Foreign Relations of the United States, 1977–1980, Volume VI, Soviet Union

40. Paper Prepared in the Central Intelligence Agency¹

Washington, August 1977

ER M 77–10525

The Value to the USSR of Economic Relations with the US

Foreword

The attached paper examines key elements of the US-Soviet economic relationship—in technology, energy, credit, grain, and MFN—and concludes that, in the current context, and taken individually, these elements do not provide the US or the West with policy levers that could be used to exert significant influence upon Soviet behavior.

But the assessment is focused narrowly on the current situation and on specific economic instruments. To do justice to the potential for leverage and influence in the East-West relationship, the problem should be considered in a more dynamic and comprehensive context of a long term political-economic-military competition. An assessment in those terms would place far more emphasis on the deepening economic problems and resource stringencies facing the Soviet economy over the next five to ten years, and the strains and pressures these will increasingly place on the Soviet resource allocation process, particularly in the military sphere. In the context of such deepening problems, the potential for using East-West economic relations for political influence might be much larger, particularly if conceived as part of a broader strategy for long-term competition. These possibilities deserve far more attention and analytic effort than they have so far received.

CONCLUSIONS

The importance of Western technology, credit, and grain to Soviet economy has increased in recent years, and will increase further during the next decade. Moscow is determined to avoid exploitable dependence, however, and expects to be able to do so.

—In the great majority of instances, alternatives to US sources are available.

—Other Western countries have shown little willingness to sacrifice economic gains for a concerted, sustained policy of using East-West economic relations for purposes of exerting influence upon Soviet behavior.

—The Soviets believe that, in the US itself, conflicting domestic interests place severe limits on the US ability to use its policy instruments for these same purposes.

The growing dependence of Soviet economic growth on a rising productivity of labor and capital will put an increasing premium on Western capital goods and technology during the next decade. In addition, Moscow will need vast amounts of Western equipment to sustain production of oil in some fields, minimize declines in others, and develop new sources of oil and gas. Some of this equipment will have to come from the United States.

Technology

In importing Western technology and equipment, the USSR is playing “catch-up.” Specific sectors of Soviet industry—such as the fertilizer and automotive industries—are being helped greatly by Western technology and equipment, increasing the quality and quantity of output and reducing costs. The Soviets will be especially dependent on Western energy technology in the future, such as high capacity oil lifting equipment discussed separately below. The magnitude of Soviet imports of Western equipment, however, is too small to have much impact on overall economic growth.

In only a few areas is the United States the sole supplier of the most advanced technology of interest to the Soviets. In many of these fields, US pre-eminence is being increasingly challenged by technological advances in Western Europe and Japan. Moreover, less advanced technology is often sufficiently good to satisfy immediate Soviet needs. In the many instances where US technology is available from US licensees or subsidiaries abroad, the Soviets can turn to these.

The United States must rely primarily on persuasion in marshaling effective support from its allies for control of technology exports. The record on this score is disappointing at best. Our allies see little or no need to limit Soviet acquisition of technology unrelated to items on the COCOM List. Even in COCOM, they have shown a tendency to push for relaxation of definitions to permit the sale of their own goods while supporting the embargo on those higher technology goods produced only in the United States. Their reluctance in the past to go along with the United States in controlling anything but the most sensitive technology and equipment affords little hope for consent to broader vigilance now.

Energy

The supply of oil in the USSR will become a critical problem in the next few years, with production peaking perhaps as early as next year but not later than the early 1980s before declining. To stave off or slow the expected production decline, the Soviets will need substantial amounts of Western oil field technology and equipment. Because of its superior technology, the United States is the most logical source of much of this equipment and know-how. Without assistance in the form of Western technology and equipment—especially high capacity lifting equipment involving US technology—gas lift and electric submersible pumps—Soviet oil production will fall sooner and more sharply than would otherwise be the case.

Although the USSR and some West European countries produce low capacity oil well pumps, the only pumps adequate to deal with the Soviet lifting problem are produced in the United States. The USSR has been buying several hundred annually in the US and recently sought a turnkey plant for their manufacture. Thus far neither of the two US producers has been interested in supplying the production technology.

The US is the preferred source of other equipment and technology such as drill pipe, rock bits and rotary drilling rigs, none of which is under export control restrictions, as well as certain COCOM-controlled items, e.g., seismic and gravimetric measuring and recording instruments. There are close substitutes for these in other Western countries, however.

Credit

The Soviet hard currency debt increased from only $5 billion at the end of 1974 to $14 billion at the end of 1976, and it will probably grow to about $17 billion by the end of this year. What pushed up the debt was mainly the Western economic recession, which nearly halted the growth of Soviet hard currency exports and the massive Soviet grain imports in 1975 and 1976 following the disastrous 1975 harvest.

The USSR’s hard currency trade deficit reached a record $6.3 billion in 1975 and $5 billion in 1976. The traditional means of financing deficits—Western government-backed credits and gold—were no longer adequate, and the Soviets had to borrow heavily on the Eurodollar market at higher interest rates including a substantial amount on short term.

As a result of heavy Soviet borrowing, many major banks reached or at least approached their legal or self-imposed ceilings on credit to the USSR. Moreover, the international banking community has grown concerned about the growth of the Soviet debt and the persistence of large trade deficits. Although bankers remain confident about the USSR ability to repay its debt, they feel that additional credits require higher interest rates.

Moscow’s stubborn stance on terms is hampering progress in negotiations for government-backed export credit lines. The “gentlemen’s agreement” on export credit terms is now in effect, and the Soviets are unwilling to pay the higher interest rates required. Soviet negotiations with Italy have dragged on since May 1976, with France, Japan, and the United Kingdom watching closely to see whether the Italians can withstand Soviet pressure to break the agreement by offering better terms. The betting is that Italy will cave in.

A reduction in the trade deficit is expected in 1977 with continued—if sluggish—Western growth leading to expansion of Soviet exports; a sharply lower grain bill will reduce imports. A deficit of $4 billion or less and a $3 billion increase in debt is anticipated. A further decline in the deficit is likely in 1978, given continued economic growth in the West and the bumper grain crop Moscow expects this year. Oil exports could fall, but probably not enough to prevent an increase in total exports while imports should be stable or lower.

Prospects in the longer run, however, are much dimmer because the expected decline in Soviet oil production and exports will seriously aggravate the Soviet hard currency position. Western bankers will probably have increasing doubts about Moscow’s ability to maintain its foreign exchange earnings and manage its debts in the 1980s. Substantial new credits are likely to depend upon Soviet willingness to undertake large compensation deals, particularly for development of energy resources, that provide assurances of export capacity.

Grain

Even with normal harvests, Moscow will need to import 10–20 million tons of grain annually to support announced livestock expansion programs during the next several years. If past practice holds, about half of Soviet import requirements would be filled by the United States. The need for US supplies obviously depends both on the size of Soviet requirements and on production and stocks in other supplier countries. Attempts to apply US leverage on the grain issue might lead to minor concessions in the short run but would carry longer run costs. The threat of withholding grain, even if not exercised, would compromise US reliability as a supplier and lead the Soviets to pursue alternatives.

Our leverage is lessened by the wide range of options available to the Soviets in the event of a moratorium on US grain shipments.

—In the short run, other countries would be able to provide additional grain, especially at premium prices.

—Over the longer run, the USSR could probably arrange for alternative supplies, perhaps with the aid of long-term contracts.

—Domestic demand for grain could be substantially reduced by (1) rationing and other conservation measures, (2) export cuts, and (3) further slaughtering of livestock if need be.

—In dire circumstances, Moscow could fall back on strategic grain stocks.

MFN

Soviet exports would be little affected by the granting of most-favored-nation status. Most Soviet exports to the United States either enter tariff free or carry tariffs little higher than MFN rates. A few million dollars’ worth of manufactured goods would benefit from MFN treatment, particularly if quality and servicing deficiencies were overcome. MFN is a relatively minor issue in the broad context of US economic relations with the USSR. The restrictions of the Trade Act of 1974,² in any case, blunt the effectiveness of using MFN as a bargaining tool.

1. Source: Carter Library, National Security Affairs, Brzezinski Material, General Odom File, Box 2, Brzezinski, Zbigniew: 6/77–12/78. Secret. The paper’s forward and conclusions are printed; its main text was not found attached. This paper is included in an overview prepared by the NSC and distributed to select Cabinet members on August 26, along with briefing papers prepared by the Departments of State and Treasury and the Central Intelligence Agency, for the August 31 meeting with the Policy Review Committee (see Document 46). A copy of the complete paper is in the Carter Library, National Security Affairs, Staff Material, Office, Institutional File, Box 29, INT Documents: #5600s: 8–9/77.
2. For a summary of the act and its restrictions, see Congress and the Nation, vol. IV, 1973–1976, pp. 131–134.