THE SOVIET ECONOMY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T00608R000600010037-6
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 14
• Document Creation Date: December 12, 2016
• Document Release Date: April 13, 1999
• Sequence Number: 37
• Publication Date: March 7, 1975
• Content Type: MF

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 MEMORANDUM FOR: Dr. Milton KK:ovner
Appro6 to el~~ Dire CIA-R
Affairs
Department of State
Here is the updated version of r..-e
briefing on the Soviet economy that
you requested.
Deputy Chief
USSR/Eastern Europe Division
ICIA/OER
IoAUGII54 IVI WHICHCMAYr13EMUSED.oI
7 Mar 75
(DATE-Y-
Distribution:
(S?-6809)
Original &
1 -
Addressee
1 -
D/OER
vi --
St/P/C
1 -
D/U
U/SR
F5X1A9a
OER/D/U/ :vm/5107 (7 Mar 75)
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? The Soviet Economy
General
agriculture.
,-(rjc'
-- Soviet economic growth slowed markedly in 1974
because of a 3 percent dip in agricultural output. GNP
increased by 3.2 percent compared with a 7.5 percent growth
in 1973. Nevertheless, Soviet growth compared favorably
with that in the recession-hit West.
r
-- The Soviets are clearly shifting to a more
balanced approach to economic growth. Consumption has been
placed on a more equal footing with investment among competing
uses for output, and a larger share of investment resources
is being devoted to consumer related sectors such as
Soviet trade with the West increased by almost
48 percent last year, compared with a 60 percent increase in
1973. In contrast to the general increase, agricultural
imports were cut back. Moscow's ability to import technol-
ogy and equipment has been strengthened by a major turnabout
in its hard currency position; price increases for Soviet
oil and other raw materials have far outweighed price
increases for imports.
Agriculture
-- Unfavorable weather conditions last year resulted
in a Soviet grain crop of 195.6 million tons, short of
the plan target of 206 million tons and much less than
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1973's record harvest of 222.5 million tons, Nevertheless,
it was the second largest crop in Soviet history-1
proved to be the worst managed and least efficient organizational
form in the country.
-- Not only is the agricultural sector hard
pressed to increase the supply of food in pace with the
needs of a modernizing and moderately growing population,
Grain production was 5-10 million tons short
of domestic requirements and export commitments. Soviet
leaders had the option of reducing reserves built up after
the 1973 harvest or importing foreign grain. They apparently
chose to leave the stocks largely untouched and contracted
to import almost 7 million tons of grain for delivery in
Fiscal Year 1975.
The agricultural sector is by far the weakest and
least productive sector of the Soviet economy.
--- The system of collective and state farms has
but it ties down a very large percentage of the labor force.
Forty million people, about 27 percent of its labor
force, is engaged in meeting the nation's food requirements.
In the US only 5 percent of the labor force is on the
farm.
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-- Productivity of labor is much higher in the US,
partly because the US farmer uses mineral fertilizers much
more intensively, and the ratio of farm equipment to
cultivated acreage is far higher in the US. For example,
one farm laborer in the USSR feeds seven people; in the
US, one farm laborer feeds 48.
-- in recognition of the serious problems in
Soviet agriculture, we expect continued high priority
accorded to this sector, with increased deliveries of
equipment and fertilizer, extensive land reclamation programs,
and the development of the recently announced Brezhnev plan
to improve agricultural land in the northern European
areas, the so-called non-black-sail zone. The entire
program is clearly designed to reduce the large fluctuations
in farm output -- particularly grain --? which have plagued
Soviet agriculture.
Industry
Industrial output grew by an estimated 6.8 percent in
1974 -- the largest annual increase since 1970. Adequate
supplies of raw materials and energy were major factors
in this growth as well as larger than planned additions of
new workers and the hi6hest rise in labor productivity in
the five-year plan pericd. The leading industrial sectors
-- energy, producer durables, chemicals and processed foods --
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reflect the leadership's priority for technological growth
acid expansion of agricultural output.
From a longer-run perspective Soviet industry faces
a diminishing supply of those inputs of capital and labor
which in the past have been the main contributors to high
growth rates, slow progress in the application of modern
technology, a low level of productivity, and concern that
the technological gap vis a vis the West may in fact be
widening.
-- If the growth record of the-Soviet Union is
compa?-ed to the principal market economies, a striking
feature is the particular dependence of the USSR on rapid
additions to its active labor force and to its productive
plant and equipment, as distinguished from its ability to
use its basic productive resources efficiently. In other
words, past high rates of growth could be sustained mainly
by stepping up inputs of labor and.! capital.
-- However, in recent yc.ars, there has been a
marked slowdown in the pace at. which new modern plant and
equipment were introduced. Much of the disappointing
performance, in turn, stem- from infer: or an d outdated
technology.
The need therefore is for a qualitative
improvement, a more efficient use of the labor and capital
available. With a volume of industrial output almost two
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thirds that of the US, industrial labor productivity in
the USSR is roughly 40 percent that in the US and this
comparison, moreover, does not take into account the sub-
stantially poorer quality of most Soviet products.
-- The burden of maintaining a military establish-
ment roughly equal to that of the US falls heavily on
Soviet industry. The defense program diverts industrial
output from investment programs, preempts the services
of the best managerial, scientific and engineering man-
power, and ciier.ts Soviet R and D programs heavily toward
military. objectives.
-- To help boost productivity, the regime, while
continuing to tinker with organizational and managerial
reforms, is relying increasingly on foreign contacts,
particularly with the West. It believes that the shortcut
to technological progress and accelerated growth in produc-
tivity lies in improving western machinery and technology.
Consumer Welfare
It has been the Soviet consumer who has paid the
price for the high priority accorded by Soviet leaders to
defense needs and providing for rapid industrial growth.
His per capita consumption is only one-third that of the
average US citizen.
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-- Material co;iditions have been improving and
now that the demand for many basic consumer items has been
satisfied, growing emphasis is being,placed on catering to
consumer demand for improved quality and variety.
The area in which unsatisfied demand is the
greatest -- housing -- has been among the slowest to
improve.
although the USSR has built urban housing
at a very rapid rate during the last decade, hous:.ng
space per capita is only about one-third that in the
US and half that in West Germany. Even if the five
year plan housing goal is reached, it would still
leave per capita housing space about 10 percent short
of the minimum standards set for health and decency
by Soviet officials.
-- The Soviet Government has shown increasing
sensitivity to the needs of the consumer. ;Ihile it is
still premature to speak of "consumer sovereignty" in the
USSR, recent improvements in consumer welfare have whetted
the appetite for further gains. And the visible satisfaction
ofrising expectations elsewhere will be noted increasingly
in the USSR, stimulating pressures from technocrats for
advanced productivity methods and demands from consumers
for more and better goods and services.
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-- In this connection, the Soviets are looking
increasingly to the Western countries for modern equipment
and technology to produce consumer goods.
US-Soviet Trade
US-Soviet trade has developed rapidly since the trade
agreement and the lend lease accord were concluded in 1972.
Bilateral trade totalled a record $1.4 billion in 1973 and
almost $1 billion in 1974, the drop attributable to smaller
grain imports. Moscow's renunciation of the 1972 trade
agreement should not substantially affect the volume of US-
Soviet trade in 1975. US exports are expected to exceed
the 1974 level becuase of deliveries of capital goods ordered
by the USSR in 1972-73 when Eximbank credits were available.
In the long-term, US-Soviet economic relations will depend
on overall progress in detente and on the extent to which
recent US legislative restrictions are modified.
In assessing the potential for US-Soviet trade, several
factors must be borne in mind.
(1) -- Even at the record level of 1973, US-Soviet
trade accounted for only 3.3 percent of all Soviet foreign
trade and imports from the US represented less than two-.
tenths of one percent of the Soviet GNP. Conversely, US-
Soviet trade in 1973 amounted to 1.0 percent ^f our total
trade and less than one-tenth of one percent of our GNP.
(2) -- Although the historic doctrine of autarky has
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found a dwindling number of adherents in the USSR, Soviet
leaders may not yet have come to the point of accepting
international economic cooperation with the US or the West
as an unqualified good, either on economic or political
5rounds.
(3) -- The Soviet trade profile with the US and the
West in general -- reflecting a. pattern of machinery and
equipment imports and raw materials exports -- more nearly
resembles that of a less developed country than an economy
second in size only to that of the US. And the Soviet
export pattern does not yet show any indication of the
diversity of exports which is a prerequisite for any sub-
stantial expansion of trade with the West:.
(4) -- Soviet trade with Eastern Europe has accounted
for about half of total Soviet foreign trade and the economics
-- and politics -- of this trade pattern is not lik&ly to
change in the short run.
(5) -- While it can be argued that the Soviets stand
to gain technologically from expanded commercial relations
with us than the quantitative data on trade volume would
suggest, this too should not be over-emphasized. Imports
of plant and equipment from the US, even uiider the most
optimistic assumptions, will constitute only a fraction of
the total value of equipment invested in Soviet industry
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and these will be operated in the Soviet institutional
milieu with all its endemic inhibitions to the rapid
diffusion and utilization of even domestically generated
technology. Perhaps the most that can be said is that US
technology will raise technological levels in certain key
sectors of the Soviet economy, but the barriers to rapid
assimilation will ensure that the overall diffusion of
foreign technology in the USSR will be slow and uneven.
-- Finally, although the current Soviet BOP
position is better than it has been in decades -- thanks to
augmented hard currency earnings from higher prices for
its oil and gold exports -- much of the projected growth in
trade with the West will be credit financed. Soviet hard-
currency indebtedness grew to about $4.2 billion last year
and debt service payments of about $1.1 billion represented
about 15 percent of its hard currency exports. Credits have
to be repaid and the level of Soviet indebtedness will
exert a constraint on Soviet import capabilities.
-- In sum, I think the Secretary was perfectly
correct when he told the Senate Foreign Relations Committee
that while economic relations with the USSR cannot be
separated from the political context, a sense of proportion
must be maintained about the leverage our economic relations
give us with the USSR.
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Trade with the Soviet Military
Imports of Western machinery and equipment are
only a small share of total Soviet investment in plant
and equipment and therefore will not provide a significant
growth dividend.
Furthermore, to fill military requirements from
resources freed from civilian industry would be a reversal
of traditional resource allocation policy. Generons
allocations have been made to military porgrams regardless
of shortages elsewhere in the economy.
-- The problem is that practically all sophisticated
technology - whether in the area of automotive technology,
electronics, electronic instruments, metallurgy or in other
areas - have some potential application in military production.
-- Given our export controls, however, the exports
of even these goods do not mean that military refinements
to these technologies would be transferred to the USSR
along with the basic civilian technology.
Oil and Natural Gas
-- The USSR is a net exporter of oil.
-- The USSR is less affected by the energy
crisis than any of the other industrialized nations,
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-- The Eastern European countries overall get
about 75-80 percent of their imported oil from the USSR.
They pay less than the world market price even though the
Soviets recently more than doubled the price.
-- After supplying EE, the USSR has left about
nine percent of its production for Western Europe and Japan.
This oil is sold at world market prices.
-- The USSR faces problems in increasing oil pro-
duction. Present production is at the rate of 600,000
barrels a day. Up to 1980, Soviet oil production is expected
to increase from the present level of nine million barrels
a day to about 11.7 million barrels a day.
-- Soviet domestic consumption is rising at the
rate of about 6%-7% a year but is expected to taper off
to about 15% a year during 1976-80.
-- In setting future oil export policy, the USSR
must draw a balance between main.,aining its political
influence in Eastern Europe and earning more foreign exchange
from sales in Western Europe.
Natural Gas
-- The USSR is looking to natural gas to take
up the slack as oil production tapers off. They are
concentrating on gas development. A contract with West
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Germany provides for delivery of 900,000 tors of pipe.
This contract would give the Soviets an additional 70
billion cubic feet of gas a year for.22 years.
Even if the North Star project falls through,
the USSR will build a pipeline on its own from that area.
-Soviet supply of natural gas to western Europe
now is proportionately small, but by 1.980 it could amount
to 10 percent of total supply in West Germany and Italy.