Soviet documents Strategic Research, the more highly The question it answers is thus rather
left the CIA people dazed classified shop that attempts to recon- narrow: Is the U. S. defense effort as
struct the ledgers of the Defense Minis- large as it would be if it simply matched
if, as some suspect, a large part of,the try. every part of the Soviet effort?
overlooked military expenditures were The State Dept.'s Block has described The alternative "burden assessment"
mistakenly being counted as investment, research on Soviet defense as "an exer- attempts to cost the actual Soviet
a great deal of theorizing about the cise in meta-Intelligence. Analysts en- defense program at the prices and in the
excessive capital intensity and sluggish gage in the exegesis of obscure texts, currency in which it is actually paid
productivity of the Soviet Union's cen- guess at unexplained residues, hunt after for-rubles. This figure can be compared
trally planned economy may also be in . ? directly with the Soviet GNU. The ratio of
need of amendment. On this point, Block ll?""T?~Iffl V *`,1! ruble military expenditure to ruble GNP,
says that the revision "may mean that : - # since it represents the share of total
productive. This raises so many ques- = use, is called the military "burden."
tions on productivity that the knot can't
C.` What the CIA has suddenly decided is
be untangled quickly. Says Abram that the Soviet burden has actually been
Bergson of Harvard University, prob- in the vicinity of 11'73, to 13'7c through at
ably the ranking U. S. ex ert on the
Y P least the 1970-75 period. This is more
Soviet economy: "A revision of this sort than double the current U. S. figure and
r
is very disconcerting. It raises the ques- that of every nation in Western Europe.
lion of whether this will be the last T- T- ' 11 During the entire postwar period, the
71
revision, or will there be more. I think Vi
U. S. burden has reached this range only
preliminary is a term very much in order once, standing at about 13% during two
in this particular area." y! j years of the Korean War.
Questions over the revision have V~"'?'~'""`~
The ratios. The CIA begins its estimation
forced some economists to doubt just of Russia's military burden by attempt-
how good the CIA's economics can ever ing to price each of the items in the
be. Says Bergson: "The basic fact you `r' ? Soviet arsenal. Over the years of com il-
have to keep in mind is that the calcula- p
} lung threat assessments, it has built up a
tions must proceed on very meager stock of dollar value estimates for the
material. Inevitably, there's a very large hardware the Soviets are known to have.
t
?~
?
?
.,
'
margin of error." LA
?' r~?Isitr~ But these dollar estimates must be
The distortions. Since a 1967 reorganize- Lee: He charges that even the revised translated into rubles for use in the
tion, the CIA's Soviet work has been estimates of Soviet strength are low. burden assessment. For this purpose, the
apportioned between two distinct offices. OSR maintains a long list of ruble-dollar
And in the CIA's Office of Economic analogues, and indulge in assumptions." conversion ratios, each of which is
Research, where about 40% of the staff And in the last analysis, all that considered appropriate to defense items
of hundreds concentrates on the econo- systematic intelligence assessments can of various specific types. Owing to the
mies of *the Communist countries, most attempt to do is shed a sort of oblique scarcity of weapons data, though, most
experts believe that the estimates pro- light on the fundamental military ques- of these ratios between the ruble and
duced for broad economic aggregates tion, which is "combat effectiveness." dollar prices of comparable industrial
have been kept within a tolerable margin There will probably never be a way of products are largely based on the prices
for error. Since data bearing on GNP and deciding whether one military estab- of technologically related civilian goods.
similar measures are not classified by lishment is really "better" than another to some cases, moreover, there is not a
the Russians, the OER relies heavily on -without resorting to the traditional close fit between Soviet and U. S. civilian
published Soviet sources. But even here, test-war. items, so the dollar cost used to calculate
data are incomplete and subject to The assessments. The CIA employs two the conversion ratio will itself be only an
considerable distortion because of alleg- basic approaches to the comparative estimate of what an article of given
edly faulty Soviet collection procedures measurement of competitive war ma- spgcifications would cost if it were
and the existence of incentives encour- chines: threat assessment and burden produced in the U. S.
aging misrepresentation by plant assessment. Usually; these two ap- Finally. the OSR'S last full-scale compi-
managers and other bureaucrats. So proaches will disagree on the proportion lation of Soviet civilian goods prices was
wherever possible, the OF.R works from by which one nation's defense program based on the price reform of 1955,
. raw data on the physical volume`. of is "larger*: than its competitor's: and it meaning that today's ruble-dollar con-
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version ratios incorporate the errors
accumulated in the course'of 20 years of
updates reflecting estimated Soviet ci-
vilian price trends. The OSR is now
completing an overhaul based on price
manuals issued by the Russians follow-
ing the price reform of 19ti7. Books
covering the more recent reform of 1975
are not yet, and may never be, available.
Obviously, the ruble-dollar conversion
process does expose the OSR defense
spending estimates to a considerable
potential for error.
In fact, the CIA would undoubtedly like
to believe that every bit of its 2S0%-or-
more underestimate of Soviet procure-
ment and construction outlays was due
to the use of ruble-dollar conversion
ratios that were much too low, and that
all of the errors in these ratios were due
to an exaggerated sense of the Soviet
defense production sector's efficiency
relative to Soviet civilian industry. This
would mean that its civilian sector
pricing was basically sound, and that
only the burden estimate would be
affected. Soviet weaponry was in no
Higher defense spending
cut es44mates of Soviet
GNP growth by 0.5% to 1%
sense underestimated, according to this
view, but only the resources the Soviets
had to use to produce these weapons.
The implication. Experts do agree that
the CIA's ruble-dollar errors were ser-
ious. But the question remains as to just
how much of the CIA's revision, particu-
larly in weapons procurement, can be
accounted for by the agency's retreat on
this particular issue. As exemplified by
the testimony of CIA Deputy Director for
Intelligence Edward Proctor to last
year's Proxmire subcommittee, the en-
tire CIA revision process amounts to this.
"What we have come to is a realization
that the Soviet military production
complex is about half as efficient as we
thought, and much closer to the civilian
efficiency." While embarrassing enough,
this disclosure can only account for a
100% increase in estimated procurement
costs. The problem with this approach,
therefore, is that the agency has actually
raised the procurement estimate by
about 300%. To generate that much
error, the CIA, would have to discover
that Soviet defense industry is only one
quarter as efficient as had been thought,
But this would have the rather novel
implication that it is actually the civilian
sector that is twice as efficient as
defense production. No one, including
the CIA, would go that far.
Some CIA spokesmen press the further
explanation that since the agency's
overly generous appraisals of Soviet et-
eiency were concentrated in higher tech-
nology weapons, the CIA'S pricing error
au1n11-A nvnr ftmn_II,A tvnirel tri!,, n
became more complex and, they say,
Russian industry fell increasingly far
behind U. S. efficiency while the whole
spectrum of technologies advanced.
But the CIA's 1971 congressional ex-
hibits actually imply that the Russians
adapted slightly more efficiently than
the U. S. to 1970-75 chanires in weapons
complexity. Steven Rusetielde. professor
of Soviet economics at the University of
North Carolina, does think the ct.t's
error was particularly bad in high-
tech-nology areas but still believes much of
the error is unexplained by technolo y.
As for the idea of a growing U. S. effi-
ciency advantage over the Soviet Union,
he says, "There is no evidence of that
.occurring."
As a result of the apparent inadequacy
in the CIA's attempt to account for its
error, some experts feel that other
mistakes have contributed to underesti-
mating the Soviet procurement outlays.
There are three possibilities:
The CIA correctly estimates quantities
and qualities of Soviet weapons, hut
underestimates what their production
costs would be for U. S. industry. If the
CIA now admitted this kind of error,'
Defense Dept. arguments for higher
budgets might become more strident,
since a higher level of U. S. spending
would appear to be called for from the
point of view of matching the Soviet
effort. But no change in the estimate of
the quality, quantity, or combat effec-
tiveness of Soviet arms would follow.
"This is undoubtedly a major part of the
CIA's error," says William T. Lee, an
independent consultant on Soviet affairs
and 11-year veteran of the agency.
a The CIA correctly estimates the quan-
tities of the various Soviet weapons, but
does not have complete information on
their quality and complexity, and there-
fore underestimates their costs. For
example, it was not until the Israelis
captured large numbers of armored
vehicles during the 1973 war that the CIA
discovered that such Soviet vehicles have
for several years been equipped with
costly ventilating and other devices to
foil nuclear, chemical, and biological
warfare contamination. Oversights of
this kind affect both ruble and dollar
estimates of Soviet defense spending.
More important, they involve the disclo-
sure of greater Soviet military capabili-
ties than were previously suspected.
a The most fundamental possibility that
would have contributed to the CIA's
sudden discovery that the Soviet Union
has been spending four times as much on
armaments as had been thought is that
they simply have been producing more of
those armaments than the agency real-
izcW. Like incomplete quality informa-
tion, this kind of miss would affect all
three dimensions of the Soviet military
establishment: ruble burden, 611ar
thrnnf ?fn,l .....,,1,.,- Ir.,,.tivenevs For
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the CIA to disprove this possibility
conclusively by documenting the extent
of its efficiency-type errors would
require years of exhaustive research-or
another intelligence breakthrough of
unprecedented proportions.
Most Soviet experts do not place great
weight on the possibility that the Soviet
Union's arsenal is bigger than the CIA
believes it to be. Still, economist Rose-
fielde acknowledges a lingering uncer-
tainty. "I don't know why they're so sure
they're right on the number of weap-
on%," he says, "but everyone says so."
But Rosefielde, like others, places
'greater emphasis on the likelihood that
quality underestimates may have loomed
large in the CIA's goof. One high govern-
ment official outside the CIA says that
the agency's real mistake was in think-
131g question: Does Russia
have an even better arsenal
than the CIA admits?
Ing "the Russians were primitive, under-
developed, not very sophisticated."
While the agency says that its revision
amounts to no more than a downgrading
of Soviet defense sector efficiency, the
same official says flatly that "by far the
greatest majority" of the revision
reflects an upgrading of the presumed
complexity and performance capabilities
of the weapons being turned out by the
Soviet defense sector. In other words,
costs may be higher in part because
weapons quality is higher and not
because efficiency is lower.
The Information gap. A similar view was
advanced last June when the CIA
unveiled its revision and its preferred
explanation. Lieutenant General Samuel
V. Wilson, director of the DlA, refused at
two different points to second the CIA's
stress on new-found inefficiencies in the
Soviet defense industry. "I am not sure
enough to buy the additional adjectives,
Yar less efficient' than we had earlier
believed," he said during one exchange.
"I have a feeling that they (the CIA) are
ascribing more significance to it than I
would." Clearly, Wilson does not have in
mind 300% worth of inefficiency.
. So the fact is that the revision, rather
than reflecting a more detailed under-
standing, may just paper over a
profound information gap. At this point,
then, the CIA's revision has a dual signif-
icance: U. S. policymakers now know
that the Soviet Union has devoted a
greater effort to armaments than was
previously thought and that it is a lot
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harder to estimate this effort accurately ? ? _ ..
than was previously thought. This - s: .'. .:.
Soviet Union ma} have more and better t'" "'`" '~?"`"`'~""``""'" "'"`'?``
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