201. Memorandum From the President’s Assistant for National Security Affairs (Clark) to President Reagan1


  • “Can the Soviets ‛Stand Down’ Militarily?” (U)

The CIA has prepared a report which raises the question whether the Soviet Union, facing mounting economic problems, may at some point decide to shift resources from arms production to civilian uses.

Without committing itself to an answer, the report stresses the great difficulties inherent in such a policy change. By its very nature the Soviet economy finds it much more difficult to shift resources from the defense sector to the civilian one than is the case in market economies. While in the United States the expansion or contraction of the defense sector is essentially a factor of the defense budget, in a planned economy like the Soviet one, the process is infinitely more complicated. There one must make not only a budgetary adjustment but also put through changes in highly complex production plans, reallocate financial, material and human resources, etc., all of which are directed by the state.

The study assumes that the Soviet Government could, if it so wishes, make a 20 percent cut in defense expenditures by the late 1980s. It believes such a cut would have appreciable effects on the ailing economy. All the branches of the Soviet military would have to bear the burden of the cuts except the strategic forces which would emerge relatively intact. Western policies would play a major role in such a development. “The credit, goods, food and technology provided by the West have helped Moscow maintain its current resource allocation scheme.” Denial of such assistance would produce additional pressure on the leadership to shift resources from military to civilian uses.

The report warns that such a shift, once it occurred, would be difficult to monitor, at any rate, in its early phases.

[Page 652]


Intelligence Assessment Prepared in the Central Intelligence Agency2

SOV 82–10101



As the Soviet economy continues to deteriorate, more and more attention is being given to the notion that at some point the leadership might attempt to prop up the Soviet Union’s faltering economy by shifting some resources from arms production to civilian end uses. [portion marking not declassified]

To be sure, there is no evidence that any resource shift is under way, or even that Soviet leaders are seriously contemplating one; the dominant feature of Soviet defense spending has been the persistence of its growth. Nevertheless, as economic problems mount—and as the struggle for leadership intensifies in Moscow—the possibility of a resource shift requires that Western policymakers have some grasp of the Soviet system’s technical capacity to accommodate such a shift if, in fact, a decision of this sort were to be reached or even considered. [portion marking not declassified]

Apart from ideological imperatives, perceived national security needs, and the personal commitment of Soviet leaders to growing military power, the very structure of Soviet defense planning and production, which is vastly different from ours, contributes heavily to the momentum of defense spending in the USSR and makes any shift of resources out of the defense sector more difficult than would be the case in a market economy. [Portion marking not declassified]

In the United States, the allocation of resources for the production of both guns and butter is carried out in the free market. Government’s role is to allocate enough money to provide the minimum number of guns judged necessary to assure the national security. A political decision to expand or contract the US military sector, once reached, is implemented merely by raising or lowering the defense budget. The free market then reallocates resources, and it is an efficient mechanism for doing so. By contrast, the entire Soviet system—with its five-year [Page 653] plans, its comprehensive resource-allocation process, its command economy—is designed and managed by the government to provide a high priority to defense production. A political decision to alter the guns-vs.-butter ratio requires far more from the government than merely a budgetary adjustment: production plans must be changed; financial, material, and human resources must be reallocated; production must be rescheduled in government plants; and the actual goods and services that emerge must be given prices and assigned to customers—all by government officials. [portion marking not declassified]

After briefly outlining the Soviet industrial structure, this paper examines the technical capacity of the Soviet Union to shift resources from military-related production to civilian end uses—assuming a Politburo decision to attempt such a shift. It examines the time that a significant resource shift would require and the impact of such a shift on the Soviet Union’s economic performance and military prowess. After outlining the role of Western economic assistance in maintaining the Soviet Union’s current resource allocation scheme, this paper discusses the difficulties that the US Intelligence Community would have in detecting and monitoring a resource shift from arms production to civilian end uses. [portion marking not declassified]

Key Judgments

On the basis of observed military activity, we expect that Soviet defense spending will continue to grow 4 to 5 percent a year through at least 1985. Sustaining this policy over the long term will be increasingly difficult, however, especially if economic conditions worsen beyond our projections. Indeed, a new leadership by mid-decade will feel greater pressure to reduce the growth rate of defense expenditures to free up labor, capital, and materials—resources urgently needed in key civilian sectors. [portion marking not declassified]

An absolute cut in defense spending on the order of 20 percent by 1990—a hypothesis discussed in this paper—could result in meaningful economic changes. A gain in per capita consumption growth of up to one percentage point a year would be likely, and there could be a moderate increase in the growth of GNP. We believe such an abrupt shift is highly unlikely in the short run. If it were made at all, it would be phased in gradually after 1985. [portion marking not declassified]

Absolute cuts would almost immediately free up raw materials and some semifinished goods such as high-quality steels, construction materials, chemicals, and fuels. These could help eradicate bottlenecks in such critical economic sectors as energy, agriculture, and transportation. Many military production facilities could begin producing goods for the civilian sector within a reasonable period of time. Capacity currently used in armored vehicle and tank production, for example, [Page 654] could be converted in roughly a year to support increased production of a broad range of civilian vehicles—for example, railway rolling stock, tractors, trucks, and construction equipment. [portion marking not declassified]

Absolute cuts in military programs would probably impact most on theater air, naval, and land arms, possibly causing a major restructuring of missions and postponing replacements. The Soviet strategic forces could emerge relatively intact. [portion marking not declassified]

The military would object strongly to a resource shift of this magnitude, but the objections would be manageable once the Politburo decision was final. [portion marking not declassified]

The credit, goods, food, and technology provided by the West have helped Moscow maintain its current resource allocation scheme. If the West were able to deny or limit Moscow’s access to these forms of assistance, pressure would be increased on the Soviet leadership to shift resources from arms production to the civilian economy. By curtailing the Soviets’ import capacity—primarily by restricting credit but also by hampering their oil and gas production and thus their hard currency exports—the West would further raise the cost to the USSR of maintaining its present resource allocation policy. [portion marking not declassified]

It is, of course, impossible to say for certain that the Soviets would respond to Western pressure by shifting resources. However, it is important to note that in some instances they have deemed a shift to be in their best interests and have directed the military-industrial complex to support the civilian economy. [portion marking not declassified]

Monitoring Soviet weapons production by intelligence methods is extremely difficult. Thus it is highly possible that should Soviet leaders in fact shift some resources from arms production to civilian end uses—especially if the magnitude of the shift is smaller than hypothesized in this paper—the change could go unnoticed for quite some time. [portion marking not declassified]

  1. Source: Reagan Library, Executive Secretariat, NSC: Country File, USSR (8/5/82–8/12/82). Secret. Sent for information. McFarlane initialed the memorandum for Clark. Prepared by Pipes. Reagan initialed “RR” under the stamped notation: “The President has seen.”
  2. Secret; [handling restriction not declassified]. According to a title page, attached but not printed, W. Alan Messer prepared the assessment based on information available as of June 1.