Soviet Foreign Trade Policies in the 1980s

Citation preview

Berichte des Bundesinstituts für ostwissenschaftliche und internationale Studien Soviet Foreign Trade Policies in the 1980s Philip Hanson

41-1986

Als Beitrag zum Umweltschutz: Innenteil überwiegend aus Recyclingpapier

Die Meinungen, die in den vom BUNDESINSTITUT FÜR OSTWISSENSCHAFTLICHE UND INTERNATIONALE STUDIEN herausgegebenen Veröffentlichungen geäußert werden, geben ausschließlich die Auffassung der Autoren wieder. © 1986 by Bundesinstitut für ostwissenschaftliche und internationale Studien, Köln. Abdruck und sonstige publizistische Nutzung - auch auszugsweise nur mit vorheriger Zustimmung des Bundesinstituts sowie mit Angabe des Verfassers und der Quelle gestattet. Bundesinstitut für ostwissenschaftliche und internationale Studien Lindenbornstraße 22, D-5000 Köln 30, Telefon 0221/5747-0

C o n t e n t s page Kurzfassung

1

Introduction

5

1.

2. 3.

Seven Trade 1.1 1.2

Characteristics of Soviet Foreign Policy Financial Prudence Use of the West as a Source of Technology and Food 1.2.1 Civilian Technology Import Strategy 1.2.2 Food Imports 1.3 Military-related Technology 1.4 Shifting Trade between Eastern Europe and the West 1.5 R e l i a n c e on Primary Product Exports for Hard Currency 1.6 Import Hunger, Export Aversion 1.7 Organizational Rigidity P a s t P a t t e r n s as a Guide t o t h e F u t u r e . . . Prospects

3.1 3.2 3.3 3.4 3. 5 4.

Conclusions

Summary

14 15 20 22 24 29 31 34 35 39

S o v i e t E x p o r t s t o t h e West P o t e n t i a l S o v i e t Demand f o r Imports from t h e West: C a p i t a l Goods P o t e n t i a l S o v i e t Demand for Imports from t h e West: Food The Hard Currency Balance The E a s t European Option

Notes

7 8

39 41 43 46 47 49

,

51 67

Oktober 1986 Die vorliegende Arbeit i s t aus einem Forschungsauftrag des Bundesinstituts für ostwissenschaftliche und internationale Studien, Köln, hervorgegangen. Dr. P h i l i p Hanson i s t Reader in Economics am Centre for Russian and East European Studies der University of Birmingham. Redaktion: Heinrich Vogel

Philip Hanson Soviet Foreign Trade Policies in the 19 80s Bericht des BlOst Nr. 41/1986 Kurzfassung Diese Untersuchung behandelt die sowjetische Außenhandelspolitik in der zweiten Hälfte der achtziger Jahre. Es handelt sich dabei um einen Versuch, eine Reihe von Merkmalen dieses Bereichs der sowjetischen Politik herauszuarbeiten und die voraussichtliche Entwicklung des sowjetischen Außenhandels in den nächsten Jahren im Lichte der Weltmarkttrends und der diesbezüglichen Grundzüge der sowjetischen Politik einzuschätzen. Die Einschätzung basiert auf der Vermutung, daß eine Änderung der entsprechenden Merkmale nicht zu erwarten ist. Es werden sieben Charakteristika der sowjetischen Außenhandelspolitik herausgearbeitet, und in ihrer Rolle seit 1970 beschrieben:

1. F i n a n z i e l l e Vorsicht. 2. Schwergewicht auf Nahrungsmittel- und Ziviltechnologie-Importe aus dem Westen unter Beachtung der komparativen Vorteile des sowjetischen Wirtschaftssystems. 3. Aufrechterhaltung eines separaten Systems zum illegalen Erwerb militärisch nutzbarer Technologien. 4. Eine konstante Gewichtsverlagerung zwischen politischen und wirtschaftlichen Überlegungen, die sich im Grenzfall auf die Entscheidung zwischen dem Handel mit dem Westen und dem mit Osteuropa auswirkte. 5. Weitgehendes Setzen auf Brennstoffe und Rohstoffe aus dem Nichtnahrungsmittelbereich, um im Westen Devisen zu erlösen.

2

6. Bei den Produktionseinheiten eine Neigung zu mehr Importen und weniger Exporten - eine Neigung, der die zentrale Politik und Planung entgegenzusteuern versuchen . 7. Wirksamer Widerstand gegen organisatorische Veränderungen im Bereich des Außenhandels. Diese Charakteristika sind tief verwurzelt und dürften von Dauer sein. Zusammen mit der Nichtkonvertierbarkeit des Rubel und der im allgemeinen nicht starken sowjetischen Position auf den Weltmärkten lassen sie angesichts der rapide gesunkenen Terms-of-trade der UdSSR mit dem Westen auf bestimmte Inhalte der sowjetischen Außenhandelspolitik für den Zeitraum 1986-1990 schließen. Insbesondere unter der Voraussetzung, daß die Energiepreise niedrig bleiben, - ist ein starker Anstieg der sowjetischen Nettoverschuldung unwahrscheinlich, d.h. es ist nicht anzunehmen, daß die Kreditaufnahme kontinuierlich steigt; - kann der Import von Nahrungsmitteltechnologien aus dem Westen nur unter erheblicher Belastung für die sowjetische Wirtschaft in stärkerem Maße reduziert werden; - dürfte der illegale Erwerb militärisch nutzbarer Technologien keinesfalls reduziert werden; - wird Osteuropa gedrängt werden, der UdSSR mehr Nahrungsmittel und Technologien zu liefern; - ist die Ausweitung von Energie- und Rohstoff1ieferungen auf die Weltmärkte zur Steigerung der Deviseneinnahmen mittelfristig ein plausibleres Vorgehen als Versuche, den Export von Fertigprodukten zu steigern; - dürfte die zentrale Selektion und Überwachung der Anforderungen untergeordneter Stellen nach HartwährungsImporten noch strenger werden. Die Abbhängigkeit des gesamten Endverbrauchs und der Investitionen der Sowjetunion von Importen ist erheblich. Vorsichtige Schätzungen in dieser Untersuchung führen zu der Vermutung, daß die sowjetischen Deviseneinnahmen aus dem Export in der letzten Zeit in der Größenordnung von etwa einem Zehntel des Nahrungsmittelkonsums und der Investitionen für Ausrüstungen lagen. Diese Investitionen sollen jetzt im Laufe einer FünfJahresperiode stark gesteigert werden, in der die sowjetischen Deviseneinnahmen

3

im Westen wahrscheinlich um bis zu 20 % in US Dollars, zurückgehen dürften, möglicherweise um wesentlich mehr in Verrechnung zu DM. Extreme kreditpolitische Vorsicht der sowjetischen Politiker dürfte sie dazu veranlassen, auf diese Situation hauptsächlich mit einer Reduzierung der Hartwährungsimporte zu reagieren. Diese Einschränkungen werden wohl vor allem Maschinen, Ausrüstungen und andere Güter des Nichtnahrungsmittelbereichs betreffen. Eine Reihe möglicher Entwicklungen könnte diesen Prozeß abmildern oder eventuell sogar umkehren. Insgesamt aber spricht die Wahrscheinlichkeit sehr für eine solche Entwicklung. Schon jetzt liefern die kleinen Staaten Osteuropas der UdSSR eine beträchtliche Menge an Maschinen. Sie wurden gedrängt, noch mehr zu liefern. Es darf jedoch bezweifelt werden, daß ein weiteres reales Wachstum der sowjetischen Maschinenimporte aus den verbündeten Warschauer-PaktLändern im Zeitraum 1986-1990 mehr als bescheiden ausfallen kann. Eine Beschleunigung der verdeckten Inflation bei den Preisen dieser Maschinenlieferungen in die UdSSR kann freilich das verzeichnete ("reale") Wachstum besser aussehen lassen als es tatsächlich ist. Insgesamt verstärken die Schwierigkeiten im Außenhandel die binnenwirtschaftlichen Hindernisse für Gorbatschows sehr ehrgeiziges Modernisierungsprogramm mit seiner "altmodischen" Akzentuierung eines beschleunigten Investitionswachstums im Produktionsgütersektor.

Introduction

This paper is about Soviet foreign trade policy in the late 1980s. It is an attempt to identify a number of characteristics of that area of Soviet policy, and to assess the likely development of Soviet foreign trade in the next few years in the light of world-market trends and of these features of Soviet policy.

The assessment is based on the view that

the characteristics in question are unlikely to change. The first section, therefore, is devoted to specifying these characteristics and providing some justification for the view that they are stable. It will however be argued, from a survey of the past 10-15 years, that these characteristics are not of a kind that provides much scope for formal modelling of Soviet foreign trade behaviour.

In other words, more

or less subtle and complex varieties of extrapolation from past magnitudes are not likely to be good predictors of the future. This is because much of what we have observed so far is precisely the outcome of policy choices.

In section two, therefore, an approach to forward projections is

outlined which takes the past as a guide chiefly to the direction of causation and to likely choices and outcomes, leaving scope for quite a wide range of projections. Section three describes the world market conjuncture of early 1986, especially the sharply reduced level of real energy prices», and its implications for the USSR. future developments.

Section four offers an assessment of likely

- 6 -

Throughout, certain well-understood features of Soviet foreign trade activity are taken as given. These are the inconvertibility of the ruble; the divorce between domestic and foreign-trade prices and the planners' resulting difficulty (though not necessarily total incapacity) in determining what would be a cost-effective level and composition of trade; the separation of foreign-trade management from the domestic users of imports and producers of exports; the exclusion of direct foreign investment into the USSR and the virtual absence of labour migration; and the fact the the USSR, despite the large size of its domestic economy, is on the whole a price-taker on world markets, and not a price-maker. This last point may be a little less familiar than the others. tA recent set of studies of Soviet buying and selling on world oil, gas, coal, grain, aluminium, copper, manganese, chromite, gold, platinum, asbestos and cotton markets, chiefly during the 1970s, found the USSR to have moderate influence on gold prices (in the short run) and on oil and grain prices, but little or no power to determine the prices of the other commodities.1

This is so even where the Soviet share of world trade has

been quite large (e.g., manganese and chromite).

Raymond Vernon suggests

that the observable relationship between prices and the volume of Soviet buying and selling (respectively) in the grain and oil markets exists because both world supply and world demand for these commodities are price-inelastic in the short run and the Soviet Union "projects abroad an image of imperturbability" with respect to its demand and supply, to which other operators in the market scramble to adjust.2 Daniel Bond has shown that joint Soviet and Southern African control of supplies of non-fuel minerals to Western Europe would constitute a powerful monopoly.3

That is a scenario which Western

- 7 -

Strategie planners have to consider, and which Soviet strategic planners may be eyeing with interest, but it is assumed here to be unlikely to develop in the near future. In the absence of major changes in international strategic and commercial alliances, then, the Soviet planners are responding to price changes on world markets - very broadly speaking - rather than initiating them.

That is a good reason for looking at changes in Soviet trade policy

as originating, characteristically, in Soviet trade with non- socialist countries and then feeding through to Soviet trade with CMEA partners and other socialist countries. This direction of influence is epitomised by the Bucharest formula for intra-CMEA prices, which follow "world market" prices with a lag.

It is true that the level of Soviet CMEA trade is

higher than that of Soviet trade with the developed West; in some respects Soviet "Eastern" trade may be more important to Soviet policymakers than Soviet "Western" trade. But we are concerned here with policy, and policy is almost always to do with changes at the margin dictated by considerations of a short or medium term (up to five years) nature. The impetus for policy changes is likely to continue to come from "the West", in the sense of world markets. 1. Seven Characteristics of Soviet Foreign Trade Policy The policy traits classified in this section do not make up a comprehensive picture of Soviet foreign trade decision-making. Given Soviet economic institutions, however, and the alliances and antagonisms that dominate East-West relations in general, they are characteristics which I judge to be crucial in determining future Soviet trade policies. Some of them are the products of the Soviet economic system, some of thera are products of international political focus, and others are more in the

- 8 -

nature of policy choices. Even the policy choices, however, seem unlikely to change, if only becuase they have been adhered to for so long. 1.1

Financial Prudence The Soviet international debt has consistently been kept to levels

that are low by international standards. Estimates of the Soviet hardcurrency balance of payments and debt are Western artefacts, and may not always reflect the situation as Soviet policymakers see it. This point will be taken up later in this sub-section. To begin with, however, one can say that the picture given by Western estimates is one of extreme financial caution bordering on paranoia. The Soviets seem to manage the hard-currency balance of payments in such a way as to maintain very high international liquidity, keep their debt-service ratio low and their credit rating (the banks' assessment of Soviet sovereign risk) favourable, and in general to avoid even the faintest suggestion of financial vulnerability. Table 1 shows the Soviet hard currency current account, as conventionally assessd by Western specialists.

It has been in deficit in

only two out of the past 16 years. This happened in 1975 and 1976, a period which came after the Soviet-US detente of 1972-74 (the US Congress refused in late 1974 to ratify the US-USSR trade agreements of 1972) and between the 1973/4 and 1979/80 OPEC oil price rises. A tentative interpretation of the figures in Table 1 would be that Soviet hardcurrency imports, especially grain imports after the 1975 harvest failure and capital goods ordered on credit in 1972-75, had risen sharply while Soviet hard-currency earnings growth had dropped off after OPEC I. The extent of the resulting deficit was almost certainly unintended, and action was taken to eliminiate it.

- 9 -

Relations between Moscow and Washington deteriorated after the mid-1970s.

It is therefore impossible to say how much of subsequent

Soviet policy is attributable to a fixed stance of extreme financial caution, and how much of it reflects additional caution in a period of worse-than-average relations. At all events, what is observable is an increased level of gold sales in 1976-81 and a curbing of import growth, so that the current account has remained heavily in surplus since 1976 and the growth of net debt to the West was more or less halted, and even reversed, until the sharp fall in energy prices in 1985. Whether Table 1 captures Soviet external financial developments as Soviet policymakers see them, is uncertain.

On the face of it, the size

of the current account surplus from 1977 through 1985 indicates, not so much prudence on the part of the Soviet state planners and State Bank officials, as doctrinaire mercantilism.

Soviet financial caution looks

even more extreme if one allows for Soviet gold reserves. These are estimated at some 77 mn troy ounces (2,395 metric tons) at the end of 1934; if valued at, say, $300 per ounce (i.e. somewhat below the late 1984 London market price) they were equivalent to $23 bn, or nearly 11 months' hard-currency imports at 1984 rates.^ At the same time, the figures are rather puzzling. The current account surplus in Table 1 cumulates to $37 bn in 1977-85. Why, then, was Soviet net debt not eliminated?

A question mark must be placed against

these balance of payments estimates.

In characterising Soviet financial

prudence, it is worth seeing if we can arrive at something closer to the Soviet "operational" view of what is happening. One answer to the balance of payments/debt puzzle has been adopted by Wharton Econometric Forecasting Associates' Centrally Planned Economies

10 -

Service (WEFA CPES) and by PlanEcon, Inc.

It is generally agreed that the

"hard-currency" arras sales in Table 1 have mostly been made on credit, and that - particularly during the 1980s - Soviet credit outstanding to less developed countries (henceforth LDCs) has grown. Estimating the hardcurrency trade balance (as defined for Table 1), changes in Soviet deposits in BIS-reporting banks and net new borrowing, and allowing for the effect of exchange-rate movements on the dollar value of debt, it is possible to arrive at net Soviet hard-currency lending to other countries as a balancing item. In other words, the current account and debt figures can be reconciled, in this way.

Then outstanding Soviet net hard-currency

credits to LDCs can be estimated.

WEFA CPES end-year estimates are $25.2

bn for 1983, $31.0 bn for 1984 and $38.4 bn for 1985.5

Looked at in this

way, the USSR becomes (in the 1980s, at least) a large net hard-currency creditor to the rest of the world. As an accounting solution, this approach is surely correct. As a guide to the way Soviet policymakers see Soviet external finances, however, it may be misleading.

It treats all the USSR's multilateral-

settlement trade partners equally as markets in which convertible currency dan reliably be earned, and it does not distinguish between more and less liquid assets.

(To be fair, it should be added that Wharton and PlanEcon

analysts do not claim that their assessments serve these purposes.) Soviet lending to LDC convertible-currency trade partners is not an activity on which much hard information is available.

It is likely,

however, that it is mostly in connexion with arms sales, that much of it is on soft terms, and that some of it is unlikely to be repaid at all. Most LDC buyers of Soviet arms are OPEC countries, and payment has been partly in crude oil. With oil prices falling, the quality of these Soviet

-

11 -

assets (the debt outstanding to Moscow) has deteriorated.

A British

Foreign and Commonwealth Office background brief puts Soviet hard-currency income from arms sales (repayment of principal plus interest) at $5.5 bn in 1983, of which about $2.5 bn was in the form of oil deliveries.6

That

figure is above the estimated value of "hard-currency" arms deliveries for that year in Table 1, but in Table 1 the oil is counted under imports and the interest payment is in principle allowed for in the calculation of net interest.

The FCO assessment therefore implies that arms sales, as a

source of current inflows of hard currency, were well below the $4.7 bn which is the estimated value of current deliveries to LDCs with whom Moscow does not trade (formally) on a bilateral settlement basis. There are two further complications about Soviet payments and debt figures.

One is that Table 1 makes no allowance for hard-currency trade

inside CMEA.

It has been estimated that the Soviet balance in this trade

was a deficit of around $1 bn in the early 1980s, declining to $300 mn in 1985.7

The other complication is that estimates of Soviet borrowing from

Western banks do not allow for the unknown amount of inter-bank borrowing by Soviet banks in the West from Western-owned banks. One rough estimate of Western bank deposits in Soviet-owned banks in the West in late 1985 is about $5 bn.°

For these two reasons it is likely that the Soviets see

themselves as earning less (net) and borrowing more than Table 1 suggests. Considerations of this sort bring us a little closer to the liquidity levels influencing Soviet decisions about buying and borrowing on Western markets. They also make Soviet external financial seem less extreme in its caution.

Thus when the Soviets borrowed some $1.5 bn on

the Euro-markets in 1985^ and Soviet foreign trade officials subsequently confirmed that there were to be cuts in capital goods ordering from the

- 12 -

West in 1986-90, for payments reasons, compared with ealier intentions,10 they were not being guided by current account figures close to the conventional Western estimates of Table 1. They were responding in part to assessments of future earnings decline, and partly to a current position less favourable than Table 1 suggests. There is no reliable method for approximating the data used by Soviet dec ision-makers. There is however some reason to think that convertible-currency dealings with developed Western countries are closer to the operating categories of Soviet planners than transactions with all countries formally classified as multilateral trade partners of the USSR according to IMF information (the concept used in Table 1 and in CIA studies).

In addition to the reasons already given for doubting the

operational significance of "LDC hard-currency trade" as usually defined, it is odd that this definition of multilateral trade partners should include, at least for 1970-81, countries such as Libya, Iraq and the Yemen People's Republic. These are Soviet allies of varying degrees of closeness, and Libya and Iraq are generally understood to have been bartering oil for Soviet arms. The group of countries classified in Soviet trade statistics as "industrially developed capitalist countries," less Finland, is in several ways more relevant to Soviet calculations about external finance. Its banks and governments are the immediate source of almost all convertiblecurrency lending to the USSR; its markets are the source of almost all Soviet export earnings of convertible currency once the problematic category of arms sales is put to one side; its suppliers are the main trading partners requiring hard currency payment (though food imports Argentina and Brazil are also significant), and it is a group of nations

- 13 -

who must be seen predominantly as hostile: even neutrals such as Austria, Sweden and Switzerland cooperate informally in US-led strategic export controls. It is true that some Soviet trade with the developed West is bilaterally balanced at the microeconomic level, with firms agreeing to various sorts of countertrade. A recent Austrian study puts barter transactions at about 15 percent of East-West trade.12

The Soviet

planners treat some of the trade flows between the USSR and the West as a separate, self-financing category for this reason.

Even so, Soviet

transactions with the developed West are likely to be of greater operational importance in Soviet planning than hard currency transactions as usually defined - and this is especially likely to be the case in the 1980s, when LDC buyers of Soviet arms have themselves run into financial difficulties. Table 2 contains calculations of a Soviet debt-service ratio in which merchandise exports to the developed West less Finland are the denominator.

This has been around a quarter for most of the past decade,

moving up slightly in 1977-78 and sharply in 1985.

In contrast, the more

usual calculation, in which all "hard-currency" earnings are the denominator, yields a relatively stable debt-service ratio which runs about 10 percent lower - though it, too, moves up sharply in 1985. The rate of Soviet machinery ordering, both in current value and in volume, is also shown in the table. The sharp drop after 1976 may be explicable solely by the slowdown in Soviet investment growth in the late 1970s and the deterioration in Soviet-Western political relations. If it was influenced by external financial circumstances, however, the burden of debt in relation to exports to the West alone (DSRW in Table 2) fits the

- 14 -

scenario better than the total-hard-currency debt-service ratio.

(The

jump in ordering in 1981 is the result of orders for the self-financing Urengoi-to-Western Europe gas pipeline, and can perhaps be treated as a special episode.) The view that Soviet planners have exhibited great financial caution, however, is not put into doubt by the figures in Table 2. The very high level of gold reserves has also to be taken into account.

If we

are looking for Soviet operating rules of thumb, though, especially for the 1980s, the discussion here suggests that we should pay special attention to transactions with the developed West. 1.2

Use of the West as a Source of Technology and Food Foreign trade, particularly with the West, is used by Soviet

planners to offset major weaknesses in Soviet economic performances. In common with the East European countries, the USSR devotes substantial resources to research and development (R and D) and gets relatively little from them.

The USSR and the East European Six employ about the same

number of research scientists and engineers as the USA, Canada and Western Europe together, but continue to lag behind the latter countries in the introduction and diffusion of new civilian products and processess. The main reason for this disparity, it is now generally agreed, is systemic.^3 This lack of technological dynamism is probably the most important single reason why labour productivity and average consumption levels in the USSR and Eastern Europe remain substantially below those in Western Europe and North America. The USSR also makes a particularly unproductive use of the large share of resources that it allocates to agriculture.

In the early 1980s

at least a fifth of the Soviet labour force was engaged in agricultural

- 15 -

production, if work on the private plots is included.14 and some estimates put the share nearer to a quarter.15

if, say, 5 percent of the farm

labour force is engaged in producing non-food items (cotton, flax, etc) and net imports are around 10 percent of the total calorie intake of the Soviet population (see below), a very rough calculation suggests that the average Soviet agricultural worker not engaged in the production of technical crops is producing enough food for 8-9 people.

In comparison,

3.4 mn persons engaged in agriculture in the US in 1980 produced (in addition to technical crops), enough to feed a total population of 226.5 mn and provide net exports of $10 bn: in other words, to feed 67 US citizens per farm worker and supply food to other countries as well.^" Investment yields are also low"in the Soviet farm sector. Agriculture narrowly defined had in 1976-80 been receiving about 20 percent of Soviet gross investment outlays (in 1973 prices), agriculture more broadly defined about 27 percent and the "agro-industrial complex" about 3^ percent.1?

Net subsidies to Soviet agriculture in 1980, as

estimated by Treml1°, were 35 bn current rubles, equivalent to 5.3 percent of GNP19, an exceptionally heavy burden of subsidy. 1.2.1

Civilian Technology Import Strategy Soviet policies and decision-making criteria on technology imports

have been extensively studied by Western specialists."^ From Soviet leadership speeches, other official statements, the specialised Soviet literature and the actual patterns of Soviet trade, certain formal principles and informal practices can be deduced, with respect to technology with primarily civilian applications. They can be summarised as follows:

- 16 -

1. Planned output growth will if possible be obtained through the use of Soviet-made machinery and know-how available in the USSR, or, failing that, East European machinery and knowhow. 2.

Where the required quantity of machinery of the desired

performance characteristics is not readily forthcoming from Soviet and East European sources, the plant manager and ministry officials who are responsible for meeting output targets tend to press for Western machinery and know-how to be acquired. 3. These pressures are subject to a process of screening by the central planners, in which balance of payments constraints are one major consideration. So far as technology imports from the West are concerned, these "constraints" are interpreted in the extremely cautious fashion described in sub-section 1.1. 4.

Eventual purchases tend to be of embodied technology in

the form of machines, machine systems and complete plants, and not of licences and know-how unaccompanied by the hardware to implement them.

This is merely a matter of

common sense, since so much of the Soviet Union's persistent weakness in technological innovation is to do with implementation - a problem which the acquisition of new knowhow on paper would not resolve. The importance of machinery imports as such has been explicitly emphasised recently by a Soviet deputy prime minister (interview with Yakov Ryabov, Izvestiya 26 May 1986.)

- 17 -

These characteristics provide only a weak guide to Soviet foreign trade behaviour with respect to machinery and know-how imports. Neither high domestic priority nor particularly large technology lags behind the West nor hard-currency export earnings - nor even a combination of all three - will guarantee that a particular branch will receive imported technology on a large scale, as the experience of the energy sector shows.21

it needs also to be remembered that military hardware and

closely related (dual-use) lines of production are the subject of a separate process of technology requisition and assimilation, operating on different principles (see 1.3.) Table 2 shows that Soviet ordering of Western machinery fell sharply after 1976, both in volume and in current prices. A tentative explanation (in the style of narrative history, rather than a statistically testable hypothesis) would be that the internal screening became more rigorous as the ratio of debt service to exports to the West increased, and as the ratio of gold reserves to hard-currency imports fell after 197^.

It it is true that the debt burden and the reserves were not

in a state which would have set warning lights flashing in most Third World countries or in the more adventurous East European economies. For the ultra-prudent Soviet policymakers, however, they were worrying - or so one can plausibly suppose. With East-West political relations also deteriorating and debt problems looming in Eastern Europe, the cut-back in orders is not, in retrospect, surprising. The spurt of orders in 1981 is, on the face of it, less easy to account for. case.

There are grounds, however, for treating it as a special

More than half of these orders were for equipment for the Urengoi-

Western Europe gas pipeline which became such a bone of contention between

- 18 -

the United States and her West European allies. The pipeline was special for at least one, and possibly two* reasons; first, it was a selffinancing exercise, and indeed involved contracts for future hard-currency revenue from gas exports that would be greatly in excess of what was needed to pay for the imported pipe and equipment; a possible additional consideration, about which one can only speculate, may have been that Soviet policymakers may have seen the piepline much as the US Administration did: as a means of increasing leverage over West European governments.

Whatever the role of such political considerations in Soviet

thinking, the financial aspects of the pipeline project were probably sufficient to explain its going ahead, so far as Soviet decisions are concerned.

Opportunities for almost totally secure countertrade deals of

this scale are rare. The prospect of stagnating oil output and oil-export volume must have made it well-nigh irresistible. The new stagnation of hard-currency export revenues in the West in 1982-84, and their 15 percent decline in 1985, however, (see Table 2) was probably worse than expected.

The relatively high level of reported

orders in 1985 is therefore especially hard to explain.

It may be noted

however that the import purchasing power of gold reserves increased substantially in 1985 and that the sharp fall in the oil price came only towards the end of the year.

It is true that Soviet hard currency

earnings fell most sharply early in the year because of reduced oil deliveries, but it was perhaps only towards the end of the year that Soviet planners began to see the fall in earnings as difficult to reverse quickly.

If so, the (roughly estimated) debt-service ratio in row 3 of

Table 2 may have seemed only a short term aberration during the months in Which most of the orders were placed.

\

- 19 -

Whatever the inside story actually was in 1985, the relatively high rate of machinery ordering contrasts markedly with strong top-level statements by Gorbachev, Ry^VJcov and others about the need to reduce dependence on imported Western technology.23

One possible explanation

would be that the new Soviet leadership has been making production targets more ambitious and penalising officials more heavily for failure; this increase in pressure on enterprises and branch ministries may well have increased their pressure "from below" for imports of Western machinery, regardless of top-level statements of policy.

Cut-backs in ordering are,

in any case, likely to follow. The importance of imported Western machinery in the Soviet economy is a difficult and contentious subject, on which there is a large literature."

There is no need to review the issue here. There is

however some recent evidence which may provide a clue to how Soviet policymakers view the dimensions of machinery imports in relation to the domestic economy. Professor V K Fal'tsman of the USSR Academy of Sciences' Central Economics Mathematical Institute appears in his research to have had access to unpublished data on investment expenditure on imported capital goods, in domestic investment (i.e. users') prices.^5

j n an article in

late 1985 he asserted that in recent years about a third of all equipment investment was in imported machinery.2°

The workings in Table H for the

years 1980-84, show that this claim is consistent with a practice of pricing imported machinery by the simple method of converting valuta or foreign trade rubles into domestic rubles at 1:1.

If this is what is in

fact done - and it is what some Western specialists suspected was done machinery imported from the West for hard currency in 1980-84 would have

- 20 -

been viewed in internal Soviet calculations as constituting about 7J percent of equipment investment in the same period (see Table 4 ) . This interpretation is of course speculative.

Even if it is

correct, it does not follow that this rather oddly-obtained number would dominate the planners' assessments of what machinery imports from the West are "worth". But simple, easily-grasped, meaningless numbers usually have enormous influence on policy. 1.2.2.

Food Imports Vladimir Treml has estimated that 1981 Soviet gross imports of

food and food materials (including animal fodder but excluding less direct contributors to the food supply such as imports of pesticides or of mineral fertiliser technology) contributed 21.2 - 27.2 percent of the calorie value of the food supplied to the Soviet population; he estimated the contribution of net food imports at 17.7 - 23.k percent.2?

Those

estimates are for food imports from all trade partners, and for a year in which Soviet food imports were particularly high.

About two thirds of

this food is bought for hard currency, however, and recently even in more "normal" years the contribution of the West to Soviet food supplies has been substantial. Treml's calculations for 1981 can be extrapolated to other years and adjusted to exclude imports from bilateral trade partners. On the assumptions that (a) the total calorie intake of the Soviet population in 1983 was approximately the same as in 1981, (b) that the value of food imports in constant prices varies closely with their total calorie content and (c) that available estimates of differences between the general level of intra-CMEA and world-market food prices are reliable, it can be estimated that in 1983 gross imports of food and food materials from non-

r 21 -

socialist trade partners were equivalent to 9.8 - 12.6 percent of total Soviet calorie intake.^° Table 3 shows that In 1970-84 food and capital goods accounted for between three-fifths and four-fifths of Soviet hard currency imports, and usually around two-thirds.

Compared with the early 1970s, the share of

food in hard-currency imports has risen, while that of machinery has declined.

(The year 1983 saw a bunching of imports of equipment and pipe

for the Urengoi-Western Europe gas pipeline. These echo the surge of orders in 1981 recorded in Table 2. For the reasons discussed in 1.2.1 above, this episode can probably be regarded as a special case.) It appears, therefore, that Soviet policymakers, while still looking to hard-currency trade to remedy systemic deficiencies in the Soviet economic system, have lately given priority to treating the agricultural deficiencies of the system in this way, rather than the deficiencies in innovation. This is not necessarily a long-term change of priorities.

It reflects a particular set of circumstances in the past six

or seven years:

(i) a run of bad Soviet grain harests; (ii) fears, after

the Polish events 1980-81, that unrest over living standards might erupt in the Soviet Union itself; (iii) the deterioration in relations with Moscow and Washington, and (iv) the latter's readiness to use technology trade as a lever but not (on the whole) food trade. Finally, (v) falling relative food prices on world markets may have played a part. It is easy to imagine changes in these circumstances. The need to turn to the West and to some non-socialist LDCs both for food and for new technology embodied in capital goods, however, is built into the Soviet system.

-22 -

1.3

Military-related Technology The third feature of Soviet policy is the continuous and

systematic collection of militarily useful know-how from Western sources, conducted as an exercise largely (though not entirely) separate from normal trade, and governed by different considerations. Public information about this activity has recently been increased after the French authorities obtained secret internal Soviet documents about the spetsinformatsiya (special information) system, and made some information from them public.^9 Clandestine acquisition of Western documents and "samples" (components, materials and equipment - referred to as obraztsy in the Soviet documents) is by KGB Directorate T, the GRU (Military-intelligence) and other acquisition agencies, following detailed targets set by the VPK (military Industrial Commission).

The ultimate source of these targets is

the Soviet military, in their development programme for military systems, and the military-production research units, plants and ministries who supply those systems. The Ministry of Foreign Trade is used as one of the acquisition agencies but is not at the centre of the decision-making process. Data on the flow of "imports" under the clandestine acquisition process must at least in part be excluded from the trade statistics, while some may be included but unidentifiable.

Observable Soviet machinery and

licence buying, therefore, is mostly civilian in purpose, though some openly and legally purchased machinery may on occasion be put to military uses.

It is unlikely that the total value of the clandestine flows, even

at the risk-premium prices (typically three times the normal price) that are paid, is large relatively to normal trade. This is because, though numerous, they are mostly one-off items, often small, for use in reverse

- 23 '-

engineering Soviet equivalents or simply for information on the capabilities of Western military hardware. . The policies and decision criteria relating to VPK acquisition are quite different from those relating to civilian technology imports. The items acquired are used in the Soviet weapons development programme, i.e., primarily in research, development and design.

There are almost certainly

instances (e.g. when equipment was acquired for manufacturing microprocessors) when illegally obtained equipment is directly used in production for the military.

The more characteristic form of use however,

is as a substitute for a stage or stages in a Soviet development programme, e.g. by copying the Western item.

The end-product will as a

rule be Soviet-made tanks, aircraft, weapons control systems and so on, and these will usually be made with Soviet-built machinery.

There appears

to be little resemblance to the programme of overt, "normal" civilian technology imports, in which machines, lines of equipment and complete plants are simply bought in and directly used - often with little or no subsequent replicating of them, let alone adaptation and improvement.30 The costs and benefits of Soviet clandestine acquisition of Western military technology cannot be assessed from the information publicly available in the West, The benefits probably cannot be assessed by Soviet policymakers themselves. This is partly because, as the documents acquired by the French make clear, the spetsinformatsiya programme (which is not the only militarily-useful acquisition programme in being) is very wide in scope: many thousands of clandestinely-acquired documents and samples are fed into Soviet military prgrammes each year, and are tightly interwoven with the domestic research, development and innovation (RDI) effort, in a variety of ways.

The separation of their

- 24 -

contribution or -to put it differently - the calculation of how Soviet military programmes would proceed without them, must be a practical impossibility. The costs of the clandestine technology acquisition system are not revealed in the Soviet internal documents. The documents give budgets and expenditures for the acquisition of specific spetsinformatsiya, but these probably relate only to expenses over and above the "overheads" entailed in keeping the collection system in being and maintaining communication channels. These overheads are, in part at least, joint costs, associated with normal diplomatic and trade operations. They may or may not be allowed for in any costing of the military acquistion process. The "normal" trade system appears to be regularly used, in addition, for acquiring embargoed items through roundabout channels.

(For example, a US

sonar device legally shipped to Norway and then transferred to Japan in a box labelled "equipment for oil prospecting" for onward shipment to the USSR.31) In general, and with whatever distorting effects it may have on everybody's official trade returns, clandestine technology acquisition should be seen as an activity outside normal Soviet trade.

It must be

governed above all by military-technical considerations, and be very little, if at all, affected by the balance of payments. It will not be considered any further in this paper. 1.U

Shifting Trade between Eastern Europe and the West In the past decade about one-eighth of Soviet merchandise trade

turnover (as reported in valuta rubles) has been with LDCs and another eighth with socialist countries outside Europe (including CMEA members Cuba, Mongolia and Vietnam).

The remaining three-quarters of Soviet trade

- 25 -

is with developed countries: West.

the East European six and the developed

One constant element in Soviet foreign-trade policymakers is the

need to make choices, at the margin, between these two main groups of trade partners. That there are especially strong political considerations involved in Soviet trade with Eastern Europe, is obvious. Attempts to measure the absolute levels of Soviet so-called "subsidies" to Eastern Europe or of the Soviet "costs of empire" more broadly defined, however, entail large conceptual difficulties as well as problems of measurement. In a well-known study, Michael Marrese and Jan Vanous estimated Soviet "subsidies" to Eastern Europe in 1971-78 from differences between intra-CMEA prices and world market prices for samples of commodities in five main commodity groups.32

if the intra-CMEA trade flows are converted

into dollars (a) at the official Gosbank dollar-ruble exchange rate and (b) at the weighted average dollar-ruble price ratios for the samples of products in each commodity group, the difference between (a) and (b) in the 1970s was a large and growing sum, implying a substantial, and growing, opportunity cost to the USSR from trading with Eastern Europe rather than on world markets. In crude summary, the immediate reason for this is that the USSR, on the basis of these calculations, was obtaining lower prices from its sales to Eastern Europe than from sales on world markets (a difference dominated by oil-price differences) and at the same time paying more (on balance) for the goods it imported from Eastern Europe than those goods would fetch on world markets. Wolf and others estimated these "subsidies" at somewhat lower levels than Marrese and Vanous, but also (predictably) found them to be growing strongly.33

They dominate the total "costs of empire" calculated

- 26 -

by Wolf for the USSR in 1971-80.

(These costs also include "subsidies" to

other allies such as Cuba, military operations to maintain or expand the Soviet empire, economic aid, military aid3^ and covert activities abroad, but no part of the costs of maintaining and equipping the Soviet military.) In current domestic ruble prices, Wolf et al. put Soviet trade "subsidies" to Eastern Europe in 19Ö0 at 3.3 - *».5 percent of Soviet GNP. In current dollar terms, they estimate the same subsidies at a level equivalent to 69.8 percent of total Soviet hard currency revenue in that year. 35 Whether Soviet policymakers and planners have been making a conscious decision to transfer resources to Eastern Europe on the scale suggested by the Marrese-Vanous or Wolf calculations, however, is doubtful.

Desai has shown that the price differences considered in these

studies may be seen as the product of a trade-diverting customs union, rather than as the consequence of an attempt to transfer resources. The customs-union approach allows for the possibilities that (a) both the USSR and Eastern Europe may lose from CMEA arrangements or (b) the USSR may even gain if its trade with the rest of the world (in the absence of CMEA arrangements) was suboptimal.3° These differing interpretations of the so-called subsidy need not be resolved for the purposes of this paper.

It is obvious (a) that Soviet

planners know that (for example) a ton of oil sold on world markets has had greater purchasing power over desired imports than a ton of oil sold to Eastern Europe and (b) that if the Soviets would like to eliminate this difference at a stroke, they do not feel able to. What they can do is make marginal adjustments in trade from year to year between their two major groups of trade partners.

One stimulus to such adjustments is

- 27 -

probably the changes in Moscow's terms of trade (i.e., net barter terms of trade) with the West relative to the changes in Moscow's terms of trade with Eastern Europe. The development of these relative terms of trade is shown in Table 5.

The series given there for Soviet terms of trade with the West is

particularly rough and ready.

It lacks strict comparability between 1970-

81, on the one hand (where the series is the implicit Soviet official series), and 1982-85, on the other. Nonetheless, the picture of increasing relative attractiveness of trade with the West in 1970-80 (particularly in 1976-80), and substantially reduced relative attractiveness thereafter is reasonably clear.

For 1975-81, the year-to-

year changes in the relative terms of trade are broadly similar to the changes that can be derived from the net barter terms of trade series calculated by Wolf,37 even though his recalculation of the Soviet net barter terms of trade with the West yields a substantially different picture from the one given here for the change between 1971 and 1975. It must be assumed that changes in these relative terms of trade are capable of influencing Soviet choices, at the margin, between trade with Eastern Europe and trade with the West. They are only one of a number of influences, however, on such decisions. The direction of their influence, moreover, may not always be what one would expect. One example will illustrate the complexity of the influences involved.

In 1982, faced with difficulties in production and a weakening

world oil price, the Soviets cut deliveries of crude oil to Eastern Europe below the levels set under their agreements for 1981-85, and pushed up the rate of delivery to the West, partly but not entirely through increased re-exporting of Middle Eastern oil. In the first quarter of 1985,

- 28 V

however, when domestic production again dropped markedly below target, the export cuts fell on deliveries to the West (about 40 percent) while deliveries to other socialist countries (predominantly Eastern Europe) were trimmed only by about 7 percent.3°

Incomplete information on

bilaterally agreed deliveries for 1986-90, moreover, suggests that Soviet oil supplies to Eastern Europe in the second half of the 1980s are planned to be close to the level actually obtaining (though below that originally planned) in 1981-85.39

in other words, there has not been a further,

delayed reduction. Soviet oil export decisions in 1981-84 could be seen as indicating (a) a clear preference, at the margin, for the more rewarding Western market and (b) a negatively-sloped short-run supply curve, reflecting a hard-currency earnings target. The increase in oil export volume to the West through 1984 (Table 6), in the face of weakening prices, strongly indicates the latter. The decisions apparently made in 1985, on the other hand, indicate that different considerations prevailed.

Perhaps the

deliveries to Eastern Europe were seen as having reached a "floor" - a minimum level below which there might be serious economic damage and political instability in Eastern Europe. That can only be a tentative reading of the evidence, but regardless of whether it is right or wrong, any formal, quantifiable modelling of Soviet oil export behaviour on the basis of earlier patterns would have produced the wrong predictions for 1985.

Soviet choices, at the margin, between East European and Western

trade are the outcome of a complicated mixture of market conjuncture, asessments of economic costs and benefits and perceptions of political costs and benefits.

- 29 -

1.5

Reliance on Primary Product Exports for Hard Currency The USSR has been unsuccessful so far in developing exports of

civilian manufactures to competitive markets. She has therefore relied on sales of energy, raw materials, and semi-processed products to earn convertible currency in the West. Since the mid-1970s arms sales to LDCs have also become important as a source of what are usually classified as hard currency earnings; but it has been argued here that the hard currency nominally attributed to arms sales is an especially problematic item. Broadly speaking, therefore, primary products and semi-manufactures have been the sources of convertible currency revenue. This was the case even before OPEC I and II. In 1970 60 percent of Soviet non-arms merchandise exports for hard currency came from fuel, ferrous metals, timber, agricultural produce and diamonds. The balance was made up of machinery and equipment (8 percent), chemicals (2 percent), and a residual category which includes some raw materials and semimanufactures not counted in the figure of 60 percent.™ Energy in that year was the source of only 22 percent of hard currency earnings - slightly below the share contributed by timber and agricultural produce, taken together. The rise in energy prices transformed the mix of Soviet hard-currency earners; in the first half of the 1980s oil, gas and coal sales accounted for about 80 percent of hard currency earnings in the West and about 70 percent of total non-arms merchandise exports to convertible currency trade partners in total (Tables 1, 2 and 6). Table 7 presents estimates of the volume of Soviet non-oil-and-gas hard currency exports to the West from 1970 to 1984, in 1975 dollar prices.

Between 1970-72 and 1982-84 the real growth of these exports

averaged only 1.3 percent a year, while the volume of total Western

- 30 -

imports from all sources was growing at an average of 3.6 percent a year.l,1 Within this slow-growing total, traditional exports like timber, ores and metals and agricultural produce were in many cases tending to fall in volume. This reflected Soviet primary-product output growth which was either slowing or, if not slowing, was insufficient to keep up with the input-intensive growth of Soviet processing industry.^ The other element within this slow-growing total is manufactures. In 1965 the Soviet Union provided 0.82 percent of OECD imports of manufactures; in 1981, 0.51 percent.

Over the same period a group of 14

newly-industrialising countries increased their share from 2.JH to 6.95 percent.

Disaggregation to 2 - and 3 - digit levels of the Standard

International Trade Classification (SITC) suggests that the USSR was losing market share within most product groups.^3

A more detailed study

by Poznanski reached similar conclusions.^ This picture suggests the following generalisations.

Non-food raw

materials, including energy, are a category of exports in which the USSR has a comparative advantage derived from natural resource endowment; there is also a systemic comparative advantage attached to such exports, because the Soviet economic system does not (relatively to a market system) handicap their production either in quality (as it does in manufactures) or in quantity (as it does for farm products).

On the other hand, the

system indirectly inhibits even these exports because of its notorious tendency to high and wasteful rates of usage of fuel and raw materials per final unit of domestic production.

The windfall gains in real energy

prices in the 1970s can be seen, against this background, as an opportunity for increased Soviet participation in world trade which may well prove to have been temporary and exceptional.

- 31 -

1.6

Import Hunger, Export Aversion There is a substantial literature devoted to analysing and

measuring the propensity of Soviet-type economies to engage in foreign trade, in comparison with market economies of the same population-size and level of development.

A systemic tendency to "under-trade" was widely,

but not universally, predicted on theoretical grounds. Data for Eastern and Western developed economies in the 1950s and 1960s seemed on the whole to support this prediction.

The evidence was not, however, conclusive.^5

More recent data would probably indicate conclusions that are still less clear-cut. What is now clear for the USSR in its trade in manufactures with the West is that there are strong tendencies at the production-unit level, and probably also at the branch-ministry level, towards import hunger and export aversion. "So far as Soviet enterprises are concerned, this notion [of an incentive to export] is practically non-existent."^°

This assessment by a

Western specialist is shared by Soviet officials and managers. Ä Soviet deputy minister of foreign trade has described some Soviet engineering enterprise managements as perceiving export assignments as "a form of punishment."2^

There are speicl price mark-ups on equipment delivered for

exports, and enterprises have supposedly had since 1968 a right to retain some of the hard currency earned by their export products. These incentives, however, are not enough to offset the extra costs (including managerial effort) associated with producing for a competitive market. The costs arise from tougher quality control than for items produced for the home market and the requirement to provide service back-up for users, which is rarely required on the home market.

(In addition, the "right" to

- 32 -

retain some convertible currency is probably, like most Soviet enterprise "rights", exercisable in practice only at the discretion of the superior ministry.) The fact that the domestic economy is centrally administered virtually guarantees that Soviet manufacturing enterprises will continue to be reluctant to produce for export to competitive markets. To be more precise, the disinclination will persist so long as the economy is centrally administered and enterprise managements' rewards are determined primarily by considerations other than export performance.

In an economy

as large as that of the USSR, the latter condition is close to being a consequence of the first. This is partly because management bonuses seem in practice to be less variable with performance in general than the formal rules of the game require, and partly because, insofar as performance indicators do have an effect on income, that effect tends to be dominated by the single indicator of output-plan fulfilment. The use of special export bonuses or multiple currency conversion rates, or both, is unlikely to have much impact on managerial behaviour.

Closer

integration of foreign trade and production management, as has been tried in most East European countries, might make some difference, but the resistance to this sort of change has so far been strong (see section 1.7.) On the import side, however, the position is different. The enterprise director who has plant extensions incorporated in his investment plan, the ministry officials responsible for an increase in branch capacity or for the introduction of a major new product, the supply planners in Gosplan and Gosbank who become aware of a shortfall in domestic supply of a staple food item or a key material - all seem

- 33 -

strongly inclined to turn to Western sources of supply.

The formal

planning procedures require that it be established that a particular piece of machinery, for example, is not available from domestic sources before convertible currency is allocated for its purchase from abroad. But Soviet critics of allegedly misguided "buying in" from the West quote numerous instances where this criterion has not been applied.^" Political leaders like Brezhnev and Gorbachev and senior scientific administrataors like Academician Aleksandrov are apt to criticise past decisions to import technology on the grounds that Soviet scientists and engineers had the ability to develop and design an equivalent or better piece of equipment.

They argue that a high degree of

self-sufficiency is inherently desirable - by implication, at any cost. Soviet ministry officials and plant managers may well share this sentiment, but their practical position is different. Faced with a requirement "from above," to increase or modernise production capacity, they will often doubt the capacity of Soviet machinery producers, the Soviet supply system and Soviet construction-installation organisations to deliver reliable, high-performance equipment on time, and instal and commission it promptly.

Part of the attraction of Western machinery

suppliers is simply that they are private-sector firms who have to fulfil contracts in order to stay in business; some of them, moreover, are plant contractors and can put together a complete package of equipment supply, installation and commissioning, which the Soviet planners generally have great trouble in doing.

Surveys of executives of Western companies with

Soviet market experience show that these attributes are an important motive for Soviet "buying in" from the West.^9

- 34 -

Thus Soviet enterprises and branch ministries, by virtue of the inducements and pressures they experience in their everyday operations, have a proclivity to bid for more imports from the West and to impede the growth of exports to the West, This is only a particular facet of the more general character of - to use Janos Kornai's term - the shortage economy. The central planners - Gosplan, Gosbank and the Ministry of Foreign Trade, in this case - can be seen as striving continuously and on the whole fairly effectively, to restrain these proclivities. While generally avoiding a trade deficit in foreign-trade prices, however, they have allowed the dependence of Soviet production on imports to rise strongly over time and the ratio of imports to net material product to reach a level substantially above the export: NMP ratio when imports and exports are both valued in Soviet domestic prices. On this, the arguments and calculations of Vladimir Treml are persuasive.5°

He estimates

merchandise imports in domestic purchasers' prices as equivalent to 20 percent of NMP in 1980, compared with about 9 percent in 1970 and with an export:

NMP ratio in 1980 of 7 percent. Established Soviet domestic

prices are, it is true, poor guides to Soviet relative domestic scarcities, but they are at the very least a guide to the perceived importance of exports and imports for the domestic economy.

It therefore

appears that the tendency of the shortage economy to suck in imports is expressed in a greater degree of perceived (and probably also real) import-dependence than Western economists have traditionally believed to exist. 1.7

Organizational Rigidity The characteristic patterns of Soviet foreign trade activity might

be modified by changes in organisation. The relative weaknesses in

- 35 -

agriculture and technical innovation, and the tendency to suck in imports and to impede export growth are all deeply rooted in the workings of the centrally administered economy.

East European experience, however,

suggests that fairly modest organizational changes, such as the extension of foreign trade rights to production units and the use of a kind of multiple exchange-rate system to enhance the returns to exporting, may do some good. The Soviet organizational arrangements for foreign trade have changed little in the past 20 years. The Ministry of Foreign Trade has kept the negotiation and conclusion of foreign trade deals firmly under its own control. The planning of convertible-currency and bilateral flows and settlements by Gosplan, the State Bank, the Foreign Trade Bank and the Ministry of Finance seem not to have been altered since the early 1960s.51 A decree of May 1978 provided for production ministry representation on the "administrative councils" of the foreign trade organizations in an advisory capacity.52 Another decree, this time of June 1984 (a Chernenkoera innovation) provided some facilitation of so-called "direct links" between Soviet and other CMEA production units.53

Neither of these

organizational changes seems to have been of much practical importance, and other formal modifications of the foreign trade system in recent years are impossible to find. Rumours of impending legislative changes affecting Soviet foreign trade still circulate, but past Soviet immobility on this particular front make it hard to envisage drastic change coming soon. 2.

Past Patterns as a Guide to the Future Seven characteristics of Soviet foreign trade policy have been

identified, and their role in Soviet trade activity since 1970 has been described.

- 36 -

(i)

Financial caution,

(ii)

An emphasis on food and cvilian technology imports from the West, reflecting the comparative advantages of the Soviet economic system

(iii) The maintenance of a separate system of clandestine acquisition of militarily-useful technology, (iv)

A constantly shifting balance of political and economic considerations affecting, at the margin, the choice between trade with the West and trade with Eastern Europe,

(v)

A heavy reliance on fuel and non-food raw material exports to earn convertible currency in the West,

(vi)

A bias of production units towards importing and away from exporting - a bias that is held in check by the central policymakers and planners,

(vii) Effective resistance to organizational change in the sphere of foreign trade. These characteristics are deeply entrenched and likely to persist. Together with the inconvertibility of the ruble and the general lack of strong Soviet market power in world markets, they suggest certain ingredients in Soviet foreign trade policy in 1986-90, in the face of sharply reduced Soviet terms of trade with the West. Specifically, if real energy prices remain low: a large increase in the Soviet net debt is unlikely, i.e., borrowing is unlikely to be increased in a sustained way; food and technology imports from the West can be sharply cut only at considerable cost to the Soviet economy;

- 37 -

clandestine acquisition of militarily-useful technology is very unlikely to be cut at all; Eastern Europe »111 be under pressure to supply more food and technology to the USSR; to increase hard-currency revenues, expansion of energy and raw material supplies to the world markets is a more plausible course of action in the medium term than attempts to expand exports of manufactured goods; central screening and control of bids from below for hardcurrency imports is likely to become still more selective. Past Soviet behaviour does not, however, yield immediate, straightforward statistical evidence of quantifiable relationships corresponding to these general characteristics. For example, it might be expected that the annual volume of Soviet machinery imports from the West would be the outcome of two contending influences:

a positive relationship with the level of equipment

investment and a negative relationship with external financial vulnerability.

The volume of Soviet imports of machinery, equipment and

pipe (MKW) in 1970-84, however, does not appear to be strongly related to both the volume of equipment investment (EI) and the ratio of debt service to merchandise exports to the West (DSRW; see sub-section 1.1 and Table

Of several specifications tested, the following was the least unsatisfactory Iftecording to the OLS results).

55

In MKWt = 0.0031 + 2.265 In EI t -0.036 DSRWt_-] (2.790)

(5.287)

(-0.197)

R2 = 0.809, DW = 1.21*4, F (2,12) = 30.513,

- 38 -

standard error of regression = 0.2335. The coefficient of the equipment investment variable is significant at 1 percent.

On the other hand, the external finance

variable, though its sign was "right", was not significant, and serial correlation cannot be ruled out. Thus the data for 1970-84 suggest a strong multiplier effect of domestic equipment investment on machinery imports from the West, with a 1 percent increase in the former generating 1 average 2 /4 percent increase in the latter, provided that DSRW.. remains The determinants of the level of Soviet exports to the West also appear not to be simple and regular in their operation.

The growth rates

of total OECD import volume and OECD real GDP growth rates are quite strongly related, with fluctuations in GDP growth affecting, over time, the propensity to import. Thus for 1960-81 Fink and Mauler estimated the following m = -4.306 + 2.923y (r2 = 0.742) where m is annual percentage growth in import volume and y is annual real percentage GDP growth - both for total OECD.5^ An attempt to extend this analysis of causal links to the link between the growth in OECD total import volume and annual percentage changes in the volume of OECD non-fuel imports from the USSR, however, was only mildly helpful. An index of the volume of Soviet non-fuel exports to the West (Sov NFX) 1970-84 (from Table 7) was regressed on a UN index of total import volume of developed market economies (DMEM).

The corrected

r 2 was low (0.11) and the F-statistic low (2.74), but the coefficient of the total-imports variable was at any rate significant at the 10 percent level, and the relationship was plausible: Sov NFX index = 80.1 + 0.33 DMEM index.57

- 39 -

'

In general, Soviet foreign trade developments are affected by a large number of economic and political considerations.

The repeated

interaction of these factors in differing market conjunctures may preclude clear, repeated, quantifiable behaviour patterns emerging.

Partly because

of the margin of financial safety which Soviet long-term policy creates, there is also wide scope for discretionary behaviour by the Soviet authorities.

Conscious policy choices are inherently unamenable to formal

modelling. The best way of assessing likely Soviet trade policy in the late 1980s is to begin with assumptions about key world market developments that impinge on the USSR and follow alternative plausible Soviet responses, within limits suggested by the record of the past decade and a half of Soviet policy decisions. 3. 3.1

Prospects Soviet Exports to the West Obviously, prospective Soviet energy earnings are an unavoidable

starting-point. in Table 6. table.

Six alternative scenarios for energy earnings are given

The assumptions behind them are listed in the notes to that

Key assumptions worth noting here are (i) that the volume of

natural gas sold to the West in 1990 is demand-constrained while that of oil is set by Soviet production and domestic fuel substitution, together with (ii) a politically-determined constant rate of supply of oil to CMEA partners - assumed to be the perceived safety "floor" amount; (iii) crude oil prices remain in the $10-20 range and (iv) prices of other fuels move roughly in line with that of oil. Combining three alternative price levels ($10, $15 and $20 per barrel) with low and high volume projections produces six alternative

- 40 -

projected levels of hard currency earnings from energy in 1990. The fange of these is enormous: from $8,0 bn (around a quarter of 1985 levels) to $20.7 bn (somewhat above the 1985 level). There is no reason why the highest price scenario should be associated more with the high than with the low volume scenario. If anything, one might expect the opposite.

It could therefore be argued

that a middle range of scenarios has a higher probability of being realised than either extreme; perhaps a best-guess range of #12-16 bn, then, is appropriate. Non-fuel (or more precisely, non-oil-and-gas) exports to the West ^in 1970-84 are shown in Table 7 in 1975 prices.

In current prices they

were $4,742 mn in 1984 and an estimated $4,220 mn in 1985. It has already been noted that the volume of these Soviet exports grew substantially more slowly between 1970-72 and 1982-84 than the total volume of Western imports:

1.3 percent a year against 3.6 percent.

If total Western GDP grew at 3 percent a year on average between 1985 and 1990, Western total import volume could be expected to grow at about 4 \ percent a year (from the Fink-Mauler regression).

If Soviet non-

fuel exports lagged as badly in 1986-90 as in 1970-84, their growth rate could be projected at 1.3/3.6 x 4.5 percent, or 1.6 percent a year. Alternatively, applying the admittedly doubtful regression equation from 1970-84, with 1985 treated as the base year, one gets a DMEM index for 1990 of 124.6 and therefore an index of Soviet non-fuel Western export volume of 80 + (.33 x 125) s 121, approximately.

This is very close to

what must be considered a "high" scenario, in which the Soviet planners push non-fuel exports in an emergency with such success that they maintain Soviet market share - in other words, a scenario in which there is a 4.5 percent annual growth in these exports.

- 4.1 -

If one takes Soviet non-fuel exports of about $4,500 n

as a

starting-point, these calculations produce a 1990 total in 1985 prices of $4.9 bn to $5.6 bn. Taken together, these rough projections of fuel and non-fuel exports - the former at various prices, the latter at 1985 prices - give a range of total Soviet hard-currency merchandise exports to the developed West in 1990 of the order of $16.9 bn to $21.6 bn. Even the latter is only just above the estimated 1985 level of about $19.7 bn. 3.2

Potential Soviet Demand for Imports from the West; Capital Goods Soviet equipment investment plans for 1986-90 are ambitious. No

plan targets have been given for this flow but total gross investment is supposed to increase at 4.3 percent a year in real terms between 1981-85 and 1986-90, and so-called re-equipment and reconstruction - as distinct from new-plant investment - is supposed to rise from 38.5 percent of all productive investment in 1985 to 50.5 percent in 1990.58

This latter

indicator probably refers only to the re-equipment and reconstruction share in state-funded, productive investment, not to a share in total investment. The share of equipment in total investment, in supposedly comparable (1984 estimate) prices, has risen from 28 percent in 1970 to 37 percent in 1984.59

Data on the re-equipment and reconstruction share of

all state productive investment cannot be traced back very far, but the latter percentage has risen more than the equipment percentage in 1978-84. Assuming total investment growth between 1985 and 1990 to be at the same rate as between 1981-85 and 1986-90, guessing at an equipment share in total gross investment of 40-45 percent in 1990, and assuming the equipment share in 1985 to have been 38 percent, one arrives at a

- 42 -

guesstimated growth rate for total equipment investment between 1985 and 1990 of 5.2 to 8.1 percent a year.

If allowance is made for a plausible 2

percent annual rate of concealed inflation (and under tauter plans this is likely to be an underestimate), the real growth of equipment investment comes out at 3.2 to 5.9 percent a year. This in turn implies a rapid growth in potential import demand. If the statistical relationship between real equipment investment growth and the volume of machinery, equipment and pipe imports from the West were th same in 1986-90 as in 1970-84, and the debt-service ratio were not a constraint, the latter would grow at 7.2 to 13.4 percent a year.

If this

category of imports constituted 30 percent of hard-currency imports from the West in 1985 (see Table 3 for the share in earlier years), it would have been about $6 bn. Therefore the apparent Soviet demand in 1990 for Western machinery, equipment and pipe would be $8.5 bn to $11.3 bn, in 1985 prices.

Even the smaller of these two shopping bills would absorb al-

most half of the high-scenario merchandise export earnings in the West projected in sub-section 3.1. Another approach to projecting Soviet machinery import demand is to take Fal'tsman's figure of a one-third share of imports in Soviet machinery investment."0

If that share were maintained, and the (implied)

1:1 conversion rate between foreign-trade and domestic rubles is assumed still to apply in 1990 and no adjustment is made for concealed inflation, the valuta ruble value of machinery and equipment imports from all sources in 1990 would be 28.5-32.5 bn. Maintaining the 20 percent nominal 1984 share of Western hard-currency supplies in that total (from Table 4), and applying the average 1985 ruble-dollar conversion rate, one arrives at a 1990 demand for $6.8 bn - $7.8 bn of Western machinery, equipment and pipe at 1985 prices.

- 43 -

Between them, therefore, these two approaches to projecting potential Soviet demand for Western machinery yield a range of the order of $7-11 bn in 1990 (in 19&T prices). No account has so far been taken of the likely composition of Soviet demand for Western machinery.

One feature of the declared

investment plan for 1986-90 is the increased share that is to go to investment in the engineering sector, and within that to electronics-based equipment.

Of the 62 pages of the 1985 revised CoCom export control

"industrial list" (which excludes atomic energy and munitions items), kO are devoted to electronic communications and computing hardware."^

The

scope for legitimate purchase in the West of these items is obviously limited.

This appears to be more of a constraint than in the past on the

Soviet ability to meet declared civilian investment targets by buying in hardware from the West. One authoritative assessment is that new investment directly in military production facilities will be held down in 1986-90, while the emphasis is placed on strengthening "dual-use" (civilian-and-military) capabilities in information technologies-

This investment would be

upstream from military production proper, and would help to create a stronger Soviet industrial-technology background for a further development of military production in the 1990s.°2 If this is correct, it is possible that clandestine channels of technology acquisition (sub-section 1.3 above) will be used more extensively than before for purposes that are not directly military. This seems a plausible scenario even if financial constraints are ignored. External financial constraints will tend to reinforce it. 3.3

Potential Soviet Demand for Imports from the West: Food

- 44 -

The buying of grain with hard currency earned from oil and gas is probably still a highly cost-effective exercise for the USSR, and this probably applies to food imports generally.

Vanous has estimated the

Soviet domestic marginal cost of grain production in 1985 at 2.k times that of crude oil and 12.8 times that of natural gas (per metric ton of grain, oil and gas, measuring gas in oil equivalent).°3

The oil:grain

exchange ratio (ton for ton) on world markets, on the other hand, was of the order of 0,67 tons of oil per ton of wheat in 1985. While the real price of energy in terms of all other goods has fallen sharply in 1985, the real price of energy in terms of grain has fallen only moderately.

In mid-1986, with Chicago wheat prices around

$2.50 a bushel,"** the world-market ratio between a ton of crude oil (at $15 a barrel) and a ton of wheat was about 0.84:1.00.

At $10 per barrel

of oil, an "exchange" of crude oil for grain on world markets would still entail large Soviet gains from trade, if Vanous' estimates of Soviet domestic oil and grain marginal costs are of the right order of magnitude. The volume of Soviet food purchasing in the West is dependent on the highly variable Soviet grain harvest. Soviet policy is to reduce food imports from the West in the long run in order to reduce dependence. This was reiterated by Brezhnev in May 1982, in introducing the Food Programme."5 One objective traditionally cited has been the attainment of a grain harvest equivalent to one metric ton per head of population.66

A

level of 905 kg per head of end-year population was reached in 1978, but subsequent per capita levels have been well below this.

The annual

average in 1981-85 (taking US Department of Agriculture estimates of the Soviet harvest and end-year population figures) was only 639 kg.67

The

- 45 -

medium-term "expedient" of importing large amounts of grain and other food from the developed West, Argentina and Brazil seems virtually certain to continue, even though the volume of buying cannot be reliably forecast. Given that Soviet hard-currency resources are likely to be limited, the likelihood is that hard-currency spending on food will grow at the expense of capital-goods imports. The grounds for predicting this are the following. (i)

Soviet gains from energy-for-food trade remain high despite the lower level of world energy prices. The costeffectiveness of energy-machinery trade in contrast is hard to assess.

Any estimate of the gains from energy-for-

machinery trade will be more open to doubt than an equivalent estimate for energy-for-food trade. And potential gains from machinery imports are more vulnerable to domestic inefficiency in using what is imported than is the case with food imports, (ii)

If the dollar weakens further against West European currencies, or at least does not appreciate again, the purchasing power of dollar-denominated oil sales over mainly European-currency-denominated machinery will remain lower than in the past relatively to their purchasing power on world agricultural produce markets.

(iii) West European food production subisidies, and the resulting downwards pressure on world market food prices, have proved to be extremely hard to reverse.°°

Competition among

capitalist countries to dispose of food surpluses is likely to continue to work to the advantage of large net food importers.

- 46 -

(iv) Soviet policymakers have already exhibited a preference, at the margin, for food over machinery in hard-currency expenditure (see 1.2.2 above and Table 3 ) . (v)

Eastern Europe is more plausible as an alternative source of machinery than as an alternative source of food supplies (see 3.5) below.

3.4

The Hard Currency Balance A continuation of past patterns of behaviour in hard-currency

imports seems to be incompatible with likely export revenues in 1986-90. If hard-currency food imports in 1990 were of the same order of magnitude as in 1982-84 (in 1985 prices), the hard-currency food bill would be $8-9 bn.

The lower extrapolation of capital-goods imports is $7 bn. The share

taken by items other than food and capital goods in hard currency imports has varied widely in the recent past, but has not gone below one-quarter of the combined total of food and capital goods (Table 3). A plausible extrapolation of a minimum 1990 hard-currency import bill (in 1985 prices), in the absence of balance of payments constraints, is therefore 1.2 ( 7 + 8 ) = 18 billion dollars. Even this minimum figure is close to the top of our "most plausible" range of projections of Soviet hard-currency exports to the West in 1990 (sub-section 3.1 above).

It is true that

total hard-currency exports as conventionally estimated would include some exports to LDCs.

But the problematic nature of Soviet "hard-currency

earnings" from LDCs (chiefly arms) has already been noted.

The likelihood

is moreover, that arms sales will continue to be depressed by the reduced energy revenues of the main customers. That strengthens the case for treating hard-currency exports to the West as the main effective constraint on Soviet hard-currency spending.

- 47 -

Gold sales, net services revenue and net new borrowing could make that particular constraint cease to bind.

Gold and credits may well take

some of the strain in 1986-87, because the relatively high level of reported machinery ordering in 1985 (Table 2) may make it difficult to cut the actual inflow of capital goods imports quickly. The great financial prudence which has marked past Soviet borrowing, however, is likely to ensure that imports are cut to prevent any large and sustained trade deficit with the West emerging.

The cuts

are likely to be centred on capital goods imports. They will be less severe than otherwise if one or more of the following occur:

two or three

good Soviet grain harvests, reducing the food import bill; a further weakening of food prices on world markets; a collapse of political control and therefore of gold production in South Africa; a major and sustained mellowing of relations between Moscow and Washington. 3.5

The East European Option The strong current Soviet interest in closer technological

cooperation in CMEA is understandable.

The Soviet desire to obtain more,

and more sophisticated and reliable, capital goods from Eastern Europe is no doubt genuine and - as such desires go - intense.

The question is how

severe the limits are on its fulfilment. These limits are of two sorts:

limits to East European

capabilities and limits to Soviet leverage."9 The limits to East European capabilities are clear. The East European Six are economically relatively small. Their combined population is about 40 percent of that of the European Community of 10, and their GNP about 25 percent. They have already increased their deliveries of equipment to the USSR, in real terms, at around 8-9 percent a year in the

- 48 -

first half of the 1980s. Investment in the region has suffered deep cuts in the past four years so that the physical capacity to produce new and advanced products must be limited. Moreover, these economies have much the same systemic problems with innovation as the USSR itself.70

If the

technological level of supplies to the Soviet Union is upgraded by buying technology from the West, that means buying in Deutschemarks and selling in inconvertible rubles, which is not, on any substantial scale, a sustainable process. Finally, the quantities of energy and raw materials supplied by the"USSR seem unlikely to be much increased in 1986-90; this will probably limit their output growth. The limits to Soviet leverage are less obvious, but are also quite severe.

The purchasing power of Soviet exports to Eastern Europe

(specifically, the Soviet gross barter terms of trade with the East European Six) is not likely to increase strongly.

The volume of

deliveries is apparently not planned to rise rapidly. Under the existing intra-CMEA pricing rules, the Soviet oil price to Eastern Europe should start to decline in 1987. It is true that accumulated East European debt to the USSR is significant and has to be repaid.

But it is probably of

the order of 14 bn rubles, or some two-fifths of the level of Soviet imports from Eastern Europe in 1985. Moreover, the Polish debt to the USSR - at 5.6 bn rubles (end-1985), a substantial part of the total - is not due to be repaid until after 1990. If the total value of Soviet exports to Eastern Europe were held constant at the 1985 level, the annual value of Soviet imports from Eastern Europe would need to be increased by 3 percent of their 1985 level to achieve balance, and by a further 5 percent, approximately, to pay off the accumulated net debt of the group, excluding Poland.

Increments of this order are not negligible, but the

- .49 -

debt repayment does not in itself amount to a major increase in the Soviet power to command East European resources. The practice of int/2-CMEA pricing may also limit Soviet real leverage.

The East Europeans, delivering manufactures to the the USSR,

are better able to introduce concealed inflation into their export prices than is the USSR with respect to its large energy and raw materials deliveries.

This is because the use of "world market prices" as a basis

for intra-CMEA prices is more straightforward in the latter case, and gives less scope for manipulation. To strengthen their purchasing power over East European production, the Soviets are pressing for larger East European contributions to joint investment projects; maintaining pressure publicly on the "quality" of East European deliveries and, reportedly, putting more resources into researching world market prices of manufactures. Nonetheless, the East European "option" is severly limited. k.

Conclusions The dependence of Soviet total final consumption and investment on

imports is significant. Tentative estimates given in this paper suggest that Soviet hard-currency export earnings have recently been "paying for" something of the order of one-tenth of both food consumption and equipment investment.

The latter is now planned to increase sharply over a five-

year period in which Soviet hard-currency earnings in the West seem likely to fall by 25-40 percent. The extreme financial caution of Soviet policymakers is likely to lead them to react to the situation chiefly by cutting hard-currency imports.

The cuts are likely to be focussed on machinery, equipment and

other non-food items. A number of possible developments could alleviate

»50-

or

even, possibly, reverse this process, but the balance of probabilities

is strongly in favour of it. Eastern Europe already supplies substantial quantities of machinery to the USSR.

It is being pressed to supply more; but it is

doubtful whether further real growth of Soviet machinery imports from Warsaw Pact allies can be more than modest in 1986-90. An acceleration of concealed inflation in the values of East European machinery exports to the USSR may well make reported "real" growth look better than it is, however. In general, foreign trade difficulties strongly reinforce the domestic impediments to Gorbachev's highly ambitious modernization programme, with its old-fashioned emphasis on rapid investment growth in the producer-goods sector.

- 51 -

NOTES M M Kostecki (ed.), The Soviet Impact on Commodity Markets, London: Macmillan, 1984. Raymond Vernon, "Soviet Commodity Power in International Economic Relations," in Kostecki, op.cit., pp 6-15. Daniel L Bond, "EEC Non-Fuel Mineral Imports: the Role of Soviet and Southern African Supplies," in Philip Joseph (ed.) The Soviet Economy after Brezhnev, Brussels: NATO, 1981, pp 267-295. Economist Intelligence Unit (henceforth EIU), Quarterly Economic Review of the USSR Annual Supplement 1985, p 24. WEFA CPES, Analysis of Current Issues, VI, 16 (24.04.1986). Foreign and Commonwealth Office Background Brief, "Soviet Arms Exports to the Third World," June 1985. WEFA CPES, loc.cit. Roger W Robinson, "Financing the Soviet Union," European edition of the Wall Street Journal, 13.03.1986. Financial Times, 18.03.1986. Neue Zürcher Zeitung, 17.04.1986. Joan Parpart Zoeter, "USSR: Hard Currency Trade and Payments," US Congress Joint Economic Committee, Soviet Economy in the 1980s: Problems and Prospects, Part 2, Washington, DC: US Government Printing Office, 1982, pp 479-507, Appendix A. WIFO as cited by Reuters from Vienna, 19.03.1986. S Gomulka, "The Incompatibility of Socialism and Rapid Innovation," in idem, Growth, Innovation and Reform in Eastern Europe, Brighton: Wheatsheaf Books, 1986, pp 42-62. Also P Hanson, "The Comparative Economics of Research, Development and Innovation," mimeo, 1986. Narodnoe khozyaistvo SSSR (henceforth Narkhoz) v 1982 godu, p. 287; Ann Goodman and Geoffrey Schleifer, "The Soviet Labor Market in the 1980s," in US Congress JEC op.cit., (1982), pp 323-349. S Hedlund, Crisis in Soviet Agriculture, London: 1984, p 8.

Croom Helm,

Calculated from US official labour force and trade data in The Economist Diary 1986. Narkhoz 82, pp 339-342.

- 52 -

V Treral, "Subsidies in Soviet Agriculture: Record and Prospects," in US Congress JEC, op. cit. (1982), pp 171-187. 1980 GNP in 1980 ruble prices estimated at 662 bn rubles from CIA and DIA, "The Soviet Economy under a New Leader," report presented to the Subcommittee on Economic Resources, Competitiveness, and Security Economics of the JEC, 19.03.1986 (mimeo). e.g. P Hanson, Trade and Technology in Soviet Western Relations, London: Macmillan, 1981; M Bornstein, The Transfer of Western Technology to the USSR, Paris: OECD, 1985. Yakov Ryabov in an interview in Izvestiya, 26.05.1986. Thane Gustafson, "Soviet Adaptation to Technological Pressures: The Case of the Oil and Gas Sector, 1975-1985," in P Joseph (ed.) Adaptability to New Technologies of the USSR and East European Countries, Brussels: NATO, 1985, pp 151-199. e.g. Gorbachev speech of 11 June 1985 (BBC Summary of World Broadcasts SU/7976/C of 13.06.1986) and Ryzhkov speech to CMEA session, Pravda, 18.12.1985. Bornstein, op.cit. (1985) contains an excellent review. See V K Fal'tsman, "Zakaz na novuyu tekhniku," EKO 1983 no 7, pp 3-20. Idem, "Mashinostroenie:

puti peremen" EKO 1985 no 12, pp 3-21.

V Treml, "Soviet Foreign Trade in Foodstuffs as Measured in Calories, 1970-1981," Radio Liberty Research RL 446/83 (29.11.1983). For details see Hanson "The Soviet Economic Stake in European Detente." in Harry Gelraan (ed.) The Future of Soviet Policy Toward Western Europe, Santa Monica, CA: RAND, 1985, pp 29-51. (US Government [no author or publisher details given]), Soviet Acquisition of Military Significant Western Technology: An Update, September 1985. The documents are discussed in detail in Hanson, "Soviet Industrial Espionage: Some New Information," mimeo, 1986- There is a good summary by David Buchan, "The Spies Who Steal Computers," Weekend FT (Financial Times), 17.05-1986, pp I, XIII. Hanson, op.cit. (1981). Los Angeles Times, 15.04.1985. M Marrese and J Vanous, Soviet Subsidization of Trade with Eastern Europe: A Soviet Perspective, Berkeley, CA: University of California Institute of Internatinal Studies, 1983.

- 53 -

Charles Wolf, K C Yeh, Edmund Brunner, Aaron Gurnitz and Marilee Laurence, The Costs of the Soviet Empire, Santa Monica, CA: RAND, 1983. Defined as the sum of outright grants, the underpricing of equipment to client states relative to the highest price obtainable and market less actual interest rates charged on credits for arms purchases. Ibid, pp 35-36. Rand estimate of subsidies to Eastern Europe from Table 6 of Wolf et.al., total hard currency supplies from Table 3: ruble values of total trade subsidies (Table 4) reduced in proportion to East Europe: total subsidies in dollars (Table 6): GNP in rubles from Table 5. Padma Desai, "Is the Soviet Union Subsidising Eastern Europe?" Eruopean Economic Review vol 29 (December 1985), pp 107-117. Thomas A Wolf, "Changes in the Pattern of Soviet Trade with the CMEA and the 'Non-Socialist' Countries," in External Economic Relations of CMEA Countries: Their Significance and Impact in a Global Context, Brussels:NAT0, 1983, PP 219-237. WEFA CPES, CPE Current Analysis, V, 49-50 (12.07.1985). On the regional distribution of Soviet oil deliveries in 1981-84 see Wochenberichte der DIW, 1985 no 29. On the announcements (East European sources) of Soviet delivery cuts for 1982, see AFP 16.11.1981 and DPA 20.12.1981. About the same for Czechoslovakia, according to Radio Prague B of 6.02.1986; marginally below 198,1-85 actual for the GDR according to Hans-Dieter Schulz in Deutschland Arkhiv, February 1986, pp 1249-51; increased deliveries to Romania, according to Financial Times 12.03.1986. CIA, Handbook of Economic Statistics 1984, Table 47. The latter figure is derived from Appendix Table 2 of the UN ECE, Economic Bulletin for Europe, vol 37 (1985). See the individual commodity studies in Kostecki, op.cit. UN ECE, Economic Bulletin for Europe, vol 35 (1983), section 3. Kazimierz Poznanski, Technological Levels and World Trade: A Global View, mimeo, December 1984. Poznanski's main findings for the East European six are similar to those for the USSR, and are presented in Poznanski, "Competition Between Eastern Europe and Developing Countries in the Western Market for Manufactured Goods," in US Congress JEC, East European Economies: Slow Growth in the 1980s, vol 2, Washington, DC: US Government Printing Office, 1986, pp 62-91.

- 54 -

Including writings by Frederic Prior, Franklyn Holzman, Alan Brown, Peter Wiles and Jozeb van Brabant. The subject is surveyed by Ed Hewett, "Foreign Trade Outcomes", in P Marer and J M Montias (eds.), East European Integration and East-West Trade, Bloomington: Indiana University Press, 1980, pp 11-69. Marie Lavigne, Econoroie internationale des pays socialistes, Paris: Armand Colin, 1985, p 104. N S Smeiyakov, "Delovye vstrechi," Noviy mir, 1973 no 12, pp 20340. Similar views, equally sharply expressed, can be cited from managers or ex-managers of the engineering enterprises themselves, e.g., G A Kulagin, "Moi partnery, nachal'stvo i pravila igry," EKO 1975 no 2, pp 88-96. The President of the USSR Academy of Sciences, Academician A Aleksandrov, is a longstanding critic of the whole strategy of buying-in foreign equipment in large quantities: e.g. his speech to an Academy meeting as reported in Vestnik Akademii Nauk SSSR 1980 no 6, pp 5-9. Brezhnev voiced similar criticism at the XXVI Party Congress (Pravda, 2.02.1981); so did Gorbachev in his technology policy speech of 11 June 1985, cited in note 23; Ryzhkov at the XXVII Party spoke of "the unbridled pursuit o.f imported equipment and technology which has carried away many officials ..." Izvestiya, 4.03.1986. Examples of allegedly "unnecessary" buying in have been given by many Soviet journalists and officials since the late 1970s: e.g., V Selyunin, "Podpis' pod kontraktom," Sotsiaiisticheskaya industriya, 7.06. 1979, p 2 (chemicals); K Ikraraov, "Dvoinaya igra," ibid, 6.07.1979, p 3 (paint); V Parfenov, "Inzhenery," Pravda, 29.06.1981, p 2 (continuous casting equipment); V Kuzmishchev and M Odinets, "Milliony bez otdachi," Pravda, 17.07.1984, p 2 (tyre production). In several of these examples branch officials are criticised as though the decision to import was entirely in their hands, when the regulations prescribe an apparently rigorous screening by central planners. Hanson, Trade and Technology..., Chapter 11. Treml, "Soviet Dependence on Foreign Trade," in External Economic Relations of CMEA Countries... (1983), pp 35-53. M Sveshnikov, "Nekotorye voprosy valyutnoi monopolii," Voprosy ekonomiki, 1973 no 6, pp 75-85, provides a description. M Lavigne, op.cit., p 103. New York Times, 5.11.1984 (by Theodore Shabad). MKW in current dollars derived from VT SSSR (ETN 1 + 266); price index as derived in the notes to Table 2. EI in 1973 rubles from Narkhoz, adjusted for a constant 2 percent annual rate (assumed) concealed inflation.

- 55 -

DSRW here is a dummy: O if25 percent. OLS may not be the ideal estimation method. G Fink and K Mauler, "East European Financial Relations with the West and Perspectives for Trade," in US Congress JEC, op.cit. (1986), pp 210-42. UN ECE, Economic Bulletin for Europe vol 37, Appendix Table 2. From Ryzhkov's presentation to the USSR Supreme Soviet of the final version of the plan, Izvestiya 19.06.1986, pp 2-5. Narkhoz 84, p 376. op.cit. in note 26. In the British published version of the list, "Security Export Control," supplement to British Business, 14.06.1985. CIA/DIA report of 1986, cited in note 19. Jan Vanous, "Comparative Advantages in Soviet Grain and Energy Trade," in G B Smith (ed.), The Politics of East-West Trade, Boulder, Colorado: Westview Press, 1984, pp 95-109. Financial Times 28.06.1986. Pravda 25.05.1982, pp 1-2. Enunciated, for example, by Sokolov of Gosplan in the early 1970s. T Sokolov, "Sovershenstvovanie planirovaniya i upravleniya sel'skogo khozyaistva," Planovoe Khozyaistvo, 1972 no 6, pp 9-18. For details see Hanson, "Soviet Grain Harvest Figures," RL 302/85 (12.09.1985). For an estimate of the especially large impact of the CAP on world market prices, see K Anderson and R Tyers, "European Community grain and meat policies: effects on international prices, trade and welfare," european review of agricultural economics, vol 11 no 4 (1984), pp 367-395. The arguments that follow are set out and documented more fully in Hanson, "Soviet Trade and Europe in the Late 1980s," The World Today, forthcoming. The evidence for this is persuasively surveyed by Gomulka, op.cit. in note 13.

Table 1.

Trade balance3 exports3 imports Net interest^ Arms sales Net services and transfers Gold sales0

Current Account Balance

USSR Hard Currency Balance of Payments on Current Account and Debt to Vfe3t, 1970-85 ($ mn)

1970

1971

1972

1973

1971

1975

1976

1977

-560 2,121 -2,981

-317 2,776 -3,093

-1,388 2,951 -1,312

-1,735 5,009 -6,711

-80 100

-18 100

-60 600

1,600

-826 7,869 -8,695 -103 1,500

-6,296 8,280 -11,577 -570 1,500

-5,223 10,225 -15,178 -721 1,850

-2,912 11,863 -11,805 -818 3,220

500

355 21

327 289

713 962

917

760 725

911

1,178

1,369

1,032 1,618

111

810

1,190

2,666

-3,882

-3,851

2,080

260

-80

Gross debt^ (end-year)

n/a

1,808

2,108

3,718

5,175

10,577

11,707

15,609

Net debtd (end-year)

n/a

582

555

1,165

1,651

7,150

9,969

11,181

Table 1 continued 1978

1979

1980

1981

1982

1983

1984

1985

- 3 ,690 13 ,336 17 ,026 -881 3 ,965

-2,018 19,417 -21,435 -779 3,855

-2,486 23,584 -26,070 -710 4,200

-4,000 23,778 -27,778 -1,300 4,200

-524 26,977 -27,501 -1,500 5,000

132 27,829 -27,697 -1,300 4,700

235 26,431 -26,196 -900 4,600

-1,810 22,943 -24,753 -1,400 3,500

1 ,028 2 ,522

1,140 1,490

900 1,580

1,000 2,700

1,000 1,100

1,000 750

1,000 1,300

1,000 3,100

2,944

3,668

3,484

2,600

5,176

6,582

6,235

4,390

Gros3 debt^ (end-year)

16,373

18,047

17,861

20,900

20,000

»0,501

20,303

24,764

Net debtd (end-year)

10,393

9,241

9,289

12,470

10,000

9,577

8,960

13,664

Trade balancea exports3 imports Net interest*5 Arms sales Net services and transfers Gold sales'3

Current Account Balance

Notes;

a. b. c.

d. Sources:

Arms sales to LDCs and hard currency trade within CMEA are not included. On net debt/credit with the West only. Gold sales are treated here as a current-account item. There is-no doubt that they are used to play an equilibrating role in the balance of payments. On the other hand, they are usually less that current production and it is likely, that Soviet borrowing and Soviet ordering of capital goods for hard currency are influenced by the current balance including revenue from gold sales. With West only.

1970-81: Zoeter 1982; 1982: CIA, Handbook of Economic Statistics 1984. Tables 49 and 50; 198385: derived from Wharton Econometric Forcasting Associates, CPE Service, Analysis of Current Issues, VI, 16 (24.04.86) but with net services assumed unchanged from 1981, and debt with West only considered, and net interest assumed to be 10% of end-year net debt.

Table 2.

Soviet Debt Burden, Reserves and Machinery Ordering, 1970-85 1970

1971

1972

1973

1974

1975

1976

2,106

2,339

2,601

4,519

7,030

7,233

9,077

10,539

2. Debt service ($mn)

200

356

476

729

1,133

1,773

2,378

3,095

3. DSRW (2 T 1 x 100)

9.5

14.8

18.3

16.1

16.1

24.5

26.2

29.4

.679

.612

.631

.642

.852

.516

• 365

.455

500

850

1,700

2,600

4,300

4,650

6,000

3,800

100

159

291

382

562

547

686

386

1.

Merchandise exports to DW-Finland ($mn)

U. GoId/import ratio 5. Machinery orders ($mn)

1977

6. Index of volume of machinery orders

Table 2 continued 1978

1979

1980

1981

1982

1983

11,252

16,831

21,303

20,817

22,387

23,109

2. Debt service ($mn)

3,451

4,230

4,671

5,400

5,800

3. DSRW (2 - 1 x 100)

30.7

25.1

21.9

25.9

4. Gold/import ratio

.729

1.036

1.145

2,800

2,675

240

203

1. Merchandise exports to DW-Finland ($mn)

5. Machinery orders ($mn)

1984

1985

23,187

19,7^6

6,000

(6,100)

(7,400

25.9

26.0

(26.3)

(37.5

.754

.697

.883

.740

1.079

2,600

6,700

2,300

2,200

1,100

4,600

186

570

216

211

115

469

6. Index of volume of machinery orders

Sources and definitions 1. Derived from Vneshnyaya torgovlya SSSR... (annual trade returns, henceforth VT SSSR), various years, with conversion to $ at the unweighted average of Gosbank rates during each year. 2.

Joan Parpart Zoeter, "USSR: Hard Currency Trade and Payments," US Congress JEC, Soviet Economy in the 1980s; Problems and Prospects, Part 2, 1982, pp 479-507; CIA, Handbook of Economic Statistics 1984; for 1984 and 1985 guesstimated at 30 percent of gross debt oustanding at end-year.

4.

End-year gold reserves in millions of troy ounces (CIA HES 1984 and author's extrapolations of 81.47 (1984) and 83.24 (1985), allowing for reported exports and estimated imports from Table 1.

5.

Through 1981: Zoeter, op.cit. (1982); 1982-85 Economist Intelligence Unit Quarterly Economic Review of the USSR, 1986 as 1. These are compilations of publicly reported orders, mainly from the Western press.

6.

Row 5 deflated by a machinery unit value index for 1970-76 from Hanson, Trade and Technology in Soviet-We3tern Relations, London: Macmillan, 1981, p 129; for 1977-85 the FRG machinery export price index in $ terms, UN Monthly Bulletin of Statistics.

- 60 -

Table 3. Soviet Imports of (a) Machinery and Pipe and (b) Food and Food Materials, as % of Total Hard-Currency Merchandise Imports, 1970-85

Machinery and Pipe

Food and Food Materials

Other

1970

36.7

9.4

53.9

1971

38.1

13.1

41.8

1972

35.3

22.6

42.1

1973

32.1

27.3

40.6

1974

34.4

11.5

54.1

1975

41.9

22.8

35.3

1976

40.3

22.0

37.7

1977

40.0

16.3

33.7

1978

42.5

18.6

38.9

1979

35.7

30.6

33.7

1980

28.8

37.6

33.6

1981

22.6

37.9

39.5

1982

31.2

29.9

38.9

1983

48.2

30.1

21.7

1984

29.4

35.1

35.5

1985

lt>\

3t> 1

K-6

Source:

derived from VT SSSR, various years.

Definitions;

total hard-currency imports from Table 1. Machinery and pipe ETN 1 + 266. Food and food materials = ETN 7 + 8 .

-61 -

Table 4.

Soviet Machinery Imports and Equipment Investment, 1980-84

1980

Machinery imports (ETN 1) from all sources bn. valuta rubles Machinery imports (ETN 1) from identified Western countries excl. Finland bn. valuta rubles

Investment in equipment, etc., bn. domestic rubles

purees;

15.06347

3-923098

53-9

1981

1982

1983

1984

15.904126

19.395323

22.747057

23-916314

3-255731

4.433414

5.197406

4.750824

56.6

59.3

63.4

64.3

Rows 1 and 2: Table XVI in VT SSSR v 1981, VT SSSR v 1983, VT SSSR v 1984. Row 3:

Narkhoz 84, p 376.

gnce sums, 1980-84: all machinery imports machinery imports from the West equipment investment

bn. rubles 97.026 21.560 297.5

(valuta) (valuta) (domestic)

- 62 -

Table 5»

Soviet Net Barter Terms of Trade with the West (TTW) and with CMEA (TTE), 1970-85

IXtfA) 1970

100

TTE (in rubles)

100

TTW/TTE x 100

100

1971

NA

100.6

NA

1972

NA

100.1

NA

1973

NA

100.8

NA

1974

NA

101.0

NA

1975

129.9

106.6

121.9

1976

145.2

110.2

131.8

1977

154.6

114.9

134.6

1978

159.8

118.0

135.2

1979

209.0

120.5

173.4

1980

244.6

122.2

200.2

1981

250.2

133.5

187.4

1982

236

148.3

159

1983

227

144.4

157

1984

236

146.5

161

1985

241

148.0

163

Note: (1) In terms of valuta rubles through 1981; thereafter terms of US $. Sources:

TT« and TT E 1970-81 from Raimund Dietz, "Advantages and Disadvantages in Soviet Trade with Eastern Europe: the Pricing Dimension," in US Congress JEC, East European Economies: Slow Growth in the 1980s, Washington, DC: US Government Printing Office, 1986, volume 2, pp 263-302, at p 269. These series are derived more or less directly from Soviet sources, and Dietz expresses some reservations about their reliability. TTg 1982-84, extended by the author from VT SSSR v 1983 and VT SSSR v 1984. TT W 1982-84 obtained by chain-linking Dietz series to UN Economic Commission for Europe calculations based

- 63 -

on Western trade data. UN ECE, Economic Bulletin for Europe, volume 37 (November 1985), p 51. TT E and TTy for 1985 from WEFA CPES Analysis of Current Issues VI, 16 (24.0^.1986).

»V

- 64 -

59 Table 6.

A.

Soviet Hard-Currency Earnings from Fuel Exports, 1982-90

The Recent Past 1982

1983

1984

1985 est.

Volume of hardcurrency exports oil (mn b/d) (of which, re-exports

1.38 0.15

1.56 0.25

gas (bn cu. ft/d)

2,57

2.146

oil

14,895

15,072

14,714

11,340

gas

3,649

3,184

3,731

4,190

1.56 0.28 c 2.8

1.4 0.25) c 2.9

Value of hard-currency exports ($ mn)

coal

J32

total

B.

i£2

18,674

250

17,908

250

18,695

15,780

Projections for 1990 (L = low export scenarios, H = high export scenarios)

Volume

L

H

1.4

oil (mn b/d) (of which, re-exports

0."2

1.8 0.2)

gas (bn CU. 'ft/d)

4.7

6.3

hi

hi

oil

5,366

8,050

10,735

6,838

10,260

13,676

gas

2,611

3,917

5,222

3,557

5,195

6,925

H

100

133

§1

100

133

8,044

12,067

16,090

10,462

15,555

Value ($ mn)

coal total

/

hi

H2

Ü1

Ü3

20,734

- 65 -

Notes to Table 6 Sources Total oil, oil products and gas volumes through 1984 from OECD/IEA, Quarterly Energy Statistics; value data through 1984 derived from VT SSSR; re-export volume and approximate 1985 data from WEFA CPES, Analysis of Current Issues, VI, 16 (24.04.1986) and Wochenbericht der Dig, 24.04.1986.

Assumptions used in projections Soviet domestic oil production in 1990 of 12 mn b/d (600 mn tons). Oil and products deliveries to Eastern Europe and Finland in 1990 1.7 mn b/d. No further increase in volume of coal exports. L scenario for volume: no change in Soviet domestic oil consumption, 1982-90; gas export volume for hard currency at mimiraum. H scenario for volume: 1 percent a year decrease in Soviet domestic oil consumption, 1982-90; gas export volume for hard currency at maximum plausible. Scenarios for unit values: relative prices of different fuels in 1990 same as in 1984. Crude oil prices per barrel: L1/H1: $10; L2/H2: $15; L3/H3: $20.

- 66 -

Table 7.

Soviet Non-oil-and-gas Exports to the West, 1970-84

Price index for Soviet non-oiland-gas exports to the West, 1975 = 100 (US $ terms)

Soviet non-oil-and-gas exports to the West, $ mn, 1975 prices

1970

57.9

2,948

1971

56.7

3,196

1972

60.1

3,364

1973

75.1

4,325

1974

104.0

4,212

1975

100.0

3,837

1976

99.2

3,390

1977

103.2

3,727

1978

112.3

3,988

1979

141.0

4,145

1980

153.3

4,285

1981

145.3

3,148

1982

135.2

2,842

1983

123,6

4,311

1984

118.4

4,005

Sources and definitions; The price index is based on the Hungarian $ unit value indexes for exports of machinery and equipment, food and food materials, other non-fuel production inputs and industrial consumer goods to nonsocialist countries (UN ECE, Economic Bulletin for Europe vol 37 (1985), Table 4.11 (b)), weighted by the 1975 shares in Soviet nonfuel exports to the West, derived from VT SSSR. The volume series is Soviet non-fuel exports to the West excluding Finland (VT SSSR), converted to $ at average annual official exchange rates and deflated by the price index in column 1.

- 67 -

Philip Hanson Soviet Foreign Trade Policies in the 1980s Bericht des BlOst Nr. 41 /1986 Summary This paper is about Soviet foreign trade policy in the late 1980s. It is an attempt to identify a number of characteristics of that area of Soviet policy, and to assess the likely development of Soviet foreign trade in the next few years in the light of world-market trends and of these features of Soviet policy. The assessment is based on the view that the characteristics in question are unlikely to change. Seven characteristics of Soviet foreign trade policy are identified, and their role since 19 70 is described. (I) (II)

(Ill)

Financial caution. An emphasis on food and civilian technology imports from the West, reflecting the comparative advantages of the Soviet economic system. The maintenance of a separate system of clandestine acquisition of militarily-useful technology.

(IV)

A constantly shifting balance of political and economic considerations affecting, at the margin, the choice between trade with the West and trade with Eastern Europe.

(V)

A heavy reliance on fuel and non-food raw material exports to earn convertible currency in the West.

(VI)

A bias of production units towards importing and away from exporting - a bias that is held in check by the central policymakers and planners.

(VII)

Effective resistance to organizational change in the sphere of foreign trade.

These characteristics are deeply entrenched and likely to persist. Together with the incovertibility of the rule and the general lack of strong Soviet market power in world markets, they suggest certain ingredients in Soviet foreign trade policy in 1986-90, in the face of sharply reduced Soviet terms of trade with the West.specifically, if real energy prices remain low:

- 68 -

a large increase in the Soviet net debt is unlikely, i.e., borrowing is unlikely to be increased in a sustained way; food technology imports from the West can be sharply cut only at considerable cost to the Soviet economy, clandestine acquisition of militarily-useful technology is very unlikely to be cut at all; Eastern Europe will be under pressure to supply more food and technology to the USSR; to increase hard-currency revenues, expansion of energy and raw material supplies to the world markets if a more plausible course of action in the medium term than attempts to expand exports of manufactures goods; central screening and control of bids from below for hard-currency imports is likely to become still more selective. The dependence of Soviet total final consumption and investment on imports is significant. Tentative estimates given in this paper suggest that Soviet hard-currency export earnings have recently been "paying for" something of the order of one-tenth of both food consumption and equipment investment. The latter is now planned to increase sharply over a five-year period in which Soviet hard-currency earnings in the West seem likely to fall by up to 20 percent in dollar terms, and possibly substantially more in Deutschemark terms. The extreme financial caution of Soviet policymakers is likely to lead them to react to the situation chiefly by cutting hardcurrency imports. The cuts are likely to be focussed on machinery, equipment and other non-food items. A number of possible developments could alleviate or even, possibly, reverse this process, but the balance of probabilities is strongly in favour of it. Eastern Europe already supplies substantial quantities of machinery to the USSR. It is being pressed to supply more; but it is doubtful whether further real growth of Soviet machinery imports from Warsaw Pact allies can be more than modest in 1986-90. An acceleration of concealed inflation in the values of East European machinery exports to the USSR may well make reported "real" growth look better than it is, however. In general, foreign trade difficulties strongly reinforce the domestic impediments to Gorbachev's highly ambitious modernization programme, with its old-fashioned emphasis on rapid investment growth in the producer-goods sector.

Neuere Arbeiten aus dem Bundesinstitut für ostwissenschafflieheund internationale Studien Sowjetunion 1984/85 Ereignisse, Probleme, Perspektiven. Carl Hanser Verlag, München/Wien 1985, 386 S. The Soviet Union 1982/83 Domestic Policy, The Economy, Foreign Policy. Verlag Holmes & Meier, New York/London 1985, 392 S. Wolf Oschlies Jugend in Osteuropa, Bd. 4: Jugend in der Tschechoslowakei. Kurzer Frühling, lange Winter, Böhlau Verlag, Köln/Wien 1985, 393 S.

Osteuropa und der internationale Kommunismus: Band 13: Ger P. van den Berg Organisation und Arbeitsweise der sowjetischen Regierung. Nomos Verlagsgesellschaft, Baden-Baden 1984, 384 S. Band 14: Hans-Hermann Höhmann/Heinrich Vogel (Hrsg.) Osteuropas Wirtschaftsprobleme und die Ost-West-Beziehungen. Nomos Verlagsgesellschaft, Baden-Baden 1984, 312 S. Band 15: Dieter Bingen (Hrsg.) Polen 1980-1984. Dauerkrise oder Stabilisierung? Strukturen und Ereignisse in Politik, Gesellschaft und Wirtschaft. Nomos Verlagsgesellschaft, Baden-Baden 1985, 403 S.