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

213. Special National Intelligence Estimate¹

SNIE 3–11/2–82

Washington, September 21, 1982

The Soviet Gas Pipeline in Perspective

KEY JUDGMENTS

1. The USSR has used imports from the West to enhance its military capabilities.

—By obtaining goods and technology, legally and illegally, that contribute directly to the production and technical sophistication of weapon systems.

—By expanding the base of industries of particular importance to military production.

—And, more generally, by easing economic problems, thereby reducing the burden of defense.

2. The rapid increase in Soviet imports from the West in the 1970s was made possible by large windfall gains in export earnings due to the surge in oil prices and the willingness of Western countries to provide large credits, most of which were government guaranteed. The USSR is encountering growing economic difficulties, which will make it more difficult for Moscow to increase its imports from the West in the future. The outlook for most Soviet exports, including oil, is not favorable, and Western banks are unwilling to extend new long-term credits without government guarantees.

3. Only the increase in gas exports through the Siberia-to-Western Europe pipeline will prevent a marked decline in Soviet hard currency imports in the 1980s. The USSR almost certainly will be able to meet scheduled deliveries of gas through the pipeline without diverting Soviet equipment from domestic uses. Enough equipment has already been delivered, or soon will be, to enable the USSR to meet likely West European demand for gas until the late 1980s. By then, Moscow will probably be able to produce enough modern turbines and compressors to bring the line to full capacity, or will have found new sources of equipment for any it may have lost as a result of US actions. Meeting gas delivery commitments and becoming self-sufficient in turbines and compressors will impose costs on the Soviets in inefficiencies and shifts in resources and effort.

4. While gas exports are the most promising future source of hard currency, oil exports still account for some 50 percent of Soviet export earnings, and it is important for Moscow to minimize their future decline. The USSR depends on the West for specialized oil exploration, drilling, pumping, and processing equipment. As its deposits of high-quality, accessible oil are depleted, the Soviets are turning to more remote oil and gas fields and more costly exploitation techniques. But they lag badly behind the West in the necessary technology. Without any access to Western equipment, the adverse impact on Soviet oil production could be as high as 10 percent of output by 1990.

5. Moscow’s best hope of improving its strained hard currency position in the longer run is to secure the cooperation of Western Europe in building large new pipelines for the delivery of additional natural gas in the late 1980s or in the 1990s. With enormous gas reserves and a powerful incentive to earn more hard currency, Moscow is prepared to sell as much gas as the West Europeans will accept. There is potential uncovered gas demand in Western Europe to fill not only the Siberia-to-Western Europe pipeline now being built, but also a second and third strand during the 1990s. Development of these large gas projects currently requires Western pipe, equipment, and credit and markets as part of a package deal, although Soviet need for these Western products will diminish as Moscow develops its domestic gas equipment industry. Alternative sources of gas exist, notably in the Norwegian sector of the North Sea and in North Africa, although they are in general relatively costly and some are considered insecure.

6. It will be difficult to enlist Allied cooperation in restricting trade with the USSR. Beyond economic incentives, there are political considerations that fuel the West Europeans’ reluctance to accept restrictions on trade and credits to the USSR. These include:

—Their desire to restore the detente climate in Europe and to avoid exacerbating East-West strains.

—Their desire to maintain access to Eastern Europe.

—Their belief that economic and other ties with the USSR will influence Soviet behavior.

These political considerations, combined with the economic incentive, continue to limit West European cooperation with the United States in restricting East-West trade.

7. The crux of the problem lies in developing with the West European countries a common understanding of the strategic implications of East-West trade. Such an understanding has been notably absent, but the chances of achieving it may be better now that the West Europeans are becoming more aware of the issues and the depth of US concern. Allied leaders have asserted that they will not conduct economic warfare against the Soviet Union. But adequate analysis and discussion can lead to a common conclusion:

—That deficiencies in security policies among the Western Allies have resulted in Soviet acquisition of militarily important technology, financial subsidies, and, potentially, an important role in Western Europe’s energy supply.

—That taking steps to withhold these benefits is merely prudent security policy which Allies owe to each other, and can be seen as self-protection rather than economic warfare.

8. Accordingly, Western countries might be willing to cooperate in:

—Developing and implementing broader and tighter COCOM restrictions.

—Agreeing to stricter limits on the terms and volume of government-supported credits.

—Developing other energy sources as an alternative to additional Soviet pipelines.

9. Making Western military-related technology, subsidized credit, and locked-in gas markets available helps the Soviet military buildup. Western governments would then be under increased pressure to raise defense costs, a move that requires heavy taxes, sometimes leads to deficit spending, and contributes to inflation and high interest rates. The United States is now committing some 6 percent of its economic effort and the European Allies some 4 percent of theirs to defend against a Soviet military threat that consumes 14 percent or more of their GNP. At the same time Western leaders are asking their citizens to carry a heavy defense burden they are pursuing policies that help the Soviets maintain a threat that adds to this burden.

10. This Estimate includes analysis of the potential impact of Western actions, including actions by Western Europe and Japan, on Soviet economic and military programs:

—The reduced availability of hard currency and energy would make more difficult the decisions Moscow must make among key priorities in the 1980s—sustaining growth in military programs, feeding the population, modernizing the civilian economy, supporting its East European clients, and expanding (or maintaining) its overseas involvements.

—While the cumulative impact of Western actions would clearly increase pressures on Soviet decisionmakers, we cannot judge how they would choose to spread such losses throughout the economy.

—Because economic growth will be slow through the 1980s, annual additions to national output will be too small to simultaneously meet the incremental demands that planners are placing on the domestic economy. Even now, stagnation in the production of key industrial materials is retarding growth in machinery output—the source of military hardware, investment goods, and consumer durables.

—Shortfalls in Soviet hard currency earnings due to Western actions probably would force further cuts in imports of machinery and equipment. Moscow fears that reductions in food imports would cause popular unrest and wants to avoid the bottlenecks that would be caused by cutting imports of industrial materials, such as steel.

—In the longer term, cuts in machinery imports would retard progress in modernizing a number of industrial sectors—steel, machine building, oil refining, robotics, microelectronics, transportation, and construction equipment—at a time when Moscow is counting on a strategy of limited investment growth and relying instead on productivity growth.

—Placing controls on energy-related equipment and technology would aggravate civilian industrial bottlenecks and, therefore, might cause civilian encroachment on defense production, such as a reallocation of some military-oriented metallurgical and machine-building facilities to produce the embargoed oil and gas equipment.

—The combination of enhanced COCOM controls and foreign exchange shortfalls would raise the cost of Soviet military modernization while at the same time weakening the industrial base for military production.

11. The relative impact of Western economic measures on the USSR can be estimated only as general orders of magnitude, as follows:

—Eschewing future gas projects—up to $10 billion a year in the 1990s.

—Denying all oil equipment and technology—about $10 billion a year for several years but then declining.

—Eliminating interest subsidies—less than $500 million a year.

In the long run, tighter COCOM restrictions on militarily sensitive technology (including technology and equipment that indirectly contributes to significant improvements in weapon systems) would perhaps be the most valuable action for the West. Such action would retard major improvements in Soviet weaponry, which the West would be forced to counter. While the dollar value of such action is difficult to estimate, the savings in terms of Western spending for defense annually would probably come to billions of dollars.

12. Moscow has the means to react to Western pressure by giving defense needs an even greater priority than at present and by pursuing a more truculent foreign policy. The Soviets meet their fundamental military requirements from their own large industrial base. Military programs, moreover, have great momentum and political support; they would not easily be scaled back, although the rate of modernization could be slowed. Even so, Moscow could not escape the reality that its basic choices between military and economic programs would become more difficult, at a time when a change in leadership might also make those choices less predictable.

1. Source: Reagan Library, Executive Secretariat, NSC: Country File, USSR (9/21/82–9/28/82). Secret; [handling restriction not declassified]. Based on information available as of September 16. An unknown hand wrote in the upper right-hand corner of the first page: “Please send to Pres for weekend,” under which Reagan initialed “RR.”