POSSIBLE SOVIET RESPONSES TO ALTERNATIVE US POLICIES ON GRAIN SALES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84B00049R001700200007-0
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 8
• Document Creation Date: December 19, 2016
• Document Release Date: August 25, 2006
• Sequence Number: 7
• Publication Date: June 21, 1982
• Content Type: MEMO

-Approved Foe-Release-2006/08/31 : CIA-RDP84B00049R001700200007-0
k.,.'..ONF I DENT I AL
MEMORANDU : Director of Central Intelligence
Deputy Director of Central Intelligence
VIA: Deputy Director for Intelligence
g Director o Soviet Analysis
SUBJECT: Possible Soviet Responses to Alternative US
Policies on Grain Sales
1. Action. None - for your information only.
2. Background. In view of recent US policy
discussions about sales of grain to the USSR, SOVA and OGI
analysts have taken a new look at Soviet import needs. This
memorandum examines (a) the possible effects on the Soviet
hard currency position and on Soviet policy of alternative
US policies regarding the volume and terms of grain sales to
the USSR and (b) the limits to the levers a that such
options might provide the United States. II
Attachment:
As stated
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SOYA/SE/T:JMC:jvd'
SOVA/SE/D
SOYA/PS
SOYA/ES
SOVA/CS /D
SOYA/DI/D
SOYA/EA/D
SOYA/PA/D
SOYA/TF/D
SOYA/SF/D
SOYA/SE/T
OCO/IMD/CS
Addressee
D/SOVA
DD/SOVA
DC/PES
DDI Action Staff
ED/UCI
DDO/SAG
NIO/Economics
NIO/USSR-EE
NIO-at-Large
SA/IA/DCI
(9 July 82)
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Possible Soviet Responses
to Alternative US Policies on Grain Sales
Introduction
1. On 23 May, Under Secretary of Agriculture Lodwick,
speaking at the conclusion of two days of talks in Paris with
Soviet trade officials, indicated that the US was willing to sell
Moscow more US grain than the 23 million tons already permitted
during the final year of the Long Term Agreement. He did not
state whether any restrictions would be placed on the terms of
grain sales. Control over the terms of grain sales to the USSR,
however, remains a possible induceme operative Soviet
behavior in the foreign policy arena. q
Soviet Grain Requirements
2. In marketing year 1982 (July 1981-June 1982) the Soviet
Union will import about 45 million tons pf grain. Because Moscow
needs to replenish stocks drawn down over the past three years,
we expect Soviet purchases to continue high level--perhaps
40 million tons in marketing year 1983
3. Moscow will not be able to solve its grain problem on
its own in the next several years. The new Soviet food program,
announced by Brezhnev at a Central Committee Plenum on 24 May,
calls for average annual grain production to reach 238-243
million tons in 1981-85 and 250-255 million tons in 1986-90.
With a grain crop of 158 million tons in 1981, production in
1982-85 would have to average about 260 million tons to reach
plan--23 million tons above the record crop of 237 million tons
in 1978.
4. A simple projection of grain output during the 11th FYP
--based on the 1960-80 trend--would indicate average production
of 226 million tons in 1981-85. But this projection is probably
too high unless the Soviets experience a period of above average
weather. Because the Soviets experienced unusually favorable
climatic conditions from the mid-1960s to the mid-1970s, a
projection based on 1960-80 trend is biased upward. With average
weather--and assuming no major technological breakthroughs--
annual production of 212 million tons in 1981-85 would be a more
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reasonable prospect. An average crop of this size would fall
more than 30 million tons below the total needed each year to
sustain Soviet meat and livestock programs and build up
inventories. Fluctuations in the year-to-year grain crop would,
of co result in higher or lower demand in any particular
year.
Sources of Grain
'5. The Soviet Union can satisfy most of its import
requirements from non-US sources. Global grain production has
been growing at a faster rate than consumption during the last
two crop years. This buyers' market is likely to continue.
Increased consumption awaits an economic recovery in the West,
and barring major weather setbacks in the next few years, the
availability of grain from non-US sources likely will increase.
Nonetheless, the United States will continue to be the dominant
force in the world grain trade. It still accounts for 60 percent
of the exports rse grain and roughly one-half of the wheat
that is traded.
6. The USSR currently has arranged for a minimum of 10
million tons of grain purchases per year under Long Term
Agreements with Canada, Argentina, Brazil, Thailand, and Eastern
Europe. Moscow can probably find an additional 20 million tons
of grain without turning to the United States. After total
purchases exceed roughly 30 million tons per year--or if the
Soviets- need more corn than Argenti n deliver--they would
S i
Possible U Opt ons
7. Although Moscow might not be initially disposed to buy
any more than absolutely necessary from the United States, we can
influence the terms under which all grain is purchased by the
USSR. Because of its unfavorable hard currency position, the
Soviet Union has been searching for credit of up to two years
duration to finance grain purchases. Bankers are reluctant to
extend even one-year financing in the current unsettled climate
regarding lending to Eastern Europe and the USSR. In practice,
only a few small loans have been given for more than six months
duration.
8. The United States, by offering to extend three-year
credits under liberal terms, could offer the USSR substantial
help in easing the financial burden of a large grain import
bill. Alternatively, a restrictive US policy that discouraged
foreign governments from offering guarantees or concessionary
terms would be especially costly to the Soviets. A third,
middle-ground option might give implicit support to a return to
have to turn to the United States.
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business as usual, with the Soviets receiving commercial credits
at market rates but with longer maturities than are now being
offered.
9. Under the first, most liberal option the United States
could offer credits to the Soviet Union for grain purchases at
highly favorable terms--three-year maturities and an interest
rate of 11 percent. This rate represents the proposed OECD
consensus rate for the USSR and is currently about 3-6 points
below market. Sales under these conditions would allow the USSR
to substantially stretch out hard currency outlays. In order to
implement such an arrangement, the US government would probably
have to provide bankers with some element of guarantee and
interest rate subsidies. With such a US policy in place the
other grain supplying nations would probably quickly offer
similar arrangements to the USSR to maintain their respective
share of the Soviet market.
10. At the other extreme, the United States could even more
actively than at present discourage foreign governments from
offering any form of credits through offical channels. If the US
could convince other governments not to underwrite Soviet grain
purchases, Moscow would have to rely solely on commercial
financial institutions for grain credits. In these circumstances
bankers, who take their cue from government policy, would be
reluctant to extend such credits and would demand high interest
rates--at least some percentage points over the London Inter-Bank
Offered Rate (LIBOR) which is currently around 15 percent.
Bankers would also not be likely to offer maturities much in
excess of six-months. As a result, the costs to the Soviets of
their grain purchases would be increased, and the benefits acrued
from savings in hard currency would be short-lived.
11. The third option is basically one in which the market
determines the terms, with US policy neither actively supporting
nor discouraging grain financing activities. With such a policy-
-which also might be viewed by the financial community as an
effort by the US to ease East-West tensions--bankers might be
more willing to extend credits to the USSR. The Soviets would
probably be able to obtain interest rates close to LIBOR and one-
year maturities, longer than they are now receiving. Official
guarantees could be forthcoming from some countries in support of
their grain trade, but there would be little pressure to
subsidize such credits.
12. The effects of the possible options vary widely. The
savings, to the USSR if the credit terms were liberalized could be
substantial. As shown in Table 1, Moscow might save almost $4
billion in hard currency during 1982-84 if it were able to obtain
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USSR: Costs of Financing Grain Purchases Under
Alternative Credit Terms
(Million IS $
)
1982
1983
1984
Total
1982-1984
Grain Purchases
Total value
Porti
fi
l
6,300
6,300
6,300
18
900
on
nanced
5,355
5,355
5,355
,
16,065
Option One2 (Liberal credit terms)
Total debt service
R
863
3,040
5,021
8,924
epayments of principle
I
t
446
2 230
X
4,014
6
690
n
erest
Total o
tl
f
3
417
810
1,007
,
2 234
u
ays
or grain
1,808
3,985
5,966
11 759
Option TFw4 (Restrictive credit terms)
Total debt service
R
3,134
5,811
5,811
14
756
epayment
I
t
2,678
5,355
5,355
,
13,388
n
erest
T
t
l
tl
f
2
456
456
456
1
368
o
a
ou
ays
or grain
4,079
69,756,
6,756
,
17,591
Option Three5 (Market determined credit terms)
Total debt service
603
6,159
6
159
12
921
Repayment
0
5,355
,
5,355
,
10
710
Interest
T
2
603
804
804
,
2
211
otal outlays for grain
1,548
7,104
7,104
,
15,756
Assumes that financing covers 85 percent of purchases (assumed to continue at the
1981 level of 41 million metric tons at $154 per ton).
Assumes three-year credit terms and an interest rate of 11 percent, which is the
proposed OECD consensus rate for the USSR. Credits are drawn on 1 January and 1
June, interest is paid at the end of each 6-fmnth period on the outstanding
balance at the beginning of the period, and repayments are made in six equal
installments, with the first payment falling due at six months after a loan is
made.
Grain purchases paid for in cash (15 pecent of the total) plus debt service.
Assumes 6-month credit terms with an interest rate of 17 percent. Credits are
drawn on 1 January and 1 June and interest is paid at the end of each 6 -month
period on the outstanding balance at the beginning of the period. Loans are
repaid 6 months after they are drawn.
Assumes one-year credit terms with an interest rate of 15 percent. Credits are
drawn on 1 January and 1 June and interest is paid at the end of each 6-1Mnth
period on the outstanding balance at the beginning of the period. Loans are
repaid one year after they are drawn.
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ONFIDENTIAL
liberal three-year financing terms rather than the terms that
would be available if market forces were allowed to function
normally (i.e., option 3.) On the other hand, the successful
implementation of the second option (i.e., harsher credit terms)
could add an additional $1.8 billion to the cost of Soviet
outlays for grain purchases under market determined conditions.
Possible Soviet Responses
13. A liberal credit package, or even a US policy of
letting market forces hold sway would probably evoke favorable
changes in the atmospherics of US-Soviet relations but would in
itself provide only slight leverage over Soviet behavior. It is
possible, nevertheless, that if combined with other carrots and
sticks, such a policy tool could induce the Soviets to moderate
their stance on some bilateral issues. For domestic political
reasons, however, the Soviets would strongly resist any public
linkage between their behavior and US actions, as they did after
the Jackson-Vanik and Stevenson amendments were passed. ^ 25x1
14. Moscow might respond positively to a grain deal in
several ways. It might be willing in return to improve the
climate for arms control discussions (but not to make major
concessions). A more lenient attitude toward some Soviet
dissidents could emerge, including ultimate disposition of
emigration for the Pentecostals. Increased emigration of Soviet
Jews and other minorities is another possibility. On balance,
however, offering more grain on easy terms is unlikely to lead to
significant amelioration of major outstanding political
differences . II 25x1
15. If the US were to choose the second option, Moscow's
likely response would be to increase its efforts to line up
guaranteed grain supplies under long-term agreements from non-US
exporters. Armed with the prospect of increased purchases as an
incentive, the USSR would attempt to drive a wedge between the US
and other Western grain exporters in order to undercut US
initiatives. The Soviets also probably would review harsher
credit terms as another example of US policy aimed at "economic
warfare." This, in turn, might cause them to retaliate by taking
a more aggressive posture in Namibia, Nicaragua, or other Third
World areas. At a minimum, they would more energetically seek to
alienate the US from its allies. I 25X1
Other Considerations
16. Although potentially attractive to the Soviets,
liberalized financing is not essential to continuation of large
grain purchases. In the short run, the Soviets could sell gold
to finance some of the purchases. For example, in 1982 the
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additional hard currency cost of the second option as opposed to
the first is roughly $2.3 billion--equivalent to about 200 tons
of gold at current prices, or an amount roughly equal to sales
last year. Moreover, the prospects for additional arms sales in
the Middle East also may be brighter after the recent events in
Lebanon. Finally, the savings to the Soviets are transitory
unless the value of new credits increases over time. (Compare
the differ n payments in the table for 1984 under all three
options.)
17. Moreover, a policy of restrictive credits would be very
difficult to implement. Given the buyers' market and their own
economic problems, governments of the major non-US grain
suppliers such as Australia, Canada and Argentina would be
reluctant to go along with any US initiative. II