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

251. Paper Prepared in the Central Intelligence Agency¹

Washington, December 13, 1982

The State of the Soviet Economy in the 1980s

The Basic Situation

Soviet economic growth will continue to decline in the 1980s as average annual rates of increase in labor and capital decline and productivity gains fall short of plans. We expect average annual GNP growth to fall below 2 percent per year in the 1980s.

• The labor force will grow more slowly in the eighties than it did in the seventies—at an average annual rate of 0.7 percent compared with 1.5 percent.

• Growth in the productivity of Soviet plant and equipment, which has fallen substantially since 1975, will continue to drop as the cost of exploiting natural resources rises and Moscow is forced to spend more on infrastructure.

• Continued stagnation in key industrial materials—particularly metals—will inhibit growth in new machinery, the key source for introducing new technology.

• Energy production will grow more slowly and become more expensive, whether or not oil production falls.

• With continued growth in domestic energy requirements, Moscow will face a conflict between maintaining oil exports and meeting domestic needs.

• Agriculture will remain the most unstable sector of the Soviet economy, with performance in any year highly dependent on weather conditions.

Slower growth of production will mean slower expansion in the availability of goods and services to be divided among competing claimants—resources for future growth (investment), the consumer, and defense.

• Continued rapid growth in defense spending can be maintained only at the expense of investment growth.

• Slower expansion of investment will be compounded by the increasing demand for investment goods in the energy, transportation, metallurgy, and machinery sectors.

• An increased share of investment in heavy industries, together with continued large allocations to agriculture, will depress the expansion of housing, and other consumer goods and services.

Making up production shortfalls through imports will become more expensive as the need for imports increases and Moscow’s ability to pay (hard currency earnings) declines.

• The Soviet need for imports of Western grain and other agricultural commodities will remain high in the 1980s, as will requirements for Western machinery and technology.

• We expect real export earnings to decline between now and 1990 as sales of natural gas fail to offset the drop in oil earnings, and opportunities to expand exports of other commodities remain limited by their low marketability and tightness in domestic supplies.

• The availability of Western credits will be crucial for Moscow to maintain or increase its imports from the West; a tighter credit market would complicate Soviet economic problems and make resource allocation decisions more painful.

Options for the New Leaders

Changes in Decision-Making Process

The poor performance of the economy during the latter years of the Brezhnev regime has driven home to the new leadership the notion that there are relatively few opportunities for quick fixes and that the economic problems of the current decade may spill over into the 1990s. Because the new leaders can expect to reap the benefits of policies with longer pay-off periods, their policy decisions may be more forward looking. The new leaders will be especially sensitive to the fact that severe disruption of the economic system by the implementation of hasty, ill-conceived policies might be a quick route to both economic and political disaster.

The new leadership probably will continue to favor bureaucratic centralism rather than moving voluntarily toward fundamental systemic change. These leaders—because of the stringent economic situation and their own personalities—will rely more on tightened discipline and control to effect economic policies of long standing than on coaxing desired behavior through increased incentives. Andropov’s long tenure in the KGB has given him experience in using administrative measures to modify behavior. Moreover, the Soviet people, faced with unsettling economic and social problems, seem ready to accept a leader who would demand greater discipline.

This trend, however, would not rule out a mix of liberal and authoritarian measures. Greater dependence on the private sector, for example, is a distinct possibility that could be classified as liberal, while harsher penalties for labor absenteeism and mismanagement, though authoritarian in nature, need not mark a return to neo-Stalinism.

Changes in Policy

The new leaders will surely bring changes in economic policy. Because they have laid particular stress on continuity, and because it may take some time to develop a strong consensus, new policy lines may not appear until the 1986–90 five year plan has been drafted—i.e., 1984/85. Some indications of change are likely to be discernable next year, however, as discussion and debate about policies for the late eighties ensues and annual plans for 1984 and 1985 are formulated.

Major Claimants. The hardest policy decision for the Andropov leadership will be resource allocation among the major claimants. Maintaining historical growth in defense spending would squeeze investment and consumption further. Keeping investment growth at current rates as well, might result in an absolute decline in consumption.

The Military. Strong incentives exist for at least some slowdown in military hardware procurement. In addition to needing more resources to break economic bottlenecks, a slowdown (or even zero growth) in military procurement for a few years would have no appreciable negative impact on forces already in the field, and modernization of these forces could still proceed. We believe the groundwork for such a course may have already been laid in Brezhnev’s speech to top military officers on 27 October 1982. In any event, this course will be required if the Andropov Politburo wants to improve economic performance substantially.

Investment. A strong candidate to receive more investment funds is the machine-building sector—because of the need to modernize Soviet industry and because of constraints on importing foreign machinery and technology. Modernizing machine-building would also help justify a temporary slowdown in defense hardware as such action could ultimately enhance military hardware production. The new leadership, with its longer time horizon, might launch such an effort.

Consumption. A new leadership prone to authoritarian solutions is likely to be more pragmatic in its consumer policy, and may place more stress on tying wages and “perks” more closely to production results. Retail prices may also be raised on all but essential goods and services, and an expansion of the private sector in consumer services may be in the offing.

Reform. The new leadership’s predilection for administrative measures and bureaucratic centralism would severely limit the extent of future economic reform. The difficult economic situation argues against reform measures—like those launched in Eastern Europe—that had never been tested in the USSR. Some movement toward a regionally organized economy might be thought more suitable to today’s problems—for example, exploitation of energy and raw materials in Siberia.

Agriculture. The new leaders will continue to support the farm sector, but might decide to favor the industries that support agriculture and those that process its output. The Food Program already does this to some extent, but an actual cut of investment inside the farm gate would be a stronger signal of the new leaders’ dissatisfaction with the returns from agricultural investment.

Labor. In addition to instilling tighter discipline, the new leaders are apt to focus on automating manual labor (consistent with more investment in machinery), and developing social and cultural infrastructure in labor-deficit regions. The latter would provide some inducment for emigrants from labor surplus areas and reinforce a regionally differentiated pro-natal policy favoring the labor deficit areas.

East-West Trade. With economic problems pressing from every quarter, the new leadership might welcome—though perhaps not publicly—the opportunity to expand economic ties with the West in general and with the US in particular; the more so if decisions are taken to slow growth in military hardware, step-up investment in machinery, and reduce investment on the farms. Under these circumstances, Moscow might find it advantageous to press for (1) economic ties that provide them with technology and goods for both civilian and military purposes and (2) arms control arrangements that limit Western advances in military technology which they would find difficult and costly to counter.

Impact of Changes. These changes in approach and policies will not be a panacea for the Soviet economy’s ills. Nevertheless, the changed policies could bring marginal improvements in key areas and allow the new leadership to continue to muddle through even in the face of economic conditions probably worse than they had expected. Of primary importance to the new leaders, these policies would not require the surrender of power and would continue to allow them the freedom to impose their will on the smallest economic or administrative unit. In this way, they could feel assured of their ability to handle such problems as public unrest, external economic or military threats, or internal disasters that would require an emergency redistribution of resources.

Opportunities for the US

Opportunities for the US to influence the policy changes discussed above lie mainly in whether and to what extent we are willing to expand commercial ties with Moscow and in the signals we send the new Soviet leaders with respect to arms control negotiations. Of most immediate use to Moscow would be an arms control agreement that would provide a more predictable future strategic environment and thereby permit the Soviets to avoid certain costly new systems—and perhaps thereby enable them to increase somewhat future investment for bottleneck sectors of the economy—particularly transportation, ferrous metals, and machine building. Soviet officials have clearly indicated that staying with the United States in an arms race would have dire consequences for their economy. They probably are also uncertain of their ability to keep up technologically.

Moscow’s recent attitude toward purchases of US grain notwithstanding, the United States could again become an important source of Soviet purchases of agricultural products and machinery and equipment for both agriculture and industry. The need is there, if the “price” (including sanctity of contract) is right. Soviet agriculture could benefit substantially from US technology in livestock feed production, fertilizer application, and animal breeding, and the US is still Moscow’s best long-term bet for grain imports on a large scale.

The USSR faces increasing dependence on the West in developing and processing its oil and gas resources in the 1980s. From a technical viewpoint, the US is the preferred supplier of most types of oil and gas equipment because it is by far the largest producer, with the most experience, the best support network, and often the best technology. In some products—for example, large capacity down-hole pumps—the US has a world monopoly (albeit one that could be broken in a few years by entry of other Western producers), and the most critical needs of Soviet oil industry are for just such equipment.

Because the prospects for Soviet hard currency earnings in the 1980s are far from bright, Western credits will have to cover an increasing proportion of Soviet imports from the West. An increase in the availability of US government backed credit could look very attractive to the new leaders in Moscow.

However, since the mid-1970s, the Soviet experience in commercial relations with the US has been disappointing to Moscow, and it would probably take a strong initiative on our part just to get their attention. Although a US offer to renew close economic ties with the USSR might be welcome, it would probably be greeted skeptically by the Soviet leadership as primarily a tactical maneuver—a further retreat by Washington (following the grain and pipeline decisions) brought about by US-West European economic competition and pressures from US business circles. Needing to consolidate his power, Andropov could not—even if he wished—respond unilaterally to such an initiative, but would have to move within a leadership consensus strongly influenced by the views of Gromyko and Ustinov, who would urge caution. Thus the Soviets might:

• Accept part of the offer as a means of coping with particularly acute bottlenecks, especially in technology and food supplies.

• Seek to avoid the establishment of long-term economic dependencies on the US.

• Exploit any new atmosphere of mutual accommodation as a means of reinforcing support in the United States and Western Europe for cutbacks in defense spending and arms control measures favorable to Soviet interests.

We would expect the Soviets to give any US initiative low-key treatment, publicly casting doubt on US motives, but at the same time seeking to engage the Administration in a dialogue about it. A US offer to return to a “business-as-usual” basis would probably not result in any surge in orders for US companies beyond the sectors in which the US is already an important supplier. Moscow is at least as likely to use the opportunity created by a US offer to put commercial pressure on the West Europeans and Japanese, and exacerbate existing tensions in the Alliance. At a minimum, Moscow would press for US government guarantees regarding fulfillment of contracts while at a maximum it might seek repeal of the Jackson-Vanik and Stevenson amendments. In either case, it would refuse to make any significant political concessions in return—which Andropov probably could not deliver even if he desired. If this process permitted the Soviets to acquire more technology on acceptable terms from the United States, they would do so—but not at the expense of established ties with Western Europe and Japan, or of their own long-term economic independence. The Soviets have traditionally taken advantage of opportunities to exploit relations with the West to acquire technology and goods for both military and civilian purposes and we expect they will continue to do so.

1. Source: Reagan Library, Executive Secretariat, NSC: Country File, USSR—“The Brezhnev Era” Military Posture of the Soviet Union (December 1982) (1). Confidential. Prepared by the Soviet Economy Division, Office of Soviet Analysis.