41. Memorandum of Conversation1
- Secretary’s Meeting with Chairman of the Council of Ministers Ryzhkov from 10:00 a.m. to 12:50 p.m. Tuesday, April 14
- The Secretary
- Ambassador Matlock
- Assistant Secretary Ridgway
- Policy Planning Chairman Solomon
- DCM Combs (Notetaker)
- Interpreter Hopkins
- Chairman of the Council of Ministers Ryzhkov
- Foreign Trade Minister Aristov
- Deputy Foreign Minister Bessmertnykh
- Ambassador Dubinin
After a five-minute photo opportunity, Ryzhkov welcomed the Secretary on behalf of the Soviet Government. Noting that the Secretary was heading the first representative delegation since Reykjavik, Ryzhkov said the Secretary’s visit had engendered considerable hope for progress on key questions of mutual concern. Shevardnadze had briefed Ryzhkov in detail about the April 13 talks,2 which Ryzhkov understood had been lengthy and substantive. Ryzhkov saw no need to repeat the points Shevardnadze had made to the Secretary.
After Reykjavik, Ryzhkov continued, areas for special attention during the Secretary’s current visit had been more clearly defined. The main questions were INF, SRINF, strategic weapons and space-related issues. These, above all, should be resolved. Ryzhkov understood the issues were complex but hoped reason would prevail. During the past two years (since Gorbachev’s becoming General Secretary), the Soviet side had changed its position and compromised on the key issues before us. This did not signal Soviet weakness but rather a Soviet intent to resolve these issues, particularly since history had unfolded so that our two countries could determine the world’s political climate. And if the vital issues were resolved, and trust—without which nations could not coexist—were built up between us, then other matters such as humanitarian and economic problems could also be resolved.
Ryzhkov recalled his 1986 discussion with the Secretary in Stockholm,3 at which he and the Secretary agreed to discuss economic matters at their next meeting. The Secretary was a well-known economist, a doctor of economic sciences who had considerable practical experience in economic affairs. Ryzhkov proposed they exchange views, in particular regarding global economic matters. He would like to pose two questions that interested him personally: First, how did the Secretary evaluate prospects for our bilateral economic relations? We of course knew the current situation. Were there further possibilities, or should the Soviet Union look elsewhere? Second, how did the Secretary evaluate prospects for East-West trade generally? Of course the Secretary was Ryzhkov’s guest, and perhaps the Secretary would wish to discuss additional questions.
The Secretary thanked Ryzhkov for his hospitality and said he could agree generally with Ryzhkov’s opening statement. The issues under discussion with Shevardnadze were extraordinarily important and should be resolved. And we needed to find the line in our mutual behavior leading to greater stability, less confrontation and greater [Page 178] trust in the relationship. In the Secretary’s view, stability, less confrontation and trust derived from three factors.
The first of these was the broad area of human relations and the organization of society, as set out in the Helsinki Final Act, the Universal Declaration of Human Rights and other jointly signed documents. This has to do with the rights people enjoy, including free movement and the openness of society. From what we have seen and read (the Secretary noted he had read the General Secretary’s speeches), encouraging progress had been made in the USSR, although we believe there is much room for improvement.
A second factor is the quantity and quality of human contacts between our two countries. The President and the General Secretary agreed on the importance of such exchanges at Geneva,4 and in fact both their quantity and quality have since improved. This was positive and very important.
A third factor is the existence of extraordinary tension in various regions of the world, where both of us are involved to varying degrees. Afghanistan is one obvious example, of course there are others. We have tried to address these problems in our bilateral dialogue but have made little headway toward achieving greater stability. This is quite worrisome. The technological and economic trends in world development underscore the importance of learning to interact constructively.
The Secretary said he would be glad to comment on Ryzhkov’s two questions. He would also like to hear Ryzhkov’s view of changes in the Soviet economic system. The Secretary had read about them, and they seemed profoundly important.
Regarding Ryzhkov’s first question, on the prospects for bilateral trade, the Secretary personally thought they should be bright. Whether they would be was another question. As the Secretary saw it, the basic reason for promising prospects stemmed from profound change in worldwide economic trends. We were rapidly moving into an age where the fundamental economic ingredient is information and its handling. The most important capital is human capital.
In this realm, the Secretary continued, neither of us has monopoly on human talent. This has been demonstrated by astonishing achievements in both countries. We have just read, for example, that Soviet cosmonauts went into open space to repair a docking problem—and no one was greatly surprised by this accomplishment. The United States had also done such things. But no other country beyond our two could match us.[Page 179]
So the prospect of increased bilateral economic ties is there. Whether we can summon the ingenuity to make it happen is another question, but underlying economic trends indicate that somehow it should be accomplished.
The same holds true for East-West trade generally, the Secretary continued. It is as if intensified economic interactions were struggling to happen. They are hindered by tensions and mistrust that in turn stem from how we have organized things. If these barriers can be eliminated, the interactions will grow quickly. The Secretary added he could not help but feel this was also the Soviet side’s instinct. He felt this when he first met Mr. Gorbachev at Chernenko’s funeral.5 The Secretary had spent many hours with Brezhnev and other Soviet leaders. As he listened to Gorbachev, he immediately sensed a new cast of mind.
The Secretary could not predict how interrelationships would develop. But he felt that mutual developments, together with creative and fluid thinking, could possibly—perhaps not probably—take us in interesting new directions. He therefore valued the opportunity to talk to the Soviet leadership about these matters. He would also find it valuable to hear from Ryzhkov about economic developments within the USSR.
After thanking the Secretary for his remarks, Ryzhkov said he would first like to comment on the need for greater mutual trust. The Secretary had spoken of three factors. As Ryzhkov saw it, there must be a base and a superstructure. The base was our political relations. Today these were to a large extent shaped by confrontation, above all in the military field. Ryzhkov did not want to dwell on this point and leave no time for discussion of economic matters. He would note that issues of mutual security and human rights should be looked at from all angles, including that of the Soviet Union. (The Secretary interjected his agreement that a global approach was required.) Let us conduct serious dialogue on these matters. You may raise our problems, we of course will cite yours. Some practices you regard as normal we feel are abnormal. Ryzhkov said he did not know whether the U.S. planned to participate in the proposed Moscow human rights meeting, which should provide a forum for serious discussion.
Ryzhkov said he would now like to turn to economic changes in the Soviet Union. The word “perestroika” had become international, and many questioners from abroad asked why the Soviet leadership [Page 180] had adopted this course. Seventy years of Soviet power had seen tremendous advances. The country had gone from extreme backwardness to advanced status, with great scientific, technical and intellectual potential. Our socialist system did this and we deeply believe in this system.
However, at the end of the 1970’s and beginning of the 1980’s, Soviet economic dynamism began to falter. The causes were not systemic; they were strictly subjective. Frankly the reason was that the leadership did not perceive an objective change in economic conditions, which required a fundamental shift from extensive to intensive economic growth. For years we had emphasized extensive development, in which new production facilities were added to the existing ones. But a point was reached when readily-available natural resources were exhausted and the workforce for demographic reasons became inadequate. A new approach was needed, but the old, outmoded extensive approach lived on. The moment unfortunately was lost.
Our economic mechanism, Ryzhkov continued, to a certain extent did not allow assimilation of scientific achievements into the economy as a whole. We believe in the advantages of a planned economy as a whole. We believe in the advantages of a planned economy, but central planning began to spread to trivial things, to permeate the entire economy. This suppressed initiative at the production level. Workers became executors rather than creators and innovators.
This historic significance of the April 1985 Central Committee Plenum was that newly-elected General Secretary Gorbachev frankly and openly put these questions before the party and set forth general ways to correct the situation. The next two years involved a search for more specific ways to address our problems. A new economic model is taking shape, and the next Central Committee Plenum will consider the question of economic management.
The essence of this modernization process will be in management and planning. While the planned nature of the Soviet economy will be preserved and improved, management will be democratized at the enterprise level. The higher levels must be constrained to plan only essential elements. All the rest should be regulated by economic norms, with production units given freedom to determine their own economic policies. The main problem is to find the optimum balance between the center and the production units. In addition, capital stock will be revitalized, particularly in the machine-building sector and also in the computer and biotech sectors. And new forms of economic activity, on the basis of individual and cooperative initiative will be fostered. This will pertain primarily to services, retail sales and public catering.
The foreign economic area is also being reorganized, Ryzhkov said. International trade has become complex. We have decided to give 20 [Page 181] ministries and 70 large enterprises the right to conduct direct international trade. We are also introducing new forms of economic cooperation by developing cooperative ties with enterprises abroad and by creating mixed or joint ventures in the Soviet Union. We have received some 200 proposals for joint ventures and have found some 125 to be of interest.
Ryzhkov said he had touched upon only a few aspects of “perestroika.” It affected virtually all areas of Soviet life, including the media and public organizations. Of course, one might well ask how “perestroika” is going. It would be an illusion to say that it is progressing as quickly as we would like. Old traditions are hard to overcome, as are old formulae, formed over decades. Time is required for people to adapt to new ways. People need to become accustomed, to understand.
We know that people abroad talk about opposition to “perestroika.” This speculation comes from ill wishers. There is no opposition in any real sense. There is a natural process in which the old tries to resist the new, a manifestation of Newton’s third law of physics that every action engenders a reaction. We are deeply convinced in the correctness of our approach. It is firmly supported by the people. Some, even at the ministerial level, come to us and say they cannot understand what is wanted, that they have been educated in another way. We reply: Thank you, you have done a good job, but now you should retire and we will find new faces.
Ryzhkov said he would like to comment briefly on international economic relations. He was very glad Secretary Shultz saw bright prospects and hoped this view was widely shared. The Secretary noted his view was not limited to him alone but did not come from the sometimes lumbering process of government consensus. Then you too need “perestroika,” Ryzhkov joked. The Secretary responded that in our system “perestroika” was a continuous process. The magazine “Fortune” each year listed the 500 most successful companies, and the lists vary considerably from year to year. Companies must take risks, seek rewards, or they can go to sleep and lose. The market does this, although political trends also play a role. What is clear is that a society that cannot renew itself will almost certainly atrophy. So the Secretary was impressed with what Ryzhkov had been saying.
Ryzhkov said he felt East-West relations were at a crossroads. Sooner or later the West, led by the U.S., would select one of two courses. The first, preferred by some circles in the U.S., was to isolate the USSR from the international economy through embargo and various trade restrictions. The fundamental idea seemed to be that the Soviet Union would somehow disrupt or sow discord in the world economy.
The second approach saw the Soviet Union and its socialist allies as an organic part of the world economy, as equal economic partners. [Page 182] The Soviet side favored the second course. This would be economically beneficial to all. It would also inevitably affect the overall political climate positively.
The Soviet economy would not fail if the U.S. adheres to its present course. Soviet plans are based upon the USSR’s internal possibilities. We can manage without close economic cooperation with the United States. And the U.S. does not represent all western countries, any more than the West represents the world as a whole. But it should be understood, Ryzhkov said with feeling, that the Soviet leadership was not interested in disrupting the world economy, in imposing embargoes, in waging economic warfare. We experienced difficult relations with the FRG lately but did not reduce the supply of Soviet natural gas to that country. When, at the 27th Party Congress, Gorbachev spoke of a system of international security, he listed economic security as one of four essential components.6 We try to conduct our policies accordingly.
But we are often told we are a closed society, and we find that our interest in becoming associated with international economic organizations, even as observers, is rebuffed. On bilateral trade, Ryzhkov said he was glad Secretary Shultz foresaw bright prospects. The Soviet leadership believed there was great potential for Soviet-U.S. trade, although it presently is in very bad shape. This is due to restrictions the U.S. side had imposed. Even so, several of your allies are quietly increasing trade with us. For example, Mrs. Thatcher showed considerable interest in trading with us, and indeed her visit stimulated an upturn in bilateral trade. You grant other socialist countries, such as Hungary, MFN. Why not the Soviet Union?
I am convinced, Ryzhkov said, that sooner or later our economic relations will realize their potential. The timing depends upon us. We should begin by eliminating the barriers, such as the lack of MFN for the Soviet Union, the Jackson-Vanik Amendment.7 The U.S. businessmen Ryzhkov talked with favored this. But the initiative must come from the political leadership.
Aristov interjected that U.S. barriers were holding back the process. Tariffs on Soviet goods were as high as 70 percent, when the normal was 3 to 5 percent.
Ryzhkov said he wanted to underscore the underutilization of the combined scientific and technical potential of our two countries. This [Page 183] was not natural. In addition, one observes certain economic tensions among advanced capitalist countries. These do not add up to economic warfare but could develop into something dramatic. They could be considered similar to early earthquake warnings. The Soviet side hopes they do not develop further. On the other hand, the Soviet Union represents a huge market, so huge that it is hard to grasp. The U.S. should consider this carefully. In sum, we invite a serious dialogue on economic matters.
The Secretary said he could agree with much of what Ryzhkov had said. We needed to find a strategy for developing economic relations. U.S. policy is clear: We favor trade between the U.S. and the USSR, between East and West, except for items involving sensitive military technology. The Carter administration’s grain embargo did not fit into that policy. Ronald Reagan campaigned against the embargo and removed it shortly after he became President.8
But one should reflect upon why the grain embargo was imposed. This leads to a point that needs to be part of our joint strategy to improve relations, including economic ties. The grain embargo came into being in reaction to the Soviet invasion of Afghanistan. This shows something Ryzhkov earlier touched upon. When we consider military, regional, human rights and bilateral matters, we see that each in some ways has a life of its own. But in a more profound sense, these aspects of our relationship are all interrelated. So, in my meetings with the Foreign Minister, and when the President meets the General Secretary, we discuss all four major areas. If we are to succeed in normalizing our relations, we must address each of these areas.
The lack of MFN and the Jackson-Vanik Amendment, right or wrong, are connected with emigration. Ryzhkov had mentioned Hungary: Jackson-Vanik did not apply because Hungary placed virtually no restrictions on emigration. Emigration has of course been a big issue in the Soviet Union. We are pleased to see recent positive developments in this area. The point is that the relationship is complex and must be addressed in its entirety.
The Secretary said he would like to raise a technical problem he had discussed with Kosygin—who had an interesting, creative mind—years ago, when the Secretary was Secretary of the Treasury.9 How does a large, highly-centralized economy like that of the Soviet Union (as Ryzhkov had himself noted), with five-year plans, huge when compared to any particular component of our market, interact with the [Page 184] United States? We discussed this problem in terms of grain. The problem from our side was how to handle a buyer so large that his purchase plan could manage the market, without the knowledge of others in the market. Kosygin pointed out the Soviet problem: The Soviet side needed to know how much grain was available and what the price would be. After an interesting discussion, we arrived at a solution that later became a minimal number of tons; we agree that additional amounts can be purchased without our prior agreement, to a deficit limit. In short, there are technical as well as political problems, and there are ways to solve them.
Ryzhkov said he believed a resolution along the lines the Secretary described could be applied today, he had a list of items needed by the Soviet economy but blocked by U.S. political restraints (note: the list, handed over by Ryzhkov, is appended).10 Perhaps we could use quotas and conditions as in the grain agreement. We favor establishing the necessary conditions for progress.
The Secretary welcomed that comment but wanted to suggest another idea. Ryzhkov had earlier mentioned that Soviet enterprises could deal directly in foreign trade. This could make the interface between our two economies less complex, since the difference in scale would be reduced. Ryzhkov commented that Secretary Shultz’s diplomatic side had prevailed over his political side. So let us create the necessary political conditions, and many things will take care of themselves.
The Secretary said this was the correct note to mention in summary. The Secretary agreed with Ryzhkov’s earlier comment that in the sweep of history an expansion of U.S.-Soviet economic relations was virtually inevitable. We need to create the right conditions. Knowledgeable people of good will can grapple with the issue of the best interface between our disparate economies.
Ryzhkov thanked the Secretary for an interesting discussion. They could easily continue if there were more time. The Secretary agreed, saying there was much to discuss. Ryzhkov noted the need to communicate, to move forward on basic problems. The discussion began in Stockholm a year ago had now been continued, and Ryzhkov said he hoped it would be continued in the future. The Secretary said he also hoped this would happen.
- Source: Department of State, Executive Secretariat, S/S Records, Memoranda of Conversations Pertaining to United States and USSR Relations, 1981–1990, Lot 93D188, Moscow Trip—Memcons 4/12–16/87. Secret; Nodis. Drafted by Combs; cleared by Graze and Pascoe. The meeting took place in the Kremlin. In Secto 6015, April 14, Shultz conveyed to Reagan his meeting with Ryzhkov, noting, “I think his remarks reveal that he understands the essence of his country’s current economic woes, even if he may be overly optimistic about the prospects for overcoming them.” (Ibid.)↩
- See Documents 38–40.↩
- Minutes of this meeting are scheduled for publication in Foreign Relations, 1981–1988, vol. V, Soviet Union, March 1985–October 1986.↩
- Reagan and Gorbachev signed an agreement on contacts and exchanges in scientific, educational, and cultural fields in Geneva in 1985.↩
- The memorandum of conversation among Shultz, Bush, and Gorbachev at Chernenko’s funeral, March 13, 1985, is scheduled for publication in Foreign Relations, 1981–1988, vol. V, Soviet Union, March 1985–October 1986.↩
- See “Excerpts From Gorbachev’s Talk at Party Parley.” (New York Times, January 28, 1987, p. A–8)↩
- Reference is to the Jackson-Vanik amendment to the Trade Act of 1974, which linked U.S. trade with the Soviet Union to emigration visa for Soviet Jews.↩
- On April 24, 1981, Reagan lifted the partial embargo of grain sales to the Soviet Union his predecessor, Jimmy Carter, had imposed in the aftermath of the Soviet invasion of Afghanistan in December 1979.↩
- Shultz served as Secretary of the Treasury 1972–1974.↩
- Attached but not printed is the informal translation of a paper handed to Matlock. The paper listed examples such as refusal by the United States to issue export licenses 1980–1983.↩