Russians9 $l0 billion debt to the West

Press, 18 June 1976, Page 12

Russians 9 $l0 billion debt to the West

By

JAN ZOUBEK

in the “Financial Times,” London

Soviet leaders last year learned a hard and ironical lesson — not to base their plans on the assumption that Western economies are stable. According to preliminary figures for 1975 released in Moscow, Soviet trade with the developed West resulted in a record deficit of 3.6 billion roubles, or $4.8 billion. In addition, the customary high trade surplus with the developing countries was reduced to only 300 million roubles ($399 million). However, the trade surplus with Socialist countries reduced the overall deficit to 2.7 billion roubles or $3.6 billion. Over-all this has probably brought the Soviet hard currency debt to over $lO billion. The size of the deficit can only partly be blamed on last year’s disastrous harvest, and the boom in Soviet industrial imports. There has also been a shrinkage of Soviet exports both to Western countries and to developing countries in 1975. Western exporters of capital and consumer goods to the Soviet Union have already encountered the effects of this record deficit. Import policies have become more selective and barter deals are difficult to avoid. Payment in cash is hard to come by. Between 1971 and 1974 visible Soviet trade reached a cumulative surplus of over $3.7 billion. But developments in 1975 reduced it to only $193 million. This

was not planned. Probably Soviet leaders overestimated the increase of their earning capacity resulting from increased fuel and raw material prices, and allowed imports to surpass the country’s ability to pay for them. They also believed in the stability of the Western economy, perhaps more than Western business itself, and were taken by surprise by the extent of the economic slump, and by the drop in demand for their materials. The Russians appear to have appreciated the gravity of the situation only in spring, 1975, when they cut consumer goods imports; but they allowed a continued (if Jess rapid) growth of capital goods imports, since these are necessary for the new 1976-80 plan, and Western credits were also easy to come by. However, by then a record Soviet deficit with Western countries was unavoidable. The Soviet trade surplus with other Comecon countries of only 500 million roubles was a surprise. Since it was of the same size as the surplus in 1974 — before the Russians increased the cost of their oil by some 130 per. cent., a move which was calculated to bring them some 2.9 billion roubles in earnings against 1.2 billion in 1974. Instead the Soviet trade balance with Comecon improved only $2O million mainly because of increased

imports of East European goods within the framework of long-term credit agreements for the development of Soviet natural resources. The total value of those credits to be extended to the Soviet Union before 1980 is believed to amount to 6 billion roubles ($8 billion), but recent reports indicate they may go up to some $ll billion. The higher prices charged since the beginning of 1976 by the East Europeans for exports of industrial and agricultural goods to the Soviet Union should theoretically offset part of the oil costs. However these increases have not matched the higher prices of Soviet fuels and raw materials. In addition the fuel and raw material prices charged by the Soviet Union will continue to rise until at least 1978. Throughout this period East European countries will have to make additional deliveries under long-term credit agreements for Siberian development.

These deliveries were also partly responsible for the $5 billion deficit in the East Europeans’ trade with the developed West last year. Their cumulative visible debt to the West (this excludes the U.S.S.R.), is now approaching some $2O billion, excluding that owed by the Soviet Union.

The Soviet Union’s prospects for a rapid and significant improvement of its

trade balance with the West are marginal. This year the Soviet Union indicated that it will continue to import Western technology, though emphasis has been put on long-term credits, or barter agreements. It has also indicated that it will continue to import raw materials and consumer goods, but less rapidly than before. The Soviet five-year plan provides for a considerable slow down of economic expansion and of the rate at which consumption may increase. On the other hand numerous Soviet failures will have to be covered by additional imports. Continuous difficulties in the chemical industry (fertilisers in particular) are an example. Steel pipes, modern types of roiled material, oil industry equipment also are critical areas. Reports indicate that the planned harvest of 206 million tons of grain will not be achieved and that the Soviet Union will be fortunate to match the 195 million tons of 1974. This year the Soviet Union has already purchased about 10 million tons of wheat and feed grains, and has placed orders for slightly less than 2 million tons for 1976. Soviet purchases in 1976 will probably amount to at least 10 million tons. If Soviet consumption of feed grains were to return to normal, purenases of up to 20 million tons would be necessary.

Where will the hard currency come from? Exports of crude and petroleum products constitute the biggest source of foreign exchange for the Soviet Union. In 1975 they accounted for 24.6 per cent of export earnings, compared with some 9 per cent at the beginning of the 19705. In volume terms, exports increased to 130 million tons in 1975 against an average of some 110 million tons at the beginning of the decade. Their value jumped, however, from some 2 billion roubles to 5.9 billion last year. On the other hand, prospects of the volume of Soviet petroleum exports increasing are slight and from 1980 they may go down. Prices for oil sold to the West will follow developments on the world market. Only exports to Socialist countries are certain to go up in value. In order to cover last year’s trade deficit with the developed Western countries, Soviet exports of crude and products will have to amount to some 100 million tons — instead of the 58 million tons exported outside Comecon last year. The Soviet Union does not have this amount of oil. Soviet emphasis on the rapid development of natural gas with •Western aid is therefore fully understandable. Natural gas will however, only begin to earn substantial amounts of foreign exchange at the end of the decade, while imports of equipment and technology must take place now.

The volume of most Soviet exports in 1975 was below that of 1973. Exports of aluminium, copper, iron and steel and of practically all non-ferrous metals declined. Exports of wood

were below the 1973 level as well as those of paper. The rise :n value was not sufficient to offset higher import demands. Soviet gold is not a trump card at the moment, owing to the decline of the gold price. It >s therefore clear that the continued availability of Western credits will be decisive to any further increase of Soviet imports. In 1975 Soviet net liabilities to western banks increased by $4 billion and as of May, 1976, may be estimated at some $5 billion. Servicing of the debt will take an important part of future Soviet additional export earnings. However. this figure refers to Soviet commercial borrowing only. It excludes credits extended to the Soviet Union through bilateral intra-governmental agreements, supplier credits and any other credits backed by the Western banks. The size of those credits is probably at least as big as Soviet commerical borrowings. The total Soviet deficit on visible trade with the developed West for 1971-75 was $7.2 billion, and the accumulated visible deficit is over $lO billion. Any improvement in the Soviet trade balance with the West will largely depend on an improved economic situation there, allowing the Soviets to increase exports of raw materials. It will also depend on a more rapid development of the natural gas industry as the important potential source of higher earnings and on the performance of agriculture. Meanwhile. Western credits and barter will have to cover the main needs of the Soviet development.

SOVIET VISIBLE TRADE BALANCE (million roubles) 1971-1975 Socialist countries Of which Comecon Developed West Developing countries 1971 — 7S7 -4 7R — 117 ~r- S54 1972 — 233 — 414 --1000 -I- 458 1973 - 101 - 300 - 839 -120) 1974 -t- 850 — 432 — Ill -1004 1975 4- 600 -4 500 -3400 -4 300 1971-5 •41873 - 344 - 5445 - 3717 TOTAL -4-1194 — S75 h 241 -4-1945 -2700 •+ 145