TNAG-0566-FCO40-699-Implications-for-Hong-Kong-of-change-in-Chinese-leadership-1976 — Page 20

CONFIDENTIAL

SOVIET HARD CURRENCY TRADE AND INDEBTEDNESS TO THE WEST

While overall Soviet foreign trade increased in value terms by 130% over the last five-year plan period (1971-75), the increase in turnover with the developed West was over 237%, compared with under 100% for the Communist

1.

area.

2.

Over two-thirds of the USSR's trade with non-Communist countries and over 87% of its trade with the developed West is conducted in convertible currencies. In 1975 the country incurred a record hard currency trade deficit of $6.3 billion, more then three times its previous record deficit of $1.75 billion in 1973. Imports from the West increased by 58%, mainly due to grain purchases following the disastrous harvest and to deliveries of plant and equipment ordered 2-3 years earlier when, with the sharp rise in oil prices, prospects for Soviet exports looked more promising; exports fell slightly due to deteriorating terms of trade and a reduced demand for Soviet export goods as a result of the recession in the West.

3. In the first half of 1976 the Soviet Union recorded a further hard currency deficit of $3.3 billion, partly due to continued grain deliveries. However the balance should be redressed somewhat in the second half of 1976 and in 1977; Western markets are now recovering, and the good Soviet harvest which is expected this year should mean that grain will not have to be imported much beyond the 6-8 million tons stipulated in the US/Soviet Grain Agreement. The overall hard currency deficit for 1976 will probably be something over $5 billion.

4. The 1975 deficit was financed mainly by drawings on Western government- guaranteed private credits (about $3-3.5 billion), eurocurrency borrowings (including $650 million in medium and long-term syndicated loans), gold sales (which realised some $800 million), and invisibles (possibly 15% of the total). Depressed gold prices, caused mainly by the IMF auctions, are making gold sales less attractive, although the Soviet Union cannot afford to do without them altogether. As for eurocurrency loans, some Western banks are now reaching their limits on lending to a single customer and there is greater competition for funds thanks to Westem economic revival. As a consequence the Russians may be forced to pay higher interest rates and/or provide more information if they require further loans. As syndicated loans are taken up more slowly they are also likely to have to resort to more short-term borrowing. However, by 1977 their need to borrow on Western

markets could be much reduced.

5.

Total Soviet hard currency indebtedness at the end of 1975 is estimated at some $10 billion, of which about a quarter is covered by self-liquidating deals where payment takes place later in products, eg natural gas. The present debt/ service ratio is about 20%, which is not unduly high. (The debt/service ratio stood at only 11% in 1966, but rose to 20% in 1973 following a bad harvest, only to fall again to 15% in 1974). Given its vast national assets and excellent debt-repayment record there would seem to be no grounds for questioning the country's basic

creditworthiness.

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CONFIDENTIAL