Foreign Relations of the United States, 1981–1988, Volume VI, Soviet Union, October 1986–January 1989

124. Memorandum of Conversation¹

Moscow, February 22, 1988

PARTICIPANTS

• U.S. PARTICIPANTS

  • The Secretary
  • General Colin Powell
  • Ambassador Armacost
  • Ambassador Rozanne Ridgway, EUR
  • Ambassador Jack F. Matlock, Jr.
  • Richard Solomon
  • John M. Joyce, Deputy Chief of Mission
  • A. Afanasenko, Interpreter

• SOVIET PARTICIPANTS

  • Nikolay Ryzhkov, Chairman of the Council of Ministers
  • Vladimir Mikhaylovich Kamentsev, Deputy Chairman of the Council of Ministers
  • Yuliy Mikhaylovich Vorontsov, First Deputy Minister of Foreign Affairs
  • Konstantin Fedorovich Katushev, Minister of Foreign Economic Relations
  • Yuri Vladimirovich Dubinin, Soviet Ambassador to the U.S.

Following the departure of the press, Ryzhkov opened the discussion by noting that he understood there were grounds for satisfaction over the previous day’s discussions between the Secretary and the Foreign Minister.

The Secretary replied that indeed some headway had been made. We were attempting to solve outstanding problems a step at a time. Using that approach we had made progress in START and in other areas as well.

Ryzhkov commented that resolving these problems was indeed a formidable task.

The Secretary noted that the visit by General Secretary Gorbachev to the United States had been very successful. Among other things, it had stimulated the President, General Powell, and the Secretary himself to read Gorbachev’s book on perestroyka. It was a powerful book; it spoke mostly of Soviet internal affairs—perestroyka and glasnost. Prime Minister Ryzhkov, of course, was at the center of all these issues, and for this reason the Secretary was looking forward to another discussion with him. Ryzhkov replied that he was happy to be able to receive the Secretary once again. He had often remembered their meeting last April,² and considered this a continuation. He noted many other familiar faces on the American side of the table—including Ambassadors Ridgway and Matlock.

Ryzhkov noted that since the previous meeting many changes had taken place in the world and in bilateral relations. A successful summit had occurred and the INF agreement had been signed. The latter was an historical step, an historical document. Further, there was room for satisfaction over the groundwork done during this past year in other areas—START, the conventional mandate and nuclear testing.

Further, there had been progress on regional conflicts, for example, on Afghanistan. New Soviet policies and this visit would make it possible to make more progress on this latter issue.

Ryzhkov continued that all of these problems had historical roots, and it would take time to resolve them. If we persisted, however, we would make further progress on them by the time of the President’s visit.

Ryzhkov noted that Soviet mass media had given a very favorable portrayal of the progress made the previous day in the Secretary’s meeting with the Foreign Minister. He said he had been further informed that the atmosphere had been very constructive and that also provided hope.

Ryzhkov then turned to Soviet domestic affairs. He noted his previous discussion with the Secretary had taken place when the Soviet side had been involved in formulating the concept for radical reforms. During that meeting he had spoken to the Secretary of ideas for economic reform. Now these ideas had been implemented in law, following discussion in the June Plenum of the Central Committee and consideration by the Supreme Soviet last fall.

Ryzhkov explained that the reform had now entered its second stage. The first, which had lasted two and one-half years, had focussed on formulation. The second stage concerned itself with implementation, with putting the country on a new economic footing. This did not mean that everything would be changed in the following two and one-half or three years. But the society had to get underway with the reform, to learn to work under new economic conditions. It was a major challenge, a difficult stage—Gorbachev had called it a critical stage.

Ryzhkov said these had been the major changes in the last ten months. What questions did the Secretary wish to pose?

The Secretary said that changes in the Soviet Union were being followed with tremendous interest in the United States. He himself personally followed the reform movement here closely. He said he found the changes so far instituted very sensible.

The Secretary continued that managing the change was a major problem. Far-reaching changes in a society brought change in the personal lives of all its members, and such change required not only management of the changes themselves but also popular expectations. This was true in many countries, including the United States. It was always difficult for a people to stop something and start something anew. How did the Soviet Union intend to deal with this problem?

The Secretary posed a second question. What was to be done about prices and the marketing system? He noted that Finnish President Koivisto had reminded him that the University of Chicago had had on its faculty a Polish economist named Oscar Lange. Lange, who had been with the University before the Secretary’s time there, was a socialist. He nevertheless had contended that pricing systems were ideologically neutral. They were a technique, not an ideology. How does the Soviet Government intend to use prices to signal to enterprises when to stop production of an old item or start production of a new item?

The Secretary followed with a third question: “What’s in it for us?” He noted that major changes in the Soviet Union were important for the entire world but perestroyka would also mean possible new patterns of interaction between U.S. and Soviet enterprises—joint ventures, etc.

The Secretary recalled a long conversation he had had with Kosygin on the same point.³ At that time, however, the Soviet economy had been moving in quite another direction. Even so, the question even then was still interesting.

The Secretary posed a fourth question. They had discussed the issue briefly last April. Ryzhkov, Gorbachev, and the Secretary all thought the world would be a very different place in five to ten years. The growth and rapid diffusion of knowledge was affecting how we regard raw materials. It was changing our attitudes on food and other basic requirements. What impact would this have on U.S./Soviet relations? What did we need to do to prepare for these changes to seize opportunities? The Secretary noted that some of these issues had already been addressed in the planning talks. We needed to continue this. It was a fruitful subject for discussion. The Secretary remarked that he had tried to insert this issue into the domain of public discussion in the United States.

The Secretary then noted that he had “paid his tuition” and was “ready to hear Professor Ryzhkov’s opinion on these issues.”

Ryzhkov said the Secretary had clearly outlined the questions on problems which needed to be discussed. As he understood it, the first issue concerned internal problems, and the second bilateral issues. During the previous discussion he and the Secretary had gone over Soviet internal problems in detail. Further analysis since that time had confirmed the ideas he had discussed with the Secretary at that time. The Soviet leadership was convinced that it was acting correctly in implementing these reforms. In 1985 the situation in the economy had begun to impact strongly on the social atmosphere of the country. The Soviet economy had never stagnated completely, but it had been moving forward only very slowly.

Ryzhkov continued that Gorbachev’s book explained that the leadership was convinced that it could unite the advantages of a planned economy with the principles of a consumer economy. A Russian-born economist who moved to the United States in 1925, Vassily Leontieff, had explained the difference between the Soviet and the U.S. economy very succinctly.

The Secretary remarked that he knew Leontieff.

Ryzhkov continued that according to Leontieff, any economy had two requirements: sails and a strong wind for propulsion, and a rudder for control. The U.S. economy, according to Leontieff, had powerful sails but only a small rudder. The Soviet economy, on the other hand, had only small sails and a big rudder. Ryzhkov said what the Soviet leadership was striving toward was a balance between the rudder and the sails. Achieving that balance would be a challenge for all countries.

Ryzhkov said, of course, for forward movement we need energy, not just a literary image. The Secretary was correct in describing price reform and market relations as key aspects of overall economic reform. However, other ideas of principle also played a role in a socialist society. Ownership of property was very important. State ownership of productive capacity was at the foundation of any socialist society. Even this was being looked at. Cooperative ownership had large potential for development. Lenin thought much about this subject in his later life. The United States had a cooperative movement and during his recent visit to Sweden and Norway Ryzhkov said he had also observed the cooperative movement there. Finally, the third element was individual activity. The Soviet leadership saw no potential for revolution in this area, nor for spectacular growth, but it was another component for reform.

Ryzhkov said that a draft law on cooperative movements was now in final stages of drafting: it would soon be offered to public debate and then submitted to the Supreme Soviet for consideration. The three sides of the triangle would then be in place—the law on state enterprises, the law on cooperative movements, and laws on individual activities.

Ryzhkov returned to the Secretary’s question on price reform. It was, he said, “frankly most difficult.” Without price reform, however, economic reform was not possible. It was complicated because it had three interrelated components:

—wholesale prices;

—state purchase prices; and

—retail prices.

It would be necessary to change wholesale prices at the enterprise level because they conflicted with economic reform. That would be difficult, but work was proceeding on the problem.

Ryzhkov said the leadership would like most major products to be priced at world levels. That would ease establishment of internal economic balance, as well as participation in the international economy. But many Soviet factories did not have the technical capability to work at world price levels. For example, if the Soviet chemical industry worked at world price levels, it would promote use of more chemical products and less metal. But at that price level, half the Soviet chemical industry would not make a profit. Ryzhkov said the leadership was considering now what would be more advantageous—to continue these low prices or try an alternative.

The Secretary said this very interesting subject reflected the influence of global economic interdependence. The Soviet economy required that its currency be connected in some way to currencies of other countries. What were Ryzhkov’s ideas on currency convertibility?

Ryzhkov replied that he saw such a need in the future but it would be difficult to achieve. The question was under consideration.

The Secretary continued that if the Soviet Union did not confront the convertibility issue, it would continue to be driven into barter approaches. This was not efficient. From the point of view of a U.S. firm considering a joint venture, rather than considering the simple issue of dollar profit or loss, it would have to consider also the complicated question of what to do with goods it received in barter in place of dollars.

The Secretary noted that barter did have its role, even outside socialist countries. Frank Carlucci, who had accompanied the Secretary during his last visit to Moscow, had run what was essentially a barter enterprise for Sears. Such enterprises were not unheard of, but they were unusual.

The Secretary had run into the issue in his first job with a firm bidding on a major construction job in another country. The firm had been told it could not be paid in dollars, but rather only with the output from the enterprise the firm had contracted to construct. It caused major problems. If the firm had built a coal mine and then was offered coal in payment, it had to consider what to do with the coal.

Ryzhkov replied that he would break down the convertibility question into two parts—domestic and global. The Soviet Union would have to face global convertibility eventually, although it would be difficult. But, he noted, the Soviet Union was telling U.S. firms interested in joint ventures that they could now have profits in foreign currency, or could use that foreign currency to buy Soviet goods. The Soviet Union was not insisting on compensation with goods in such enterprises. In the March Joint Trade Commission meeting the Soviet side would have to bring to the attention of United States firms this flexible position.

The Secretary remarked that Ryzhkov had hit on an important point and recommended that he emphasize it during the March meeting.

Ryzhkov turned to the Secretary’s further question on internal problems. Economic restructuring was not something that could be accomplished in one or two years. In the present, second stage—it would last two-three years—the goal was to teach people to work in the new environment. But no one expected in that time to change the entire national economic infrastructure. That would require much time. As the Secretary understood, and this was true in any society, capitalist or socialist, perspective at the leadership level was broad, while the further down into society one went the narrower the perspective became. The individual on the street was interested only in immediate advantage and immediate results.

The Secretary interjected that a famous U.S. football coach, George Allen, had preached “the future is now.” Ryzhkov nodded his head in agreement, and the Secretary acknowledged that while Allen’s idea was correct, it was not always possible to implement.

Ryzhkov continued that looking ahead required political wisdom. Nevertheless, a political leadership had to deal with today’s problems. Today’s problems in the Soviet context were three:

—housing for the population;

—food; and

—consumer goods and services.

The leadership was focussing its efforts on this spectrum of problems.

Ryzhkov noted time was growing short, and he turned to the second set of problems the Secretary had raised—bilateral problems. He posed a question to the Secretary, noting that political changes were underway in the bilateral relationship. The Soviet leadership welcomed these changes, realizing that the political climate in the world was largely determined by U.S./Soviet relations. But what did the future hold in this regard? Would the Japanese and Chinese “catch us, outdo us?” “Not only us, but also you?” Together the United States and the Soviet Union have only ten percent of the world’s population, but they have great economic potential. Should we move away from difficult economic relations? Should we now begin a new, fruitful economic relationship? That was not possible under present conditions. Frankly, the development of economic relations between the United States and the Soviet Union depended on the political stance of the U.S. Administration. But if we did not take better advantage of present economic possibilities, he said, future generations would not praise us.

Ryzhkov said this then was the answer to the Secretary’s question on the impact of perestroyka on bilateral relations. This was Ryzhkov’s personal opinion, but also reflected experts’ views. Moreover, if the United States and the Soviet Union planned to change their economic relationship, they needed to do more than simply develop traditional trade. Eventually, for example, the Soviet Union would provide its own grain. New ways of cooperation including joint ventures and other cooperative endeavors must be found. The Soviet side greeted formation of the consortium now being contemplated. Perhaps in May it would be possible to sign an agreement on it. Perhaps we should consider signing it during the visit of President Reagan to Moscow. Leading firms from the U.S. side were considering participation in this endeavor for the first time. Ford had rejected the approach, but General Motors was still considering it. Formation of this consortium was, so to speak, a first swallow; given our vast potential, cooperation could be greatly improved.

The Secretary said he would undertake to discuss with Secretary Verity a possible role for economic issues in the summit. He acknowledged that that aspect of the summit had not been under serious consideration in Washington.

Ryzhkov said both sides needed better communication on economic ideas. Annual meetings were not sufficient. A more active economic dialogue was necessary. “So far we have only Dr. Hammer.”⁴

The Secretary interjected that Hammer was what we call a “one-man band.”

Ryzhkov said present bilateral economic relations were difficult, and required political solutions. He said he regretted having to end the meeting on this negative point. But if the issue of economic relations were to be resolved, current obstacles would have to be removed. And if we were to improve overall relations, such steps would be necessary. He said he had not understood remarks made at the Paris meeting. The Soviet side believed its new thinking had made possible the beginning of a new political dialogue with the United States. But Deputy Secretary Whitehead in Paris had said that an improvement in political relations did not lead to an improvement in economic relations.

Ryzhkov concluded his remarks by noting that time for their meeting had expired. He expressed satisfaction with the discussion and suggested that it continue in the future.

The Secretary expressed his appreciation that Ryzhkov had received him. The Secretary said he found Ryzhkov “thoughtful, impressive, interesting.” He said he had found increasingly specific topics for discussion with him. The Secretary repeated his undertaking to discuss with Secretary Verity economic issues for the summit. He noted that anything featured at the summit received great publicity in the United States and in so doing a special legitimacy. Ryzhkov nodded his understanding of this point.

1. Source: Department of State, Executive Secretariat, S/S Records, Memoranda of Conversations Pertaining to United States and USSR Relations, 1981–1990, Lot 93D188, Moscow—Feb 88—Shultz/Shev. Confidential. Drafted by Joyce. The meeting took place in the Kremlin. According to Tosec 53347, February 20, the meeting was scheduled for 9 a.m. (Department of State, Central Foreign Policy File, D880147–0011)
2. See Document 41.
3. See Shultz, Turmoil and Triumph, p. 21.
4. See footnote 4, Document 99.