Soviet Trade with the Industrialized West

SOVIET TRADE WITH THE. INDUSTRIALIZED WEST Daniel Franklin Wh hile Leonid Brezhnev was still alive a Soviet planner contemplating the strength of his country's foreign trade position could have been forgiven for reaching some rather complacent conclusions. My country, he might have said, is big and self-sufficient in most natural resources, so its dependence on foreign trade is relatively small. Its imports are equivalent to roughly a tenth of national income, a percentage in line with the United States. Unlike the United States, the Soviet Union conducts more than half of its trade within the shelter of the guaranteed markets and comparatively stable prices of the Council for Mutual Economic Assistance (CMEA or Comecon). In trade with the West, the Soviet Union had a great piece of luck in the 1970s, thanks to the Organization of Petroleum Exporting Countries (OPEC). The oil on which the Soviet Union has relied for some two-thirds of its hard currency exports soared in value in those years, and so the country could buy more from the West without running up the sort of hard currency debt that crippled Poland. There seemed every chance that this luck would last. Stalin had created a system for conducting foreign trade that provided shelter from potentially devastating Western competition without noticeably harming Soviet exports to the West. Soviet protectionism against the West provoked no "retaliatory" restrictions on Soviet oil deliveries to Western markets. On the contrary, the West seemed prepared Daniel Franklin is Europe editor for The Economist, which he joined in 1983 to write about Soviet and East European affairs. This article is based on a paper he presented at the 1987 NATO Economics Colloquium, April 1-3, 1987, which will be included in the forthcoming collection: The Soviet Economy: A New Course. 75 76 SAIS REVIEW to buy as much oil as the Russians could supply. The main barrier to selling more Soviet manufactured goods was the self-inflicted one ofpoor quality. On the whole, the hypothetical planner might have concluded, the Soviet Union's protectionist foreign trade system was working well. Two events shattered this comfortable picture: the price of oil came crashing down, and Mikhail Gorbachev came crashing in. The collapse of the oil price not only knocked a big hole in the Soviet Union's main source of hard currency, forcing the Russians to look for other hard currency exports as a replacement for oil, but it also laid bare an embarrassing weakness that Soviet policymakers had preferred to ignore for years: the Soviet Union was a superpower with a "one-crop" export structure more commonly associated with Third World economies. Declining oil revenues reinforced the sense of urgency in Gorbachev's drive to turn his country into an economic as well as a military superpower. Part of Gorbachev's drive involves acknowledging the damaging effects of long-term efforts to cushion Soviet industry from international competition. Despite the stability Comecon offers, it has been aptly dubbed the "Council for Mutual Economic Inefficiency." If Soviet industry is to compete with the West, Soviet foreign trade has to become more flexible and more open. Gorbachev knows this, and he has responded by introducing the most far-reaching reform of the Soviet foreign trade system since Lenin's day. The sudden change in the oil price, together with Gorbachev's reform of the trading system, makes this a time of exceptional upheaval in Soviet trade with the industrialized West; a time for uncomfortable questions to replace the comfortable old assumptions. How damaging is the fall in the oil price for the Soviet Union? How far will the foreign trade reform go? Will it work? Above all, does Gorbachev intend a fundamental change or merely a tactical shift in Soviet trade policy with the West? The Reverse Oil Shock The Soviet Union has come to rely increasingly on energy exports, especially oil, in its trade with the West. This reliance occurred in part due to the enormous windfall gains from the OPEC price rises of the 1970s. As tables 1 and 2 show, the volume of Soviet oil deliveries to the West rose by about a quarter between 1975 and 1980, but the...