Foreign Relations of the United States, 1981–1988, Volume III, Soviet Union, January 1981–January 1983

190. Memorandum of Conversation¹

Washington, June 24, 1982, 9–10:20 a.m.

SUBJECT

• Minutes of 6–24–82 meeting on export controls on oil and gas equipment to the Soviet Union

PARTICIPANTS

• William P. Clark
• Senator Charles Percy
• Business executives and Congressmen (See Tab I)²

Judge Clark: In his opening remarks, Judge Clark reviewed the original purpose of the sanctions and stated that the President had selected to respond to the repression in Poland with a measured embargo. He made clear that principle is an important part of the President’s life and that this is reflected in his policies. The embargo was described as being “conditional” with periodic reviews. The complete lifting of the sanctions would be contingent on fulfillment of the three stated preconditions for advancing human freedoms and reconciliation in Poland. Since the inception of the sanctions, the question of how far they would be extended was left open.

The President warned the Soviets at the time that he would be compelled to take further action if the repression continued unabated. As a result of the President’s decision on June 18,³ the sanctions were extended “to the full reach of the law.” During the course of Al Haig’s meeting with Gromyko⁴ in the interim, Gromyko provided indications that a thaw would occur in Poland and that the sanctions were creating difficulties. Judge Clark stated that our intelligence confirms that the sanctions are raising havoc at a time when the Soviets are scrambling for hard currency earnings. He further stated that Gromyko’s representations were not borne out—Walesa is still confined even further from his home—with virtually no movement toward reconciliation.

The President continued to defer a decision on the controls until after the Versailles Summit.⁵ At no time did we suggest that a decision was conditional on progress concerning the credit initiative. We have been in constant communication with the Allies through State, Commerce and other agencies and carefully monitoring the Polish situation. After Versailles—where there were “certain results and non-results”—the President again deliberated on this issue. The Polish situation was judged as not having improved and even worsened—thus the President acted on the same leverage principle—the sanctions were extended to the reach that the law will allow “which is yet to be determined.”

Since the decision the Administration has received a “parade” of complaints from the British, West Germans and others. Nevertheless, Judge Clark made clear that the President will not retreat from this solid principle until there is “some deed or sign from the Soviet Bloc.” Judge Clark stated that he hoped these measures would be temporary and that we have information that the East Bloc is deeply concerned about their economic situation. He assured the group that the President would be briefed on the results of the meeting.

Senator Percy: The Senator stated that there was “no one in this room who does not put country ahead of company.” The question raised was: “How do we back our country effectively?” He further questioned if the sanctions were devastating a part of the US business community with no results or negative impact on the Soviets. He proceeded to encourage the respective business executives to state their concerns.

Caterpillar (Lee Morgan):

Background

—Until mid-1978 the company had 85% of Soviet pipelayer business. Due to “on again—off again” USG policies, it was down to only a 15% market share.

—12,000 man-years of jobs lost to US because of transfer of business to Japan (Komatsu).

—Overall, 17,000 workers laid off by the company (35% of employees).

—Operating at “break-even” level. Situation described as “major disaster.”

Political component (US policy)

—Heavy tractors and pipelayers are comprised of 70% commonly available pieces.

—Can sell upper machine but not lower machine (boom). Given the low technology of the boom, this restriction was termed “ridiculous.”

—Equipment reportedly would not delay the pipeline and only result in loss of business.

—Due to sanctions policy, the Soviet market is closed to the company. Soviets now refuse to even discuss general machines not restricted by the embargo because of the company’s perceived support for USG policy and the President in this matter.

—Company has $1 million in Soviet ordered items having to be scrapped.

—Carrying costs on other inventory was $4.5 million due to two-year period to sell elsewhere.

—Seen as needless sacrifice as pipeline will be built anyway.

Political component (domestic)

—Congressman Bill Michel presently running for reelection in a rearranged district with 50% of the district new (increase from 41% to 46% democratic).

—8,000 out of work in Peoria alone—UAW very concerned and is “making considerable hay” out of President’s decision. Using slogan “Reagan/Michel sanctions.”

—Republican Leader of the House put in political jeopardy.

Senator Percy: Saw chance of splitting Alliance on this issue.

General Electric (John Welch)

—No question that Soviet gas delivery schedule would be delayed by the sanctions.

—GE has 15-year relationship with USSR. Sanctions are very damaging to reliability as a partner.

—Althsom-Atlantique told GE they would build rotors if the government of France gave instructions. GE informed them they would not ship.

—Total of some $500 million in business lost. “They will laugh at our regulations and build anyway.” “AEG may go belly-up.”

—UK has misread our intentions and reportedly gave John Brown “go ahead” to build despite sanctions.

Senator Percy: Said he met with Chancellor Schmidt and that FRG will also give green light to its companies. Restated concern over fracturing Alliance.

Fiat-Allis (87% owned by Fiat)

—Described the large size of Russian orders which Komatsu is now filling due to sanctions. Reiterated low technology of its company’s equipment and ready availability of alternative suppliers.

—Made 1000 tractor sales in past 3 years. Reported Russian offer to pay $150 million up front for deliveries over several years. “Fall-out effect tremendous in Midwest.”

—Fiat doing business since 1932—questioned constraint on selling outdated technology at a time of worst downturn in construction history.

GE

—Commented that they are the company that can “delay or not delay” the pipeline while others are only giving over business to foreign competitors.

—GE can absorb sanctions as they are larger and stronger. Favored differentiation approach to sanctions.

Secretary Baldrige: Expressed less confidence in substantial delay in the pipeline caused by sanctions.

Senator Percy: Cited some inconsistency of principle due to President’s coming out against grain embargo.

Judge Clark: Stated he would review the possibility of differentiating products affected by the sanctions but could make no commitments. Reiterated his concern over the issue of US credibility.

Secretary Baldrige: Cited extreme difficulty in making a case-by-case determination for exceptions to the sanctions due to the way the regulations are drafted and “the legal reality.”

John Deere (Robert Hanson)

—Overall 9,500 workers laid off. Stated that unilateral sanctions have not in the past accomplished our objectives. Showed concern over being viewed as reliable supplier.

NSC staff member: Referenced intelligence reports concerning the serious difficulties encountered by the Soviets and European suppliers to the pipeline as a result of the sanctions. Provided the example of the higher cost of the Althsom substitute rotors which would reportedly wipe out the profit margin of John Brown’s Engineering turbine contract. Prospect of cancellation of contracts if Soviets would not allow the extra cost of Althsom rotors to be added on the original contract price (on assumption Soviets should select this alternative).

General Electric: Stated they had different information on the behavior and level of concern of the European manufacturers. Agreed that Althsom rotors were unrealistically priced.

Senator Percy: Requested CIA cable traffic on the pipeline.

NSC staff member

—In an effort to summarize the Administration’s position on the President’s June 18 action and respond to questions and statements made by other participants, the following points were made:

Grain versus December 29 Sanctions

• These policies should be differentiated.

• Pipeline sanctions are part of a measured and selective response to the Polish situation.

• Past Administration’s Afghanistan embargo demonstrated the unilateral sacrifice to our farmers from using a grain sanction due to abundant alternative suppliers of this fungible commodity. (EC sales increased 400% to USSR in helping to offset US supply shortfalls.) Select US oil and gas technology and equipment is unique and extremely difficult to replace with substitutes.

• Pipeline will generate a huge amount of hard currency ($6–8 billion annually), while grain absorbs an even greater volume of hard currency ($11–12 billion in the last purchasing year).

—No negotiations in progress on a new long-term grain agreement. We have reserved our options on grain.

Framework in which to view President’s decision:

Were the President to have lifted the sanctions or maintained unchanged:

• Would undermine US credibility, will and consistency in being able to pursue a stated policy toward Polish authorities and the Soviet Union; i.e., demonstration to USSR and Allies alike that “stonewalling” the US over a sufficient period of time will result in the USG unilaterally “caving in.” Danger of being viewed as a country with a policy half-life of six months—US would appear indecisive and weak.

• Commercial interests cannot be allowed to supersede principles. If the business community and trade relations were permitted to be totally insulated and sheltered from advancing important US foreign policy objectives:

—The denial of the foremost non-military policy tool available to the US for moderating Soviet geopolitical behavior, particularly given its limping economy.

—If not the repression in Poland, then when do we interrupt “business as usual” with an aggressive Soviet customer? If not the United States, then who will lead the Alliance away from undue dependency on Soviet gas and providing the USSR with the necessary hard currency to pursue its geopolitical objectives?

Conclusion: The meeting concluded with perceptions concerning the wisdom of the sanctions policy still significantly different. However, all agreed that it had been a highly useful session and a dialogue that should be continued.

1. Source: Reagan Library, Executive Secretariat, NSC: NSC Subject File, Memcons—Clark (6/24/82–5/83). Confidential. Drafted on June 25. The meeting took place in the White House Situation Room.
2. Not found attached.
3. See Document 189.
4. See Documents 186 and 187.
5. A reference to the Versailles G–7, which took place from June 4 to 6.