London: Gordon & Cremonesi
Table of Contents
Chapter 1. The Ideological Facade
Chapter 2. The Importance of Credits
Chapter 3. Forms of Cooperation
Chapter 4. Multilateral Co-production
Chapter 1. The Rise and Fall of a Vodka-Cola Pioneer
Chapter 2. The Wheat Negotiations
Chapter 3. The Financial Web of Vodka-Cola
Chapter 1. The Foundations and Clubs of the Community
Chapter 2. Think-Tanks, Military Centers
Chapter 3. The Trilateral Commission
Chapter 1. Helsinki in the Light of Munich
Chapter 2. From Military Confrontation to Economic Concessions
Chapter 3. Vietnam and Chile: Two Profitable Obstacles to Detente
Chapter 4. Detente in Doubt
Chapter 1. Convergence
Chapter 2. Agnelli and the Communist Party
Chapter 3. The Vodka-Espresso Operation
Chapter 4. The French Communist Party's Financial and Commercial Enterprises
It is the central thesis of this book that the political and ideological phenomenon of detente is the post-facto servant of an economic reality. For the USSR and the East-bloc countries detente has never been about avoiding nuclear war. It has been about acquiring from the capitalist West sophisticated technology and know-how, modern, more efficient machinery and, of course, the credits to finance them and exports to pay for them. For the USA and the Western world, detente has facilitated the extension of the international rationalization of production, characterized by the multinational companies and their financial shadows. The ritualistic mouthings of the political detente are deployed on behalf of the ensconced power elites of East and West in a determined campaign to alter the consciousness of the wider public (the meso-world) in line with the practice of economic cooperation.
The chronology of detente is evident. Since 1917 the Soviet regime's ideological commitment to the destruction of the political and social system of the West produced a counter-hostility of anti-Communism towards the USSR and its satellites on the part of the West. This has continued fundamentally unchanged despite certain modifications to meet temporary convergencies and tactical expediency. The warmer periods of Soviet-American relations, such as the NEP period of Lenin, showed the possibility of capitalist technology transfer to the USSR, heralding the flood to follow in the 1960s. Other periods of warmer relations, such as the alliance against Hitler and Khrushchev's brief search for "peaceful co-existence," temporarily modified but did not alter the basic element of official doctrines--the commitment to replace capitalism by Bolshevism or new Bolshevist regimes. The only hard contacts between East and West in the very late fifties and early sixties were through foreign trade. In most other areas, the cold war was at cryogenic temperature: wars rumbled on in Korea and Vietnam, confrontations persisted in the near-East, the Cuban missile crisis threatened disaster and there was relative stalemate in disarmament negotiations.
Most governments, and most politicians in the West, except for the ubiquitous anticapitalist minuscules or groupuscules, were manning cold-war battle stations, supported by the opinion manufacturers of the commercial media. In the West there were a scattering of anti-American, pro-socialist voices: Olof Palme of Sweden, a minister or two of the Tribune group within the British Labour Party, and, of course, some traditionally contre-tous French under the reign of Charles de Gaulle. In the East there was a strident unison of highpitched anti-West, anti-imperialist and anti-American propaganda.
Economic relations as of the middle fifties were already surging in the opposite direction, however, towards contacts, cooperation, and amicability. The initial period of economic thaw was marked by such first contacts as between Valletta of Fiat (Fascism's most decorated manager), Hammer of Occidental Oil (Communism's best-loved millionaire), and Beitz of Krupp (loved by militarists the world over). From then on until the late sixties--while the cold war was at its coldest--the great economic wave from Europe gathered way. Most of the large deals and projects were concocted directly by individual companies without the governmental trimmings and trappings of the latter detente period. "Framework agreements" between governments (proclamations of commitment to detente, cooperation, joint undertakings in research, prospecting joint ventures, etc.) and cooperation agreements between the Eastern Foreign Trade Organisations (FTOs) and the capitalist monopolists were added subsequently.
The initial cooperation ventures were direct and unadorned--usually enveloped in the thickest secrecy and largely unreported by the media. A striking example of this cloak of invisibility was the scant attention accorded the gigantic deals of Fiat by its domestic Italian media, especially by those such as La Stampa, II Globo, and Italian Television RAI, which were a part of the Fiat empire. Similarly, the comrades and workers of the Communist Party-controlled trade union confederation, the Italian COIL, called upon to strike and struggle for wages, jobs and socialism against the clearest symbol of Italy's corrupt and decadent capitalism which was Fiat, were not told of the numerous reciprocal flights being made by their boss, Valletta, and Soviet and Polish officials to plan the building of assembly lines to produce the Fiat 124 Model in Eastern Europe. Since the Italian Communist Party (CPI) was involved in the operation through its extensive network of Party-owned trading companies (which were and remain the source of most of the CPI's funds), it is highly unlikely that the Communist Party leadership of the CGIL was unaware of this negotiation.
As European and Japanese eastward traffic increased, so American companies took the first steps towards involvement using their subsidiaries for back-door access to the new opportunities. As totally legal corporate citizens of their respective host countries (Opel-GM in Germany, IBM in France, ITT in Switzerland, DoW in Holland, Exxon in Italy, and many others), the corporate subsidiaries joined the economic Drang nach Osten provided with European passports and immunity from the impotent American regulations which prohibited their parent companies in Detroit, New York and tax-haven Delaware from engaging in such activities. Progressively, the economic imperative became too strong for the obstructive political and ideological barricades, which collapsed and were replaced by "detente" traffic signals showing: go, go, go.
Publisher's Note. In this book 'billion' signifies 1000 million, i.e. an American billion or one milliard. Some American spellings are retained (center, program, license, defense; for centre, programme, licence, defence).
Chapter 1--The Ideological Facade
The mythology pursued and propounded by world leaders and political scientists (particularly in the USA) is based upon the proposition that morals, ethics and religion--the folklore foundations of their political stance--are dominant factors in international relations. The same ethic which views the successful millionaire as being an earthly manifestation of God's bounty, also projects that the compounded moral positions of politics determine the direction for economic development. This is the antithesis of the basic tenet of Marxian and Socialist theory which is that political and social structures are largely determined by economic relations. Certainly, such economic determinism is essential to dialectical materialism and the theory of class struggles as the driving force of social evolution.
The contest between the official doctrines of East and West can be explained in another way than by the classical view that the capitalist class is consciously working to shield its true economic rapaciousness and domination behind the virtues of political abstractions. The alternative view holds that in the Soviet Union and the East European regimes official political dogma and economic power are both vested in and identified with the same power group. The Communist Party, the military establishment and the intelligence and surveillance departments of the KGB are components of an integrated system--the unitary state. Economic and political functions are official, identical and integrated doctrinally and administratively, as are the overt and covert faces of government. The myth that pervasive class struggle as in the West, deriving from the capitalist or private ownership of the means of production, is absent from the countries with collective or social ownership of the means of production is official doctrine of both the governing elitists and the compliant masses.
Similarly, in the West the dichotomy between the allotted power of the official and visible meso-world in the political sphere and the invisible power in economic spheres of what we have called the "Overworld" results inevitably in efforts to advance the supremacy of politics or political determinism in official doctrine. The exercise of clandestine power in the economic sphere necessarily requires the pretended subordination or trivialization of private economics to public politics in the democratic market-economy systems.
This is at least a partial explanation for the continuous emphasis to date upon the political aspects as compared to the fundamental economic aspects of East-West relations. In the official version, political detente is claimed to have engendered trade and not the reverse. In this framework, the succession of peaks and troughs in East-West relations or Soviet-US relations is related almost exclusively to political events. Yet, as suggested above, business contacts continued throughout the period of apparent ideological antagonism. American capitalists travelled to Russia to trade in the twenties and thirties on a steady individual basis. Credits, the key of Soviet foreign trade and the most important constant of its foreign policy, were also secured, notably from Germany.
Even in face of the ideological hostility and the military confrontations, both direct and between satellites (NATO-US - Warsaw Pact, Berlin blockade, Korean War, Vietnam, Cuban missile crisis, Angola), the Soviets have always sought trade and credits. Pacific coexistence for the Soviets has always been pursued as a double-level policy, permitting political and ideological aggression to run parallel to the peaceful search for credits and trade. For the capitalist or market economies such a double-standard policy has always been a normal state of affairs. With effective economic power ensconced in the secretive reaches of the Overworld elite and in the boardrooms of the banks and large enterprises, the official political ideology has remained effectively secondary and apart from economic considerations. This weaker, supportive role has permitted at all periods of history and in most political conflicts with rightwing and conservative regimes not seeking the overthrow of the capitalist economic order, economic cooperation and collaboration with ideological and political opponents: Nazi Germany, Fascist Italy, Franco Spain, Salazar Portugal, Chile, South Africa, and the military regimes of Latin America, Greece, etc. Business has been largely free of ideological and political restraints of the nation state, even in the era before the multinational companies, which have rendered the last coup to the power of national politics to govern international economic enterprises.
The Contradictions of Communism
Given the affinity of the economic organizations of East and West to hierarchical, authoritarian structures and systems, and their superiority over proclaimed political policy, the question arises as to why there had been so little economic interpenetration until relatively recent times. The meagre extent of trade relations in the past might appear to prove the contrary thesis that politics do determine economics.
The explanation for such an apparent contradition in fact lies in the economic strategies of the Soviet bloc and the systems introduced after the Second World War to implement these plans. These characteristics of economic development virtually sealed off the Soviet economy from substantial interpenetration and cooperation. In point of fact, many of the elements of the successive plans were intended to achieve isolation and autarky for a siege economy.
Foreign trade as such has never been important in the Soviet economy. Even today, it represents only about 6% of GNP. Endowed with vast national and colonized resources, energy sources, and a huge land mass, the Soviets considered foreign trade merely a stop-gap function to procure foreign exchange for critically needed imports to build the new economy. This has been in keeping with the ideological fundamentals of the tightly controlled central planning of the economy. Marx and Lenin wrote abundantly about the threats and inherent evils of international monopolies, and especially the international dominance of monopolies and finance, which Lenin described as "the highest stage of capitalism." Though Marx in his time considered the emerging American joint stock company as a possible instrument for transforming private capital into social property, Lenin lived through the period which proved the unreality of such an expectation. Most of the giant firms he attacked repeatedly and explicitly as symbols of the new imperialism are among today's leading giant multinationals and leaders in the penetration of the modern imperialism into the socialist motherland: Standard Oil, Shell Oil, General Electric, Siemens, Krupp, and some of today's leading multinational banks such as Morgan Guaranty Trust, Deutsche Bank, Credit Lyonnais, PARIBAS, and especially Chase Manhattan and the oil banks of the Rockefellers.
It was, nevertheless, natural that in protecting the newly-established centrally-planned economy against economic as well as political and military threats from the predatory anti-Communist international monopolies, politics should serve the economic purpose of internalizing development to the greatest degree possible. The cold war philosophy provided a stern defence for the vulnerable Eastern economies against the theoretical encroachments of the capitalist monopolies. The Iron Curtain and an internalized non-convertible monetary policy ensured isolation better than the more traditional import barriers.
To facilitate the importation of desperately needed technology without laying open the nascent economy to the perceived dangers of capitalist exploitation, trading systems were evolved on the basis of commodity exchange in kind rather than upon the basis of money and prices. Such an arrangement also suited the capitalist monopolies, anxious in defence of their property rights and wary of the monetary policies of the bankrupt Russian economy. The Labour Theory of Value, which posits that the amount of socially necessary labour time incorporated in a product is its real value, was accepted, if never measured, as a planning criterion. Prices in the domestic economy became and still remain mere clearing devices to effect balances between available goods and consumers. They are useless as indicators for policy or as standards of values of goods and services. Therefore utility, availability and quality are the factors which determine consumer choices rather than prices. The same strategy has been applied to money in general. Though the NEP period ushered in a function for money and credit in planning policy, it was soon abandoned in favour of central and administrative controls for steering the economy. Growth at all levels in the centrally planned economy was delineated in input-output terms and in real magnitudes rather than in monetary terms. Thus both the function of money and prices are held to be of secondary importance and intrinsically different from--even antithetical to--their role in capitalist market economies. The chief function of money within the centrally planned economies appears to be as an accounting aggregate for the production and distribution of the national product. Other major functions of money and prices--as a standard of value, settlement of obligations or a method of payment as in the capitalist system--are of minor importance. Only in the consumer markets do prices and money play an important role. In the area of production and inter-relationship between enterprises its primary use is in cost accounting given that the production plan is geared to maximization of extensive developmental factors: labour, national resources, physical plant, etc. The current approach of the Soviet Union to the control function of pricing and profits is given by Leonid I. Brezhnev, General Secretary of the CPSU, in his presentation to the 25th Party Congress in early 1976: "Another area of the work is more skilful use of economic incentives and levers: cost accounting, profit, prices and bonuses. In other words, it is necessary to improve the entire system of basic indicators for the assessment of the work of ministries, associations and enterprises, above all the efficiency and quality of their work." Commodity exchange or barter therefore remains the essential means for producing and distributing the social product in the absence of a meaningful monetary vehicle. Domestic currencies were blocked to protect the planned economies from external world-market forces and interest rates above minima of 3-4% were considered as a part of surplus value or capitalist exploitation. Under these ideologico-economic conditions, the ruble was never permitted to become a convertible currency. Because money was a secondary factor in production and distribution, and was not a meaningful measure of the relative values of products, it could never be exposed as a commodity to the dangers of international trading on foreign exchange markets. More than any other factor, the different roles assigned to money and the price system in the capitalist and collectivist economies made barter plus gold the essential form of trade with the Soviet Union. A characteristic of underdeveloped economies, the unconvertibility of money and the consequent dependency upon barter in foreign trade has remained the most serious obstacle to East-West trade and the cause of the limited economic cooperation of the past.
On the other hand, foreign trade has always been more important to the smaller more industrially advanced associates in COMECON--Hungary, for example, depends upon exports for around 40% of its national product. Nevertheless, because the ideological fundamentals of the different, centrally-planned economies were patterned upon the dominant Soviet super-power model, barter became the basis of most COMECON trade. Clearings of import-export balances are done bilaterally. Just as in trade with the West, the non-convertible currencies of the different countries of COMECON cannot be used for multilateral clearings. The so-called "clearing ruble," used as a medium of commodity exchange among the COMECON countries, and the "transferable ruble," used for clearing bilateral trade balances, are both solely accounting units representing prices in rubles for offer on the world market in harder currencies. They in no way reflect real or true prices of the internal value of goods in the domestic market.
The limitations posed by non-convertible currencies and the necessities of straightforward bilateral barter deals conditioned the initiatives of the Communist countries to expand trade and secure longer credits. Few of the products available in the COMECON bloc for exports were saleable in Western markets, because of poor quality, lack of sophistication and even unavailability. Such exports as were made from the Soviet Union were of agricultural and semi-finished goods with restricted possibilities in the West. Inter-COMECON trade reflects the structure of the planned economies with the USSR supplying energy and commodities in exchange for machinery and equipment from the satellites. As long as the Soviet economy remained limited and in a primitive state, there was slight potential for overall growth in trade with the West. This was the general situation up to the late fifties. During this period, therefore, politics and ideology were largely directed at bolstering economic imperatives in limiting East-West trade.
Problems of the Soviet Economy
The needs for enhanced and transformed trade relations kept intensifying; the Soviet economic system as a whole was deteriorating with dangerous potential for social and political stresses. In an age of science and technology, despite its much-published achievements in space technology and weaponry, the domestic levels of technology and productivity in Soviet agriculture and industry were lamentable. A visiting delegation of young US farmers to the USSR reported that agricultural efficiency was very low and that Soviet farms used ten times more labour than American farms for comparable outputs. Average lags in the industrial technology of the USSR are usually put at twenty years in service industries, fifteen years in chemicals, ten years in light industry and at least ten years in data processing. A similar comparison applied to the other COMECON countries to varying extents, with the possible exception of the GDR, which has consistently been by far the most industrially developed of the still relatively underdeveloped region of COMECON. Doctrinal emphasis on heavy industry led to inadequacies in the light, modern, high-technology industries. The top central planners were represented by the sixty-to-seventy age group and the stultified plant and enterprise managers were oppressed by antiquated revolutionary, political and quantitative economic steering instruments. As a result, they completely missed the start of the greatest revolution of all time, the technotronic revolution, by at least twenty-five years.
Far from catching up and overtaking the USA, as Krushchev boasted, the relative position of the USSR and its satellites was receding catastrophically. Wallpaper for foreign edification, decorated with self-praising slogans about the absence of inflation and economic unemployment could not cover over the cracks and fissures completely. The long food queues in Russia, Poland and Czechoslovakia in 1975 and 1976, the universal inadequacy of even minimal social housing, the rapid increase in personal savings due to a mass consumer boycott of shoddy, unattractive, poor-quality products symptomize a system in deep structural trouble.
A recurring and growing complaint of Communist political leaders has been the inefficiency of industrial management and the poor quality of most products which have proved unsaleable in the West with catastrophic consequences for trade. As late as February 1976, Brezhnev was telling the Party faithful: "It is necessary to close all the loopholes that still allow slack executives to remain in the front ranks, despite breaches of contract commitments and low-grade output."
These internal constraints are evident in the COMECON pattern of trade. Exports of the Communist countries to the West are largely composed of raw materials, mineral fuels and food and drink products (over 65%). Capital goods constitute less than 10%. The commodity composition of its trade and its barter-based bilateral trading practices are typical of developing countries, with which the Soviet Union in fact competes. As it will not be possible to increase the raw material and food product exports because of domestic demand, stagnation and deficit are inevitable without increased exports of manufactured and capital goods to Western markets. But internal stresses have hampered attempts at such reorganization. Shortages of labour, especially skilled labour, have become acute in most COMECON countries, including the Soviet Union. Clandestine wages, consumer shortages, poor quality and manipulation of products to evade price regulations have created serious if unacknowledged inflation.
The overall inferior quality of equipment and products restricts access to Western markets, especially for Hungary, Rumania, Poland and Czechoslovakia. In the spring of 1976, the Soviets for the first time felt compelled to criticize Hungary openly for the inferior quality of its clothing, shoes and manufactured products exported to the USSR.
On the other hand, Hungarian agencies reported rejecting 20-30% of the consumer items imported from other East European countries. The Hungarian Chamber of Commerce publication "Magyar Import" recently reported that imports from other Socialist countries were rejected and turned down for sale to the public by the Trade Control Institute (KERMI) and the National Electrotechnical Control Institute (MEEI). The items referred to included refrigerators, vacuum cleaners, washing machines, spin driers and electric razors imported from the Soviet Union, the GDR and Poland to make up for shortages in domestic production. None of them met the Hungarian quality and safety requirements, which have been modelled on standards applied in the West. However, the Hungarians note with satisfaction that a 20-30% share of rejects represents a vast improvement over previous years when the control institutes turned down up to 60% of consumer goods imported from COMECON countries because of obvious deficiencies. Among the worst offenders were the Soviet-made Saratov refrigerators, the door handle of which delivered an electric shock when touched, and electric hazards in electric razors and spin driers, where wiring was not adequately insulated. Czechoslovak hot-water heaters also came in for criticism as unsafe.
The Polish Government officially put managers on notice, in September 1976, that to correct the impossibly poor quality of goods and mismanagement and waste of Western capital obtained under license or through cooperation could be considered and treated as criminal negligence. Czechoslovakia announced that priority attention in the current Plan would be given to importing capital equipment which can turn out goods capable of finding hard currency export markets. But the domestic need for these goods is also growing. Poland, Rumania and Czechoslovakia, beset by growing discontent like the USSR, cannot divert superior products made from imported plant and equipment into exports.
Viewed on a sector-by-sector basis, rather than macroscopically, the picture looks even bleaker. The deficiencies, bottlenecks and inter-sector planning discontinuities have become endless and chronic. Food processing in Rumania is primitive, transportation in Bulgaria rudimentary, the agricultural infrastructure for storing, processing and distributing crops in the USSR is catastrophic. Printing and publishing services, information processing, and, above all, technology coefficients of most specific processes in the electrical, chemical, paper, rubber and glass industries are extremely inefficient. Consequently, the pressures upon these sectors will increase as they fall farther behind.
Dominance of the Multinationals
For the West the beckoning mass markets of 400 million undersupplied consumers stretching from Berlin to Vladivostok had become hypnotic. Difficulties in the Western domestic economies from strikes, high wages and inflation, despite unemployment, more stringent anti-trust regulations threatening from leftist and reformist anticapitalist regimes, and, above all, the trend towards protectionism in industrialized countries, stimulated interest in the market potential of the Communist economies. Key to the intensifying interest was the fact that the multinational company (as Lenin predicted on the basis of entirely false premises) had "inherited the earth."
Around 1,000 industrial multinationals account for over 50% of world trade and about 75% of the Western world's productive capital. A recent survey by the European Economic Community (EEC) estimates approximately 10,000 Western multinational companies (defined as a company with "links" in two or more countries). It reported further that multinationals whose headquarters are based in Europe have nearly 60,000 "links" abroad, compared with US-originating firms, which have very nearly 24,000 such "links" with 113 companies throughout twenty or more countries. The Commission estimated that the top 200 companies represented 32.9% of the combined Gross Domestic Product of all OECD countries. In terms of national importance, the MNCs' proportion of national Gross Domestic Product was 69% in Holland, 53% in the UK, 41% in the US, 30% in Japan, 27% in the FRG, 23% in Switzerland, and 18% in France. But in value terms even these figures understate the real position of multinationals. For example, while American multinationals are fewer in numbers, their turnover is 43% higher.
The concentration of power is even greater than these figures would suggest due to the fact that the 1,000 leading multinationals have extensive participations, partnerships, and joint ventures with each other. In the petroleum industry, the nine or ten largest companies have common links probably exceeding 20,000. Similarly, multinationals in the chemical, rubber, plastics, paper, electronic, nuclear and service industries have massive joint ventures and participations with each other. Most are controlled today by some thirty to forty banking and financial institutions, who wield effective decision-making power over operational management.
The multinational companies are, therefore, the core of modern capitalism and have replaced the Western nation-state as the real political power centers of the age. This transfer of power to the multinationals has caused a profound structural reformation of the entire Western system and by the late fifties was already emerging as the critical element of industrial societies. Both the authoritarian Eastern bureaucracy and the authoritarian Western multinational clearly perceived mutual advantages in greatly expanded East-West trade.
For the East, facing an age of technology and capital-intensive industry, the technology gap had become an unbridgeable chasm. Internal self-corrections had failed. The only way out of the critical dilemma of how to upgrade the Soviet economic system qualitatively was to shift economic priorities from ideological isolation and the economics of surplus-value and public ownership of the means of production, towards integration into the new science-based global economy of the capitalist international monopolies (as multinational companies are termed by Stalinist orthodoxees). The Soviets sought to repeat the Japanese experience of borrowing licensing and incorporating foreign capitalist technology, thus saving an estimated twenty to twenty-five years on catch-up through the alternative of separate self-development. There was the added realization that self-generated catch-up was likely to prove impossible in any case, considering the retrograde point of departure and the accelerating rate of technological progress in the West.
Only the traditional impediments of the inconvertibility of Communist currencies and the inadequacy of simple barter deals as a basis for massive transfers of capital goods and services stood in the way of such integration. The Soviets were unable to use their important reserves of gold as a means of financing purchases of technology and equipment on the necessary scale. The trading of gold on the free market naturally causes the price to fall if large quantities are introduced, making the terms of trade less favourable and the operation therefore self-defeating, except for specific emergencies such as the financing of the USSR's 1975 wheat purchases. A substantial drop in the gold price would also undercut the USSR's credit rating with Western lending agencies, since gold is by far that country's main source of foreign earnings and solvency. It is said among commodity dealers that whenever the price of gold falls below 150 an ounce, the Soviets stop selling it. For the other, goldless COMECON countries, even this secondary source of hard foreign exchange is not available.
But, it was discovered, the eastern Europeans did possess one other resource which was deemed of high value to the capitalist multinationals--massive supplies of skilled, highly disciplined and very cheap labour!
Money Finds a Way
In comparison to Western salaries the workers in the COMECON countries earn from ten to twenty times less. In addition, the workers in the centrally planned economies do not belong to free trade unions and have no collective bargaining rights in respect of wages, hours of work or determination of working conditions. Above all, they do not have the right to strike. All levels of management belong to the union along with the workers, whilst both managers and union leaders belong to the unique Party. Thus the principal challenges to and checks upon management authority and prerogatives in the West are entirely absent.
It is the unprecedented and creative discovery of how to fuse this fund of cheap, skilled, strikeless labour into a new form of economic cooperation which made Communist-based profits possible for multinationals, and catalysed the detente. By innovating a new form of foreign exchange, permitting the multinational companies to earn exceptionally high profits in hard dollars, marks, francs, sterling and yen, the historical economic bottlenecks were broken and the West's political barricades against Communism dismantled.
The creation of this new "Eldorado of detente" supplied the element missing during previous surges of East-West economic cooperation and pacific coexistence campaigns. Profits commensurate with modern mammoth-scale projects became feasible. The techniques were even applicable to medium and small-scale projects. For the first time, a quantum leap out of the containments of barter and in natura commodity exchanges (despite the absence of comparable price mechanisms and the inconvertibility of Eastern currencies), became a fact and reality of modern economic relations of the detente. The era of Vodka-Cola imperialism had arrived. And just as Fiat and Krupp had signalled the breakthrough in trade during the fifties, making necessary the Ostpolitik of Willy Brandt as a political concomitant, so the Pepsi-Vodka deal became the public relations symbol of the Nixon-Brezhnev detente.
The underlying techniques of Vodka-Cola cooperation are described in greater detail later in this chapter. At this point, we may simply point out that cooperation is a method which permits the Communist regimes to acquire voluminous credits from Western government and private bank suppliers to finance plant, technology and managerial know-how importations, including a vast range of supporting inputs such as training, technical documentation, servicing systems, etc., from the capitalist monopolies, as part of a package deal which provides for guaranteed repayment facilities through the buy-back and counter-purchase of goods by the capitalist partner. These "counter-purchases" may either be of other stipulated products or of products from the plant established under the deal. Deals often cover entire production processes, specific types of advanced machinery and equipment and even complete factories and industrial complexes called "turn-key plants" (all delivered, built and presented, key in hand). The interest costs of these credits are incorporated into the final costs of the project.
The Western associate and the government foreign trade monopoly responsible for the appropriate Eastern industrial sector create a partnership to effect this strategy, which may range from a simple form of association with no formal or legal corporate status (being governed merely by a contractual relationship) up to an integrated venture on a 49/51% or even a 50/50% basis. These relationships make possible the Vodka-Cola enterprise giving mutual advantages to both the Eastern and Western partners. Such dealings are therefore quite distinct from normal or traditional foreign trade, which is based upon exports paid for by clearances made at international level through the normal capitalist methods of connecting balances to monetary aggregates and paying or receiving them in negotiable currencies. In the new form of cooperation only goods are exchanged as payments and receipts, not money. Although fundamentally based upon the barter technique, this development is more sophisticated and flexible than anything known in the past..The apparent form of such deals permits the maintenance of a closed autarkical system of economic isolationism by the Eastern elite and the perpetuation of its authoritarian industrial and political system. Numerous recent declarations by Soviet and satellite leaders claim officially that such deals have no relationship to the permanent ideological commitments and political objectives of helping to destroy capitalism and supporting workers' revolutions to overthrow exploitation for the final victory of socialism.
Again, the words of CPSU General Secretary Brezhnev are illustrative of the rhetorical defense by association with concepts of "socialism" and "peace" rather than by the exercise of logic: "No one should expect that because of the detente Communists will reconcile themselves with capitalist exploitation or that monopolists will become followers of the revolution. On the other hand, strict observance of the principle of non-interference in the affairs of other states and respect for their independence and sovereignty, are one of the essential conditions of detente.
"We make no secret of the fact that we see detente as the way to create more favourable conditions for peaceful socialist and Communist construction. This only confirms that socialism and peace are indissoluble."
All such rapports, except in the case of Yugoslavia, are claimed to be external to the centrally steered economy and hermetically sealed off from the socialist structure. The dangers that cooperation will cause changes in the system in Eastern Europe because of technological and technocratic imperatives or stimulated tastes among Eastern consumers for greater creature comforts, especially the "democratizing individual ownership of an automobile," are considered impossible. As long as prices and currencies remain purely administrative and unconnectable, it is held, there can be no significant transformations within the integrated economico-politico-social system.
Integration of Interests
These arrangements meet all the economic criteria demanded by Eastern technological growth, whilst allowing monetary protectionism to persist. Previously, the extension of bank credits to would-be Eastern purchasers was totally hampered by the inability of capitalist firms to generate profits within the Eastern economy to repay and enhance their advances. Cooperation deals make possible the lucrative fulfilment of these credits without violating the currency barrier. Furthermore, they facilitate the transfer of critically needed technology to the East without large, self-defeating outlays of gold and without changing the monetary system. Eastern governments can, therefore, avoid integration into the currencies, banking systems and credit networks of the capitalist free market system.- Repayment in project production and other export goods is an intrinsic feature of the deal, enabling the "capitalist-monopolists" to form a guaranteed export market for a part of the products produced by the cooperation project (often ranging between 30-60%) as well as supplying badly-needed export outlets for other products usually unsaleable in the West through normal trade channels. Only a very small portion (usually 10-15%) is paid for in hard currencies. The remainder is repaid in goods. In a time when the Eastern economic systems have retrograded into deepening crisis, both qualitatively and quantitatively, as reflected in ominously growing trade deficits and debts to the West, barter-based cooperation, through licensing, buy-back, counter-purchase, co-production, joint association by partnership contract and joint ventures, is a life-saver. It may provide the means of propping up the discredited elitists of the Eastern ruling class, composed of the Party, the bureaucracy and the KGB. Providing supportive Western technology, without opening up Eastern systems to the vicissitudes of capital market forces certainly provides a breathing space, at least for the moment. Whether this step represents an implicit and unconscious sapping of the fortress of privilege in the East, with consequences for the future, is not yet apparent. Clearly the ruling caste itself has no such anxieties. They expect the capitalists to sell them the rope with which they may eventually hang them. It has never been suggested or indicated that the Gosplanners have been infiltrated by anti-Communist elements to promote self-annihilating capitalist technology in order to dislocate or disrupt the system from within.
If cooperation, or economic detente, serves the aims of Eastern economic development without encroaching too harshly upon their flexible ideological barrage, the counter-ideologists of the West find the new arrangements equally easy to accommodate. For the monopoly capitalists or multinationals, detente has never, we repeat, been about avoiding nuclear war, nor about promoting constructive "convergencies" between the best socialist and democratic features of both systems. Least of all has it been about catalysing liberalism, human rights, and the market economy into the Communist countries. Slogans such as "Peace through Trade," "Economics--the Arms of Peace," "Make Love and Profits, not War," are promoted by lawyers on commission hustling deals for personal profits, as in the case of Samuel Pisar or the call-boys of the media and of academe. These jaded hacks are paid their hire by the call-houses of the Rockefellers, the banks and the oil companies, to apply the cosmetics of Madison Avenue and the advertising world to the motivations of the Western ruling elite. As with the Soviets, Poles, Czechs, East Germans and others, these motivations are entirely pecuniary and secular: accumulating more profits and cash flow by exploiting workers in the East in order better to exploit workers in the West. The business of big business is to make profits or surplus value. The rulers of the East are making it their business to help them.
Cooperation, not trade, has made profits possible and enabled multinationals to capitalize on Communism. An argument often heard is that, in overall balances, cooperation represents only a small amount compared to East-West import-export figures. Companies, governments and the domesticated multinational media, of course, have an obvious interest in playing down the relative importance and significance of cooperation deals. Should the true impact of this departure become widely realized, opposition would grow from all sides: from workers because of the growing threats of dumping, loss of jobs and production to low-wage non-union economies; from consumers because of the contribution of cooperation deals to raising interest rates, to inflation and to high prices for consumer products; and from concerned free people everywhere, already disturbed by the decreasing number of democratic countries in the world, who would raise questions about the quasi-clandestine, conspiratorial dealings between Eastern politico-economic and Western economic authoritarians. From this perspective, the control systems of both partners in cooperation seem to have a great deal in common: the internal power structures of both the Eastern regimes and of the ruling Western multinational enterprises are based on hierarchical, military-type principles. The trend towards integration in a secret monopoly control of power would seem to underscore their external economic cooperation. For example, it is hard to see how a joint venture or association with a state-owned, monopoly Foreign Trade Organization (FTO) can fail to extend the degree of monopolization and cartelization in the world economy. Shell, Exxon and BP are all signatories to a cooperation deal with the same Soviet FTO for oil, Soyuznefteexport--as an example of competition this is patently absurd. All their services, practices and procedures will unavoidably converge into an unified undertaking. When one side of such a deal is already a total and complete monopoly, and all FTOs are simply divisions of the central state monopoly, it is impossible to argue that competition will not be progressively reduced and administrative control over systems in the West expanded. When A, B and C are organically linked to D, in the area of their common interests, how can there be competition--it would be quite irrational and inoperable.
It is obvious that the superstructures and ramifications of the cooperation system are becoming heavy and extensive. The more public and private credits that are advanced, the more "investments" the multinationals make, the more powerful interests tie into cooperation deals, the greater the political and economic pressure will be to expand commitment. The Western multinationals are, therefore, likely to use their already predominant strength over the political and economic policies of the nation state in support of the unhindered perpetuation of the Eastern regimes with whom they have an ever-growing financial and economic community of interests. Obviously, with investments in the $50-100 billion range and debts on the same scale, the multinationals and the banks would definitely not be content at the prospect of a change in the Eastern regimes. In economic terms, such a change would probably result in the repudiation of all external obligations and debts contracted by the present undemocratic, non-elected, oppressive regime. Similarly, the introduction of free trade unions, collective bargaining, industrial democracy, the right to strike and any other feature of democratic trade unions, is not something the Western partners of the present authoritarian firms would foresee with tranquillity and pleasure. The multinationals and banks, therefore, have a vested, direct, financial interest in the perpetuation of these oppressive regimes and must be among their most solid, if tacit, supporters.
A debt of $50-100 billion is a large one and a lot of concessions to authoritarianism will be made to ensure its repayment. Basic considerations of individual rights, freedom of speech, free expression of opinions, etc., weigh lightly in the billion dollar universe of the Overworld. Few analogies exist in history of the depth and extent of the repercussions triggered by the integration process which is detente; few movements in history were as pregnant with consequences, for better or worse, as the detente of co-production is for our future. Its influence is behind the apparent political volte-face of the still ideologically opposed superpowers. One direct result of the economic need for detente was the Vodka-Cola cooperation in achieving a cease-fire and beginnings of peace talks in the Kippur War. Another linked outcome was the cessation of hostilities in Vietnam through the abrupt American withdrawal and the concession of South Vietnam to the North. Many in the West, like the present author, unconditionally opposed the American intervention from the beginning of the Vietnam tragedy, but regardless of the original rights or wrongs of the involvement only prior agreement between the multinationals of the US military-industrial complex and the power structure of the East could account for such a complete withdrawal and termination. Neither Henry Kissinger's small-step, near-East diplomacy nor his Vietnam negotiations could have been conducted without Soviet support and approval. It was necessary for both parties to eradicate areas of overt confrontation in order to pursue unhindered the grand design of Vodka-Colanization and the economic cooperation so ardently promoted by the Overworld elitists. It appears that Mao Tse-Tung, for one, never did understand how the American fight against Communism had become subordinated to economic realities if a report in Time magazine by Henry Kissinger of the statements by Mao on Vietnam are true. Mao is reported to have said he "could not comprehend how a nation as big and powerful as the US would give up after having lost only 50,000 men." He did not understand its apparently weak withdrawal, surrendering South Vietnam to its enemy. Nor did he understand how a great country could "allow such as Watergate to happen" (Time, 20 September 1976). Being programmed for power in essentially political and executive terms, Mao apparently did not fathom the real power structures of the US and their motivations. He obviously could not connect the fall of Nixon to an attempt by an anti-detente faction in the CIA to stem the headlong rush into detente by the Kissinger-Rockefeller faction for whom Nixon was fronting, as our earlier discussion of this interlude in American politics discloses. Nor apparently did Mao appreciate that the large economic empires of the multinationals had calculated that profits from the Vietnam war had reached the point of diminishing returns when balanced against the awaiting bonanza in East-West cooperation which could not be seriously mined until the US pulled out completely.
While politicians or militarists may conduct their affairs on short-term operational considerations, long-term, billion-dollar economic programs are not formulated and implemented without ensuring the maximum degree of very long-term guarantees and safeguards. The critical and essential safeguard of the financier is stability--that there should be no serious confrontation capable of stopping the grand design. Local skirmishes, such as Angola and Portugal, media and verbal aggression to maintain the ideological facade are a part of that design and act as safety valves or sops to extant ideological sentiments. Like Mao, most of the other political so-called leaders have not yet grasped the dimension of the design nor the scale of its probable impact.
Strategy and Solvency
East-West trade has increased tremendously since the late fifties. The average rate of growth since 1960 is close to 18%--much higher than that for world trade as a whole, which in 1975 and 1976 rose only by about 11%. The rise has been even faster than that in inter-COMECON trade--almost double, in fact. Progressively the embargo was lifted from strategic exports on the so-called Coordinating Committee on Export Control (or COCOM) list. This list of strategic commodities and technologies is maintained by the secretariat of the fifteen-nation committee (all NATO members, minus Iceland and plus Japan) in Paris. From an original list of thousands of items it has been reduced down to a hard core which includes munitions, nuclear energy materials and a highly selective list of high technology equipment which could have military applications. Not surprisingly, it has been the USA which has requested the greatest number of exceptions to the COCOM list. In 1970-1971, 1,700 embargoed items and licensed commodities were removed from the USA's own unilateral stop list. In 1972, the number of items was reduced to 400, whilst 1973 saw a reduction to a mere 70 items. Even large-scale computers, barred to exports in 1970, are now permitted to be exported to Eastern Europe. Except for items on the COCOM list, France, West Germany, Italy and the UK no longer require export licences for goods destined for Eastern Europe.
It is known that much of the advanced technology sought by the East has military as well as civilian uses. According to Newsweek, a former Soviet trade official now living in Israel reported that every Soviet foreign trade organization has a military-scientific unit attached to it for the purpose of examining the possible application of imported technology for military use. But in addition, most advanced technology is largely common to both civilian and military purposes. Only the actual hardware and weapon systems are uniquely applicable. In the Soviet Union and other COMECON countries; such as the GDR or Czechoslovakia, the military-industrial complex appears quite as extensive as it is in the West. In addition to its mass array of military-owned and operated armament factories, the army runs many factories producing civilian goods: automobile firms, electrical firms, metal-working and numerous consumer goods plants. When a Western firm such as GM, Ford, Fiat, etc., enters into agreements with the Eastern foreign trade organizations which are the only contractors or agents, they are virtually entering into an operational partnership with the military forces. That this is entirely known to and approved by Western governments and the capitalist multinationals cannot be doubted. It illustrates the degree to which economics and trade have triumphed in setting military considerations aside--a situation which is not likely to be reciprocated in the East.
Despite their lip-service to bilateral balancing of trade, the Eastern foreign trade monopolies have never achieved equilibrium in their overall trade with capitalist countries, for reasons previously described. This failure has meant continued unbalanced trade and mounting deficits for Eastern economies. By September 1976 the overall deficit of the East European countries was nearly $50 billion. Soviet long-term indebtedness to the West is generally estimated to be around $10-12 billion, with an annual servicing debt of some $800 million. The Morgan Guaranty Trust, one of the world's largest banks and heavily engaged in Vodka-Cola financing, reported an Eastern deficit figure in August 1976 of $32 billion, and this is probably an understatement to avoid panicking the capitalist money markets. A confidential NATO report which put the figure at over $50 billion released a public figure of only $35 billion, as part of the same concern to prevent doubts as to the solvency of the Communist countries and so forestall a consequent universal run on the private capitalist banks who were so deeply involved in this financing. In reality the actual debt figure is probably higher than $50 billion when the under-reporting of credit by countries such as Italy and France is considered.
The current rate of increasing hard-currency indebtedness to the West is estimated to be in the region of $1-2 billion monthly or $12-24 billion in a full year. These chronic deficits are financed mainly from Western credits and from sales of gold by the USSR ($700-800 million annually). Most of these credits are for financing debts incurred in connection with cooperation projects over the last ten years. As in most underdeveloped economies, the USSR's debt servicing has risen enormously; it represents about 20% of the Soviet Union's hard currency exports--a level at which bankers start asking searching questions.
It is an article of Wall Street faith and the current financial certainty of the City of London that the Soviet Union and the other centrally-planned State-owned economies are gilt-edged credit risks. The Soviet Union is proud of a fifty-year record of never defaulting on a debt. As all industry is state-owned, the guarantor of last resort is the government itself and, therefore, admirably credit-worthy. But now the upper threshold limits on financing of debt are being reached and outstanding long-term deficits are increasing. Actual gold reserves of the Soviet Union correspond approximately to its total indebtedness or slightly less. For the moment it is solvent and liquid, but any attempt at large-scale extension of that current outstanding debt would induce a tremor through Western money markets. Though it cannot really provide a serious comparison, North Korea with over $700 million of debt to Western bankers has already made history as the first Communist country to have defaulted. Requests for payment of agreed annual instalments are being ignored--a fact which the large US banks like First National City and Chase Manhattan and leading Swiss banks are keeping quiet. These bastions of capitalism seem anxious not to besmirch the legend that the centrally-planned Communist regimes never default on the repayment of debts. Socialist honour in this matter seems in safe hands--no self-respecting capitalist banker is going to raise a question of confidence in a debtor.
This precarious situation adds a new dimension to the importance of buy-back or barter-based counter-purchase cooperation. The Prime Ministers of Poland and Czechoslovakia have declared that such counter-trade projects are to become the principal means of foreign trade in order to boost exports and hard-currency revenues. Only counter-trade barter deals offer the prospect of keeping open the flow of capitalist technology and maintaining the detente. Despite being granted most favoured nation (MFN) trading status by most Western countries (excepting the USSR, Czechoslovakia and Hungary at present by the USA), the Eastern bloc still finds it wholly impossible to off-load poor quality, over-priced home made products on to Western markets through the means of direct exports. While the Soviet Union can gain little currency to relieve its credit position from its exports of agricultural and raw materials, it has a far greater interest in co-production deals for more finished, sophisticated commodities. Such deals bring more profits for the Western multinationals either from the production returned for sale in the American markets or from the portion of the output of the Soviet partner also exported to the West. In the first case, the multinational will be content to proceed further with investment on which it is receiving a direct, tax~free return, whilst in the second instance hard currency can be used to pacify and encourage agencies to grant further financial credit. The urgency with which the Soviets regard the situation was highlighted in Brezhnev's keynote address to the 25th CPSU Congress in late February 1976: "Among the key economic problems, the promotion of foreign economic relations acquires growing importance," he asserted. "The time is ripe," he declared, "to extend compensation agreements to processing industries as well." Most buy-back deals have been in the area of commodities and agricultural products. This announcement of the greater emphasis on buy-back and counter-purchase in processing industries is an accurate barometer of the pressures rising under cooperation.
Chapter 2--The Importance of Credits
The USSR, in a dispatch by Tass, has publicly recognized the existence of the problem of COMECON debts to the capitalist banks (Tass, 20 September 1976). It inveighed against the prospect of any freeze in credits which would be fatal to detente and to Soviet overall strategy. The article was a reaction to the deepening concern in the West about the basic solvency of the East-bloc countries just explained. For the first time Western bankers were beginning to question the soundness of continuing credits on such a scale from the point of view of prudent banking practice. Deficits of this magnitude could only be repaid through some equally large expansion in attractive exports. Both parties are therefore agreed that an enormous expansion must take place in the re-export of the products stemming from the credit-financed plant and technology in the East, adding the benefits of low-wage labour.
In the current and foreseeable future inflation, unemployment and restrictions on imports will continue in the West. Just how increased dumping of Eastern exports is received without retaliation from Western workers, politicians and nationally-based industry will certainly be the next phase of the dilemma. Credits have often been used in economic warfare. The rise and fall in credits has occurred simultaneously with the rise and fall in political confrontation in US-Soviet relations. Immediately after the Second World War, for a brief period, the US granted large credits to Poland and Czechoslovakia and even considered generous grants to the Soviet Union. By 1959, the climate had cooled in response to the final choice of the USSR to withdraw into autarky, as already described, rather than to join in the capitalist-dominated international monetary and trade system. Of all the East-bloc countries only Rumania has joined the IMF.
In keeping with the general climate, the USA put a tight ban on credits and guarantees. But this cordon sanitaire did not last long. As the first large-scale cooperation projects took shape, the European multinational firms and banks quickly changed their governments' credit policies through 180 degrees to meet the perceived demand potential in the Communist countries. Even the most reactionary anti-Socialists in high office, most of whom were associated or tied up with the banks and business interests in one way or another declared against economic warfare with the Communist states and supported cheap long-term credits to back up their investments.
Italy began an aggressive pro-Eastern credit policy in the late fifties to finance the pioneering Vodka-Colanization of giant firms such as Fiat, Pirelli, Montedison and Olivetti, although it was chronically short of domestic capital for financing its own development in backward regions like the Mezzogiorno. The large-scale credit to finance Fiat's construction of the Togliattigrad factory was the most important given by any Western country up to that time. Successively, all the West European countries, under pressure from the multinationals and their banks, cast off the prudence one would expect of visceral anti-Communist bankers of the City of London, Bahnhofstrasse, Frankfurt, and Place de la Bourse, Paris, to enter joyously into the profitable streaming of capitalist credits into the Communist countries to finance capitalist-Communist joint undertakings.
In 1963, France granted the Soviet Union a major credit of 3.5 million francs. From 1963 to 1970, France extended over one billion francs in credits to finance the activities of Renault, Rhone-Poulenc, Pechiney and others in the East-bloc countries. Maturity periods also began to extend from five to seven, and finally to ten, years.
The first British Government Export Credit Guarantee was granted to Czechoslovakia in June 1964 with a repayment period of twelve years. This was followed by a credit of fifteen-years maturity to the USSR.
West Germany was prohibited by the Allied military authorities from granting credits to the East up until 1963, with the exception of Poland. But since 1964, it has become the most extensive purveyor of credits to Communist regions, with most being tied to specific goods and buy-back corporation deals. Its credit generosity to the Soviets exceeded by far all other offers, until by 1976, half of all FRG foreign credits were going to the Soviet Union.
The rapid extension of credit and cooperation by West European countries forced the USA to follow suit and in August 1971 it too removed most restrictions and started extending credits on an unprecedented scale.
A large portion of the current outstanding Eastern debt to the West represents debt associated with extended long-term credits in what represented a profound change in previous policy. Instead of opposing financial ties and involvement with capitalist banking groups, out of fear of losing political independence and suspicion of the destabilizing infiltration of the Communist economies by~ Western capital, the Eastern regimes now energetically sought such links. During the early sixties some very large projects were promoted by the Soviet Union on the basis of capitalist credits on a new scale. Italy's $100 million credit in 1961 and the follow-up $363 million credit for the Fiat automotive plant in 1966, was paralleled in France by the granting of 3.5 billion francs for financing equipment for the petroleum and petro-chemical industries, a further 1.5 billion francs in 1971 for Renault's participation in the construction of the Kama River truck factory, and an 800 million francs credit for a joint cellulose factory. Great Britain agreed that 800 of all capital goods deliveries to the East would be financed by credits, but the longest-ever credit facility has been from the USA in the form of the $500 million Commodity Credit Corporation grant, involving an additional subsidy of $500 million for grain purchases and a $225 million loan with sixteen-years maturity to back the Kama River scheme.
Studies have been made for a mammoth project for the development of raw material reserves in Siberia estimated at $45 billion. $500 million of Japanese credit was already advanced in 1976 for other raw material projects in Siberia.
The East European countries, with the Soviet Union at their head, have succeeded not only in keeping interest rates far below their real level in their own countries (around 2%) but in having rates on Western credits fixed well below the astronomically high levels prevailing on the capitalist markets. To encourage further integrated business, credits are granted at rates much below Western prime rates and very much below those prevalent in markets for average businessmen and borrowers. Despite this incentive, the Soviet Union continues in its efforts to have the rates lowered still further. It feels that to go beyond 6% or at most 7% for interest rates on credits would be intolerable for ideological reasons. A compromise is often struck by the Western banks nominally granting the lower rates whilst tacitly recouping the difference in prices. This saves face ideologically but still ensures a return at the going commercial rate for commercial banks. The Federal Republic of Germany insists upon applying commercial interest rates, except in the case of Yugoslavia, which was given DM 1 billion with thirty-years credit at 2%. The high commercial rate (now 9%) is usually buried in the price of the project.
All such direct and indirect preferential interest rates are, of course, ultimately subsidized by the various governments and borne by the tax-payer. Canada, Great Britain, France and Japan subsidize interest rates on Communist credits officially. The official discounts are accompanied by a number of different risk protections for the national lender, including guarantees against inflation and exchange rate fluctuations. France, Great Britain, Italy and Japan also extend concessionary official credit lines running into billions, at interest rates ranging from 6.5-7.5%. Almost all these official credit lines are for backing exports to Eastern Europe as part of cooperation deals. Only a small amount (10%) is used for financing straight exports of goods and services.
Except in the case of the USA, credit lines of all leading governments finance up to 85% of each project. The US Export-Import (Exim) Bank, the agency which finances and promotes US foreign trade, employs another technique for providing subsidized credits. The Bank advances credits to cover 45% of the cost of each project. Private commercial banks cover another 45% and the recipient produces a cash payment of 10%. The Exim Bank's interest rate rose from 6% in 1974 to 7% in mid-1976. This rate, when blended with the normal commercial rate of the other 45% still provides an effective rate well below that of the market. For example, if the commercial rate is 12% and the Exim rate is 7%, the loan would be at an effective 9.5%, added to which, the higher commercial interest is repaid first in order that the private banks can make their profits as they would in the western credit market. Cheap insurance against defaults is also available. Many ordinary businessmen have openly criticized the anomaly of a large country like the USSR being subsidized by the USA and other governments at interest rates much cheaper than they themselves can get.
In Great Britain, where government trade officials have been pleading with the Soviet Union to take their full quota of the 950 million export credits on offer for 1976, home-based manufacturing industry, which is in deep recession, must now borrow at rates between 13% and 14%, following a 1.5% rise in base lending rates. This has prompted comment that the fervently-awaited recovery in British industry will be slowed yet further, despite cooperation by trade unionists in their government's extended policy of wage and public expenditure restraints, ostensibly aimed at transferring scarce resources into needed industrial investment. British workers must pay up to 169% for personal loans, whilst the latest round of public expenditure reductions is targeted to "save" just over the 950 million extended to the Soviet Union.
US trade unions have sharply criticized the concessionary rates of the Exim Bank, rightly pointing out that an American worker wishing to finance the purchase of a car or a house has to pay interest at almost double the rate extended to the Soviets. As a tax payer, of course, the average American is penalized a second time when the subsidy reappears as a charge against the public budget. He feels it again as a consumer, for shortage of capital leads to higher prices. Indeed, capital scarcity and demand, high interest rates and the cost of capital credits are the principal pressures under modern inflation. The extent of the capital shift to the East is substantial. In 1971, according to UN estimates, total indebtedness of East European countries to the West was around $7 billion compared with the present $50 billion. Most of this growth is matched by credits, transferred out of the Western capital markets to the Eastern countries. How much of the inflation and rising consumer prices is due to this capital transfer is impossible to estimate accurately, but the scale of this trend shows that its effects must have been very significant.
In his pamphlet Imperialism: The Highest Stage of Capitalism, Lenin cited the Credit Lyonnais as an example of the "imperialist" banks. It is ironic that this was also the first foreign bank to open a branch in a socialist country. As the multinational companies expanded into Eastern Europe, their banking shadows followed them. The Credit Lyonnais was the pioneer for many others, especially German and Italian banks. Ostensibly and commercially, their presence was established to facilitate the transfer of credits and to assist in working out the financing arrangements for cooperation deals. Obviously, without the existence of a private money and capital market in the East they could not transact business such as taking deposits, financing mergers, raising debt capital, making loans or speculating in foreign exchange and real estate which cover the range of normal banking activities in the West. By the end of 1973, twenty banks had already submitted applications to the Soviet Gos bank. Another thirty applications from the largest capitalist banks were submitted to the other central banks. The Chase Manhattan Bank--first located in Vienna to coordinate exploratory Eastern business long dabbled in by the various interests of its President, David Rockefeller--was also the first US bank to open a branch in Moscow and was followed by others including Wells Fargo, the Bank of America, First National, Morgan Guaranty Trust, and others. Even the New York Stock Exchange (which effectively provides cover for banking control over large segments of American industry through mysterious "Street Name" holding companies) organized discussions in Moscow in November 1972 on how the NYSE could become involved in advancing Vodka-Colanization.
A very large proportion of Western capitalism, especially the multinational companies, is controlled by the large banks. The trust and stock equity holdings of leading German, French, British and American banks exercise effective voting control over most of the companies involved in East-West cooperation. It is normal that the banks whose profits come not only from interest rates and charges on the financing of credits, but ultimately from the dividends and value of the stock of the non-banking multinationals which they control, should seek to become more directly involved. The extensive presence of so many capitalist banking concerns in Eastern Europe is therefore not an insignificant nor secondary aspect of Vodka-Colonization. It is, indeed, of fundamental importance to the process in view of the real power and control which these financial empires exercise over the industrial enterprises, nationally and internationally. The leading banks all have representation on the boards of directors or supervisory boards of major multinationals. This fact increases the degree of direct banking participation in the economic and political decisions of industry. The industry-banking complex is, therefore, a tightly knit, cohesive power structure. It further explains the complete parallelism between the liberalization of credit policies and the growth of cooperation, as well as the alacrity of the switch to detente by previously hostile political establishments.
Certainly, the first-stage presence of so many representatives of the financial power elite of capitalism is of great significance for future developments in East-West relations. This presence and related influence will grow as trade expands. The cooperation of these denizens of the Overworld of capitalism with their leading counterparts at the top of the political and financial hierarchy of the Eastern regimes will decisively affect the direction of future trends. Progressive association and collaboration between these elitist power centers will fashion a new and unchallengeable Overworld system, before which all of the West's meso-world political structures will become even more impotent and ineffectual than they are today.
While awaiting permission to set up operations directly, many Western banks have begun branch operations in Vienna through which to coordinate East-West business. Financial Square in Vienna is now an important center for East-West activities. Over 200 branches and representatives of foreign banks are located there. This includes around twenty large international banks and nearly ninety American companies. Combined into national and international consortia, the leading banks have become powerful lobbyists for removing obstacles to deals with the East in which they are so directly concerned. It is in these most politically retrograde, anti-socialist, anti-worker and anti-union circles that the most unconditional pro-Soviet pressurizing and lobbying takes place. Representatives of the big banks are constantly pressing for the granting of MFN status to the Soviet Union, for the removal of the obligation that the US Congress should be consulted on credits to the USSR of more than $300 million, for increasing Exim Bank lending possibilities, for relaxing export quotas and for removing more sensitive items from the COCOM strategic embargo list. In West Germany, the UK, France, Italy, Sweden, Austria, and elsewhere, the banking-Brezhnev coalition has succeeded in subduing most political opposition to Vodka-Colanization.
In many fields, the power of vested-interest groups in the West has a curious, but perhaps necessary, double standard in regard to tolerance of East European institutions. The major one, of course, is permitting Communist political parties and Communist-Party dominated trade unions to function freely within a democratic, pluralistic political system. The Soviets maintain that this is an expression of the will of the workers to have a revolutionary Communist Party to lead them from capitalist bondage and is not the result of any Soviet intervention in the internal affairs of other countries. But no reciprocal rights for testing whether the Soviet workers would like to have a Social-Democratic or Liberal Party to lead them out of neo-Stalinist bondage are demanded as a quid pro quo. This is dismissed as utopian, naive and dangerous for peaceful coexistence.
In the same vein, Communist international and national trade unions are permitted to operate freely in the West to maintain agents and representatives, to disseminate propaganda, to organize rallies and meetings, to agitate and to establish separate, sectarian trade unions. No reciprocal rights are permitted to Western national and international organizations in Eastern Europe, where such notions are rejected as counterrevolutionary attempts to intervene in East European internal affairs. The same dual standard is now accepted also in banking, While Western banks in Eastern Europe are not permitted to undertake banking transactions nor to function within the state banking system, although this is changing, Eastern European state banks are permitted full and unlimited banking privileges in the West. The Moscow Narodny Bank in London (with assets larger than the National Bank of Ireland) and its branches in Singapore and Beirut, the Soviet Banque Commerciale pour ['Europe in Paris, the Vozkhod Trade Bank in Zurich, the East-West Bank in Frankfurt, the Bank Russo-Iran in Teheran, the Donaubank in Vienna and the Soviet East-West United Bank in Luxembourg, though specializing in East-West foreign trade transactions, operate as fully licensed domestic banks and offer comprehensive traditional banking services. These services, of course, include many foreign exchange dealings and speculations, tax evasion services, etc., on behalf of their proprietors: the Soviet Union.
All the other COMECON nations carry out similar banking operations in the West with the exception of Bulgaria and the GDR. A few of the branches have been established for some time, but most of the expansion has taken place since 1970. Poland is relatively the most indebted and most capitalist-dependent Eastern country, with a third of its economy and labour still agricultural, high food costs, few exports, and a run-down, inefficient industry turning out low-quality goods. West Germany and the United States are its principal medium-term hopes for acquiring sufficient high-technology plant and know-how. Poland is forced to pay higher interest rates than other countries for specially needed equipment (up to 10 and 11%) and this is provoking a Soviet reaction for fear that these higher rates may be used as a springboard to raise the entire interest rate structure for all countries of the Eastern bloc.
Under pressure to find more credits, the Soviet Union, which sold 328 tons of gold in Switzerland in 1976 for slightly over $1 billion, has turned to issuing five-year promissory notes to raise more credit. During 1977 the Soviets raised up to $2 billion in the form of 6.5-7.5% interest-bearing promissory notes. The real interest is, however, approximately 10%, as the prices of the capital imports raised to provide the difference between the "ideological" rate and the market rate. As these notes are discounted to the Western banks they provide an alternative to direct lending and a supplementary source of medium-term credits. This constitutes another device for circumventing the US credit restrictions--lending to the Soviet Union--of the Jackson-Vanek amendment, as in the case of leasing. Raising hard currency loans and credits is a major parameter in the Polish Five-Year Plan, which makes banking cooperation particularly important. Western Banks in Poland include: the First National Bank of Chicago, Banca Commerciale Italiana, and two French banks, Credit Industriel et Commercial and Banque Nationale de Paris. The Polish foreign trade bank, Bank Handlowy Warszawie SA maintains branches in Belgrade, London and New York. Bank PKO (Personal Service Bank) has branches in France and Israel engaged in personal money transfers for Polish citizens and nationals of Polish origin. As for other Eastern countries: the GDR has permitted two French banks and one Italian bank to set up in East Berlin; Hungary has one Austrian bank, the Creditanstalt-Bankverein; Rumania one American bank, Manufacturers Hanover Trust; and Bulgaria, the Italian Banco di Napoli. Only Czechoslovakia opposes the presence of foreign banks, a reflection of the persistent effects of the trauma following the Dubcek era of "Socialism with a human face." Besides the Soviet and Polish banks mentioned above, Hungary has banks or banking representatives in Vienna and London, Rumania in London, Paris, Frankfurt, Rome and Zurich, whilst even Bulgaria has banking offices in London and Beirut.
Western banks operate extensively through networks of international correspondent banks through which foreign banking cooperation is carried out. A correspondent is a foreign bank which agrees to cooperate on an item-by-item basis for fees on behalf of another bank. This method is particularly utilized by banks with no directly-owned subsidiaries in certain countries and in foreign cities and financial centers. Correspondent foreign banks thus permit providing services for clients which otherwise could not be done, due to the bank's limited implantation abroad, especially smaller and medium-sized banks.
During the current phases of East-West economic cooperation, the practice of establishing networks of correspondent banks through the West has expanded rapidly. Most important East European banks have built up large numbers of such correspondent banking chains. It represents an important additional link between East and West banking, supplementary to the partnerships and direct investments described in this Section.
Below is an example of the correspondents which the Polish National Bank advertises itself as possessing in the West:
Osterreichische Landerbank A.G., Wien
Banque de Bruxelles S.A., Bruxelles
Den Danske Landmansbank, Copenhagen
Skandinaviska Enskilda Banken, Stockholm
Algemene Bank Nederland N.V., Amsterdam
Deutsche Bank A.G., Munchen
Dresdner Bank A.G., Frankfurt/Main
Mitteleuropaische Handelsbank A.G., Frankfurt/Main
Union de Banques Suisses, Zurich
Banca Nationale del Lavoro, Roma
Barclays Bank International Ltd., London
Commonwealth Trading Bank of Australia, London
The Chase Manhattan Bank, New York
The First National Bank of Chicago, Chicago
First National City Bank, New York
Girard Trust Bank, Philadelphia
Irving Trust Company, New York
Bank of America Trust and SA, San Francisco
The Royal Bank of Canada, Montreal
Commonwealth Trading Bank of Australia, Sydney
An indicator of the growing collaboration between the giants of financial monopoly capitalism and the Communist foreign trade monopoly banks (trade and credit are usually kept separate and distinct in the East) is the trend toward creating East-West banking consortia. The Polish Bank Handlowy, for example, joined six major capitalist banks on an equal share basis to create Centrobank AG in Vienna in 1971. The six banks were Banque Popular Espanol (of Franco's Spain), Kleinwort Benson of London, Banque Occidentale pour l'Industrie et le Commerce of Paris, Banco Sicilia of Palermo, Bank of Tokyo, and the Austrian trade union and Socialist Party-owned Bank fur Arbeit und Wirtschaft. Two years later, Poland became a partner in the German-Polish Central European Bank in Frankfurt. This was the first joint venture between a West German bank and an Eastern bank, being formed on the basis of 70% ownership by the Polish Bank Handlowy and 30% by the Hessische Landesbank-Girozentrale.
Rumania also has been a leader in joint-venture Vodka-Cola banking. The Rumanian Foreign Trade Bank entered a joint venture with eight important French banks in 1972 to create the French-Rumanian Bank in Paris, and a 50/30/20 partnership in the Anglo-Rumanian Bank in London along with Barclays Bank and the American Manufacturers Hanover Trust respectively. Another joint venture with West German banks was established in Frankfurt in August 1976. Hungary has a joint venture in Austria with the Austrian Kontrolbank and another in London, the Hungarian National Bank, with 25% of its shares held by other Austrian banks.
Branches of foreign capitalist banks in Hungary were authorized by a decree issued on 24 January 1977. According to the new regulations these banks, which are exonerated from paying Hungarian taxes, may employ "non-Hungarian" personnel. They will be permitted to conclude banking business, but not to promote business in Hungary. They are chiefly permitted to arrange import-export business for their Western parent banks with Hungarian enterprises, but excluded as yet from conducting normal domestic banking functions such as opening accounts, extending credit and issuing cheques. Some Western banks have pointed out that such banking privileges accorded Hungarian banking subsidiaries in the West may improve the possibilities of reciprocal rights in Hungary. The thinking is that, as cooperation expands, the willingness to extend such reciprocal rights to Western banks will grow, especially as the US has authorized the National Bank of Hungary to open a branch on Wall Street with full banking rights under American law: raise loans, issue bonds and solicit deposits, etc.
Yugoslavia is both the least integrated of the Communist-bloc countries and the most interrelated to Western economies and enterprises. Not a member of COMECON, it was the leader in cooperative ventures with multinational companies. At least numerically Yugoslavia has the most East-West banking links abroad. Its foreign trade bank, Beogradska Bank, has branches in Frankfurt, London and Paris and the Yugoslavian Investment Bank branches in London and Paris. Most of the banking institutions whose clients are involved in Yugoslavian joint undertakings have representation or agents in Belgrade. By far the most important joint Yugoslavian capitalist banking venture is the International Investment Corporation for Yugoslavia (IICY). The headquarters of this organization, originally in London, are now shared between London and Yugoslavia. In the consortia are such multinational banks as the Amsterdam-Rotterdam Bank, Banco di Napoli, Creditanstalt of Austria, Commerzbank, Deutsche Bank, Dresdner Bank, Westdeutsche Landesbank-Girozentrale (all of the Federal Republic of Germany) and the Cunard Co. and Marine Midland Banks of the US. The IICY has been the primary bank for promoting, financing and implementing Western investments in Yugoslavia, frequently by way of a direct participation.
The Moscow Narodny Bank offered "Capitalist Eurodollars" to customers as early as 1954 and 1955 as did its sister Soviet bank in Paris. Since then Eastern Communist banks have regularly increased their participations in management and underwritings of bond issues for both capitalist as well as Communist borrowers in the Eurodollar market. The first bond issue of a Communist country, in capitalism's most licentious money market, was floated by Hungary in 1971. Over seventy-five leading capitalist banks underwrote the issue for $25 million. This was followed by a second bond for $50 carrying 8.5% and a fifteen-years maturity, headed by a consortium composed of the Moscow Narodny Bank, London's Morgan Grenfell, the Bank of America and the Frankfurter Bank of the Federal Republic of Germany. Since that beginning, issues by Eastern countries have grown. The International Bank for Economic Cooperation (IBEC), the COMECON coordinating banking agency, has been in the Eurodollar market since 1972. One of its functions is to generate medium-term bank-to-bank credits to assist in financing East-West deals. The method is to cooperate with various banking consortia to put together issues of between $20-40 million. East I European ideologues and Western Stalinists may still be able to argue that the number Western banks and industrial joint venture projects in the East do not represent a real capitalist presence. On the other hand, the number of capitalist debtors or bondholders of Communist commercial papers has become very important—perhaps a portent of actual capitalist stockholders buying and selling Communist companies on the villainous, depraved, capitalist New York Stock Exchange! The margin of transition from debt to equity is not very wide in the West. Initial discussions on issuing Communist government bonds on the New York market have already taken place. And since the New York Stock Exchange has already indicated its readiness to play a role in furthering East-West economic relations, what better role could it play in furthering international peace, detente, and human happiness?
The second COMECON bank, actually a dual bank to the IBEC, the International Investment Bank (IIB) has also been actively raising bond currency Euroloans in cooperation with Western consortia: $50 million under the syndicate leadership of the British National Westminster Bank; $50 million along with Credit Lyonnais of France; $60 million through a Belgian group. Participating within these syndicates in the issues were all of the leading 100 investment banks of the Western world. Both COMECON banks, IBEC and JIB, have nearly 300 representations, links and ties with Western banks.
The growth in recent years of multinational consortia banking stimulated by the growth and domination of the economic system by multinationals has probably been the most important development in banking. Involving leading banks from different countries, the consortium provides a multinational structure of total banking services for its clients around the world. It has prompted a qualified estimate that ten to twelve multinational banking consortia will completely dominate the world's credit and money markets by the end of the century. All of the world's most powerful national banks are today intrinsically multinational in their own structure and are further integrated internationally through their common membership in these consortia. The fifty leading banks account for nearly 75% of international financing, including the nearly $70 billion annual bond issues for debt capital. Together they have hundreds of branches around the world. The Bank of America alone has 100 branches in 58 countries and earns 60% of its profits abroad. The Chase Manhattan Bank of the Rockefellers has 57 branches in 44 countries, the Deutsche Bank 65 branches in 32 countries, and Barclay's Bank has 48 branches in 33 countries. British, Swiss and German banks have, if anything, been more international than even the American giants in terms of the amount of business transacted abroad.
A first UK-USSR banking joint venture was established in 1978:
"Morgan Grenfell, the Bank of Scotland and Moscow Narodny Bank yesterday signed an agreement to set up a joint venture banking operation in Moscow, aimed at providing for their customers a service in the Soviet Union. The new venture will combine the expertise of Moscow Narodny in the financing of East-West trade with the experience of Morgan Grenfell and the Bank of Scotland in the arrangement of ECGD-backed loans and the financing of major projects. The Bank of Scotland, with experience in the oil industry, hopes to expand business in that sector, particularly in Soviet offshore oil development. It also hopes to increase funding of ECGD-backed deals which Morgan Grenfell would manage.
"Moscow Narodny, a Soviet-owned but British-registered international bank, would continue to specialise in documentary credits and play an important role in providing assistance within the Soviet Union. The office in Moscow will be: managed by Moscow Narodny's representative there. Morgan. Grenfell, with traditional ties in Eastern Europe, will continue to arrange buyer credits~and intends to expand Eurodollar lending and management, while looking at new methods of financing such as leasing, an area in which Moscow Narodny has recently been active."
Given their domination of the West's money and credit markets, it is natural that the banking consortia should also dominate the Vodka-Cola financial markets. A growing volume of credits for East European cooperation is channelled through syndicates of the consortia. Most of the large capitalist banks have established branches in East European countries either directly or through some variation of the joint venture arrangement.
Confronted by the mounting debt of East European banks, arrangements for a $200 million UK Euromarket loan to IBEC fell through following an opinion by British lawyers that IBEC had no juridical validity in the UK. In case of default, the opinion held, the lender banks would have no recourse in law for recovery. Such is the thrust for co-production banking business, however, that shortly after IBEC was able to secure a $400 million Euromarket loan from Western banks for financing sections of a long pipeline, from which revenues will be laid off against the loan. Instead of squeamish British banks, the German Dresdner Bank operated as lead bank for some ten other capitalist banks with confidence in Communist solvency. To evade all forms of legal trivia, the loan is to be registered under Luxembourg law--which excludes the risk of legal interpretation.
There is scarcely a Western bank of any importance (commercial multibanks or investment banks) which is not involved in the huge new market of raising East European credits. Most of the debt, present and future, of Eastern Europe to the West represents private bank loans, effectively about two-thirds. As the Federal Republic of Germany, Canada, the UK, France, Belgium, Austria, Japan, etc., favour private or non-governmental bank loans extended under government guarantees, the debt will continue to accrue to the private or semi-public money market.
Two salient features emerge: (1) The Western banking system, capitalism's strategic underpinning, is totally and critically extended or "loaned" into the Communist system and dependent upon its stability as condition of repayment; (2) the size of the debt-overhang will be so enormous in 1980 (US$ 100 billion) that any serious threat of default by any one Communist country would induce tremors and possible collapse of the West's monetary and financial system. Together they compel capitalist support and protection of the political status quo.
This compulsion toward support and protectionism contains another dimension which enlarges the Vodka-Cola syndrome by several magnitudes. Outstanding and largely unrecoverable debts of the less developed countries, estimated at around $250 billion, towards the industrialized world's banking system will exceed the East European level by two or three times. Although of lesser proportion, this debt is still substantially due to the same major banks. Cumulatively, under normal banking criteria, the debt-overhang should place the private system's solvency in question--theoretically, of course, for governments could not permit a crash of any significant scale to occur and would supply the liquidities necessary to seal a breach before a major run got underway. But increasingly warnings of the dangers building up are being expressed in concerned banking circles. They allege that if the present rate of expanding credits is maintained, and doubts grow on the solvency of the East European countries due to scarcity of hard currency and inadequacy of counter-purchase and co-production schemes to cover debt repayment, the situation could quickly become unstable and accident-prone. A major default in one sector or country in such a situation could trigger a sequence of runs in others which even governments and international lending institutions could not plug. Under such circumstances, political policy must inevitably be directed to protection and maintenance of existing regimes and systems regardless of their social and humanitarian characteristics.
The following Table provides a schematic overview of the involvement of the West's leading banks in raising dollar and Eurocurrency loans for COMECON countries and Yugoslavia. Actually, the list could be extended to include hundreds of other less important banks in many countries. Either as lead banks or participants in syndicated placements, medium and long-term loans of short-term deposits and placing East European bonds with customers has become a major banking activity of the capitalist system
Czechoslovakia has not been included because of the limited volume of direct bank loans which have been placed. Following the Russian invasion of the country, Czechoslovakia has preferred to provide itself with hard currency credits through the COMECON banks rather than directly through bank-to-bank or bank-to-foreign-trade organization loans. However, this policy is now changing and Czechoslovakia is increasingly coming to the Western banks and Eurocurrency market for capital funds.
Leading Western Banks in Eastern Europe
US Bank of America Moscow
First National City Bank Moscow--Budapest
First National Bank of Chicago Warsaw
Chase Manhattan Bank Moscow
Manufacturers Hanover Trust Bucharest
Federal Republic Commerzbank Moscow
of Germany Deutsche Bank Moscow
Dresdner Bank Moscow
United Kingdom Barclay's Bank Moscow
Lloyd's Bank Moscow
Midland Bank Moscow
National Westminster Bank Moscow
France Banque de Paris et des Pays-Bas Moscow
Banque Nationale de Paris Moscow--Warsaw
Credit Industriel et Commercial Warsaw
Credit Lyonnais Moscow--East Berlin
Italy Banca Commerciale Italiana Moscow--Warsaw--
Banco di Napoli Moscow--Sofia
Credito Italiano Moscow
Austria Creditanstalt-Bankverein Budapest
Sweden Svenska Handelsbanken Moscow
Finland Korsallis-Osake Pankki Moscow
Japan Bank of Tokyo Moscow
Leading Western Banks Involved in Eastern Credit Placements Either as Lead Banks
or Syndicate Participants
$US million IBEC
Bank Head Office 1/75) USSR Pol Hun Rum GDR Bul Yug IIB
America San Francisco 59,369 X X X X X X X
City Bank New York 55,499 X X X X X X X X
Bank New York 41,714 X X X X X X X
de Paris Paris 35,780 X X X X X X X X
Bank London 33,334 X X X X X X X X
Bank Frankfurt 32,418 X X X X X X X
Bank London 31,889 X X X X X X X X
Kengyo Bank Tokyo 31,187 X X X X X X
Lyonnais Paris 29,737 X X X X X X X X
Generale Paris 28,507 X X X X X X X X
Fuji Bank Tokyo 27,603 X X X X X X X X
Bank Osaka 27,051 X X X X X X X X
Bank Tokyo 25,747 X X X X X X X
Trust Co. New Yrk 25,641 X X X X X X X
Bank Frankfurt 25,526 X X X X X X X X
Sanwa Bank Osaka 25,187 X X X X X X X
Trust Co. New York 24,960 X X X X X X X X
Girozentrale Dusseldorf 23,654 X X X X X X X
Tokyo Tokyo 23,536 X X X X X X X
Bank London 23.340 X X X X X X X
of Canada Montreal 21,823 X X X X X X X X
Bank New York 21,651 X X X X X X X X
Japan Tokyo 21,124 X X X X X X
Lloyds Bank London 21,026 X X X X X X X X
Italiana Milan 20,091 X X X X X X
del Lavoro Rome 19,863 X X X X X X
Commerce Toronto 19,700 X X X X X X X
Tokai Bank Nagoya 19,560 X X X X X X
Trust Co. New York 19,193 X X X X X X X X
Bank Chicago 18,899 X X X X X X
Mitsui Bank Tokyo 18,316 X X X X X X X
Bank Kobe 18,293 X X X X X
Commerbank Dusseldorf 18,276 X X X X X X
Bank Chicago 18,164 X X X X X X X
Montreal Montreal 17,680 X X X X X X X
Vereinsbank Munich 17,088 X X X X X
of Japan Tokyo 16,410 X X X X X X X
Corporation Basle 16,159 X X X X X X X
Union Bank of
Switzerland Zurich 16,029 X X X X X X X
Daiwa Bank Osaka 15,685 X X X X X
National Bank Los Angeles 15,256 X X X X
Raiffeisen Utrecht 14,935 X X X X X X
Girozentrale Munich 14,763 X X X X X X X
Rome Rome 14,160 X X X X X X
Nederland Amsterdam 13,969 X X X X X X
Italiano Milan 13,709 X X X X X X X
Bank Amsterdam 13,473 X X X X X X X
WechselBank Munich 13,379 X X X X X X X
Girozentrale Frankfurt 13,326 X X X X X
Banque Brussels 13,175 X X X X X X X
Nova Scotia Toronto 12,962 X X X X X X
Kyowa Bank Tokyo 12,863 X X X X X X X X
Partial List of Western Loans to Eastern Europe
Loans in Loans in
millions of millions of
Year Debtor dollars Year Debtor dollars
1969 IBEC 60 1975 Hungary 50
1970 IBEC 20 1975 Czechoslovakia 60
1973 IIB 50 1975 Poland 490
1973 Poland 50 1975 GDR 250
1974 Poland 509 1975 Hungary 349
1974 Hungary 150 1975 Bulgaria 106
1974 Bulgaria 160 1975 IBEC 420
1974 IIB 150 1976 IIB 600
1974 IBEC 50 1975 IIB 300
1975 USSR 100 1976 Yugoslavia 200
1975 Hungary 100 1976 Poland 50
1975 GDR 75 1976 Hungary 25
1975 IIB 70 1976 Poland 30
1975 Poland 240 1976 Rumania 240
1975 USSR 250 1977 IIB 500
1975 Poland 50 1977 Hungary 200
1975 GDR 50 1977 Poland 208
1975 IBEC 240 1977 Bulgaria 250
1975 IIB 240 1977 Rumania 50
Chapter 3--Forms of Cooperation
Imagine a scene in the boardroom of a large Western multinational. The results of a sophisticated computer analysis are presented to the directors: the problem analysed is the optimum global configuration of the company's production and sales over the next twenty-five years. The computer's answer is a shocker: produce in the world's most favourable cost-efficiency region, i.e. Eastern Europe, and sell in the world's best comparative sales-profits region, i.e. the industrialized West. Mind-blowing--yet simple and logical. Very low wages, long hours, plus relatively skilled, disciplined and no-strike unions to produce company products at the lowest costs, for sale in the high-wage, high-price, mass consumer markets of Europe, the USA, Japan, Canada and Australia. A dream--mathematically logical but politically unthinkable. .
In early 1950 such a scenario was virtually unimaginable. Both peacenicks and hawks were looking to Eastern Europe, especially the Soviet Union, as a vast opening of a market of 400 million demanding consumers with new aspirations to which the regimes now would have to start responding with more than their constantly postponed promises of a better tomorrow. But this "official" vision soon turned out to be a mirage. For hard-nosed, pragmatic businessmen, little inclined to believe their own propaganda, the Eastern markets were a sociological phenomenon but an illusion from the perspective of the balance sheet. There were no big profits to be made. First, the "masses" were not effective consumers: not only did they not have enough money to buy extra goods, but the little they did have was not convertible to Western balance sheet currencies. So sales in the vast Eastern markets were a profitless potential. But, (the computer logic holds) if the same unprofitable consumers can be turned into low-cost producers and their output sold in the company's normal hard-currency markets, the circle could be squared. The inversion of the perspective of the Communist East as a consumer market and sales area to that of a primarily production and manufacturing area provided the key to the most important transformation of the world's economic and political relations. This key was co-production, a new and highly sophisticated form of barter. Co-production would permit the linking of the Russian citizen-worker to the American, West-German, Dutch, Italian, French, Canadian, and other Western citizen-consumer, thereby completing the profits cycle. Initiated timidly and experimentally at first, the technique quickly proved viable and efficient and expanded very rapidly.
Simply described, co-production deals involve the Western enterprise bringing its technology and managerial know-how to an East European country and setting up a partnership of one of various types with a foreign trade organization of the Eastern government who supplies land, buildings, sometimes simple components, but, above all, labour. Low-interest, hard-currency credits to finance the manufacture and transport of equipment, machines, dies, training of operatives, and so on, are usually furnished by the Western company's government either entirely or in conjunction with private banks as a loan to the Eastern partner or associate. Once the project goes on stream, the end products are shared by the partners according to proportions fixed in the contract. A share of the production is allocated to the Eastern partner for the domestic market or the export market, the proportions depending upon the nature of the products and upon government priorities. A large, usually the major, part is normally earmarked for direct exports to earn continuing hard currency. From these exports the original loans contracted in connection with the project are repaid to the Western banks.
For the Western partner, of course, the supply of credits, plant and know-how generates no profit of itself. These inputs are regarded rather as straight investment costs to be amortized and to lead forward to profits once the plant begins producing. The Western firm disposes of its share of output according to the contracted proportions either in Eastern markets, in its Western export markets, or in its domestic market. As the product of this modern plant usually is identical with the product manufactured at home, it is readily assimilated into its distribution network. Frequently, the Western partner also handles the Western sales of the Eastern partner's share if it is a final product. The range of possible forms of production is very extensive. Plants may produce components and parts to be integrated into a final product, large elements of heavy machinery or of an entire product ranging from an automobile through tires and glass window shields. Plants have been established for products as diverse as calculating machines and furniture, to chemicals and petro-chemical products. The principal input from the Western multinational is the transferred technology and management know-how, which contribute to enhancing the average quality of the manufactured products. Goods closely patterned and controlled to Western specifications may readily be merged into the multinational's world-wide distribution networks, to be sold in Western markets to recoup the hard currency returns from its original investment. By this device the barrier to monetary convertibility is neatly overcome.
Statistically the new form of relationship between centrally-planned and market economies still does not account for a substantial share of East-West trade. Most East-West business is still on the regular buying and selling basis of foreign trade cleared in currencies or through strict barter deals. But such a classical yardstick is misleading. Static macroscopic averages are inaccurate criteria for measuring dynamic phenomena. Small percentages in certain circumstances can be important--even decisive. For example, 10% inflation, 10% unemployment, 10% overall or specific environmental pollution or 10% of cancer cells in the body could spell crises and dysfunctions of the system. One cannot speak of one's average health being good if the 10% which is sick is represented by the heart.
It is the rate of growth which will determine the impact of a new phenomenon. Given the overwhelming political and economic influence of the multinationals and international banks upon world policy, their specific commitments to cooperation will decisively influence developments.
In 1973 East-West industrial cooperation was estimated to account for 1.5-2% of overall trade. By 1975, this estimate rose to 5% and should rise by extrapolation to 9% or 10% by 1979. But given the renewed emphases and pressures upon capitalist firms by East European governments to accept cooperation agreements, the proportion could easily exceed 15-20% by 1980. Only 300 agreements were in force in 1970. Their number rose to 600 in 1973 and 1,000 in 1974. It is estimated that they will number 3,000 by 1979. This would mean a quantum change in East-West trade and in the related consequences.
Recent Congresses of East European Communist Parties (USSR, Bulgaria, Poland, Czechoslovakia) have articulated the position clearly to Western firms: either accept to cooperate in manufacturing or assembling, in whole or at least in part, in the East European country and cooperate in distributing a share of the production for the account of the Eastern partner, or risk having a contract refused or given to a competitor. But these political threats are largely vain. The issue has long been resolved by total agreement between the power centers of industry and finance. Such cooperation agreements are the only highways for transporting Eastern profits to the West and they will therefore be kept wide open. So both sides benefit, if we are to recognize the narrow parochial interests of the authoritarian states and multinational power elitists as still constituting separately identifiable "sides." But what is manifestly good for the new joint venture of General Motors and the Polish and Soviet motor vehicle trust is not necessarily good for American, Polish or Russian workers and citizens. For the Eastern partner some of the most obvious economic advantages include:
Long-term, low-interest credit to finance equipment and technology procurement
- Self-financing of most projects through payment in plant output
-Hard-currency exports of share of plant output usually sold by Western partner, thus giving immediate entry to Western markets
-Management know-how and training in specific areas of maximum need
-Long-term cooperation contributes to improved organization and administration of production and distribution
-Cooperation can be integrated into central plans to plug shortcomings and gaps and continued Western advances in technology can be regularly introduced
-Modern technology gained in these enterprises can be emulated and copied throughout the Eastern industrial sector
-More modern and up-to-date products--both for domestic and export markets.
-Advantages for the Western firms are similarly numerous and hold few risks. Here are some of the more obvious:
-Labour costs the major advantage: beyond the offset costs of transport, import duties, etc., labour cost differentials are still 5:1 to 10:1
-Cooperation arrangement or license sale frequently opens access to Eastern markets - Unions are integral to government and enterprise systems, are subservient to the Party and include all levels of management in the union. This compels strict observance of cooperation agreements by workers -Strikes and demonstrations not permitted, assuring production stability and accurate long-term forecasting of profits
-Possible access to profitable markets in developing countries through joint ventures owing to lower labour costs and prices which Western firms could not match from Western plants
-Cover facilitated for commercial deals in "socialist" regions of the world still ideologically opposed to capitalism and multinational firms
-Monopoly advantages facilitated in Eastern markets and underdeveloped markets as Eastern partner is already a legal and total monopoly
-Protection provided for Western firm against anti-trust prosecution in its area of joint activities in Western markets because of the "legal monopoly" nature of the partner
-Substantial protection against dumping regulations for its Eastern-produced products. Costs of the Eastern components and products are used to undercut prices applying to West-produced products. Margins result in higher cash-flow and profits. For inferior quality products or to undercut competition, Eastern domestic prices and cost estimates make it very difficult to apply dumping regulations by traditional standards, especially the criterion that exported goods must not be priced lower than their prices on domestic markets. These products do not benefit from subsidies, special export inducements, etc., but are cheap because wage costs are extremely low and because prices are fixed by administrative rather than market instruments
-Long-term access to low-cost extra capacity operations and bottlenecks or substitutes for costlier, less profitable new plants at home
-Prolonged commercial life of quasi-obsolete products and processes and especially continued sales of obsolete lines in less exacting consumer markets abroad. This applies particularly to first and second-generation models replaced in home markets by new third-generation versions -Cooperation agreements may prevail in which East European partner specializes in producing less sophisticated components and Western firm produces the more sophisticated items. -This permits lower unit costs and longer production runs.
Like the term "cooperation," the term "technology" is also an umbrella concept and techniques of technology transfer are necessarily complicated. According to the United Nations' Economic and Social Council (ECOSOC) industrial technology can be briefly defined
". . . as the set of processes whereby raw or semi-finished materials are bans formed into a final product which may be either goods or services. Industrial technology comprises all the processes (principal and subsidiary) required for (i) designing, (ii) constructing, (iii) operating and (iv) maintaining production facilities.
"The production facilities required for the operation of a given technology may be (i) a shop, (ii) a plant, (iii) an enterprise, or (iv) a group of enterprises performing jointly given functions.
"Depending on the state of the art and the R and D which is performed, technology may be new and rapidly-evolving or mature and relatively stable, adapted to the requirements of mass production or tailored to serve specific needs, easily divisible into its constituent elements (and therefore 'segmentable') or indivisible (and accordingly provided in a 'packaged' form).
"Technical as well as managerial elements are included in a comprehensive definition of technology, which, therefore, should not be identified exclusively with the specific operations executed by means of a given piece of machinery and equipment. R and D work aimed at developing new or improved products and processes, as well as the specific techniques involved in the marketing of corresponding output (including the provision of adequate after-sales service), are an important and, indeed, in some cases decisive part of industrial technology."
Given that all the different components of technology are being transferred through the process of industrial cooperation, a variety of forms have been developed and still others will surely be developed in the future. The concept is, therefore, necessarily flexible and we cannot determine as yet an "official" definition of East-West "cooperation." As it is of very recent origin, seldom going back more than eight or ten years, and there is a tacit "official" understanding not to emphasize it publicly, there are no international terms yet agreed upon.
Certain characteristics, however, are common to most forms of cooperation deals. The most important feature is the establishment of a lasting and formal relationship between an Eastern and Western industrial enterprise for enduring purposes which distinguish cooperation from the normal ad hoc or independent importing and exporting of foreign trade. "Industrial cooperation" implies a lasting relationship between enterprises and does not include agreements between governments. It is important to emphasize this point to avoid the confusion deliberately created by the Eastern governments (particularly the Soviet Union) regarding the role of inter-governmental agreements.
Inter-governmental Economic Agreements
The purpose of economic agreements between Eastern and Western governments is to provide a framework for promoting favourable conditions for inter-enterprise deals. Though they have proliferated rapidly in the last five years, inter-governmental agreements definitely postdate the surge of inter-enterprise cooperation agreements. They are, therefore, mere political window-dressing, facilitating agreements rather than providing real stimuli. For the Soviet Union their value lies in the surface veneer they give to Eastern propaganda that detente is essentially a process between governments and the consequence of a successful offensive for peace "imposed by the forces of peace upon the revanchist anti-Communist monopolists." Ideologically, detente is maintained at the political level of government. Its declared purpose is to transfer free-floating, disembodied "technology," apparently unrelated to capitalism, monopolists or Marxian considerations of surplus value, socially necessary labour time and other official Soviet-Marxian dogmas. Of course, "technology" does not exist as an abstract concept, but as the hardware of the multinational powerhouses of capitalist production. Seldom, however, is there specific reference in the pronouncements of the Eastern leaders to such "peace loving" supporters of detente as ITT, the oil companies, General Motors, and the rest.
The first inter-government agreement to lay down certain procedures and conditions for capital credits and interest rates was signed between Belgium and Poland during 1965 and 1966. Especially following the ice-breaking visit of Richard Nixon and thirty leading businessmen to the USSR in 1972, such inter-governmental agreements have been concluded by nearly all major and many less powerful Western governments, embracing both democratic and rightwing authoritarian regimes. These have included Spain in Franco's time, Greece in the Colonels' time, and Brazil in the Generals' time. The USA has such agreements with the USSR, Poland, Rumania, and Yugoslavia, the UK with eight countries, France with nine, the Federal Republic of Germany with eight, Italy with eight.
The agreements are basically intended to give official sanction and legal and political support to firms wishing to enter into new relations with East-bloc foreign trade organizations. A type of international status and recognition is provided for the East European countries by these government-level agreements. Inter-governmental joint commissions under long-term general economic accords have emanated from these framework agreements. These were sought by the East Europeans as another means of establishing recognition of the status quo and of setting favourable ground rules for future cooperation. The commissions created extensive personal ties and formed planning groups to push for the exchange of research and information and for more concrete forms of cooperation. Most agreements eventually provide for technical and sectorial sub-groups involving specialists, technicians, and managers. This furthers integration and commitments under existing ground rules which facilitate the exchange of information and technology between two amoral, apolitical, fundamentally different social systems.
Industry Cooperation Agreements
Another intermediate form of framework agreements associated with industrial cooperation has developed as between individual multinational corporations and state bodies at the ministerial level responsible for coordinating scientific and technological research and development. The alleged purpose of these industry cooperation agreements is to promote the exchange of information and experience, including research projects of mutual interest. Some, in fact, have resulted in original joint research ventures between the multinationals and the Eastern research and development agencies. But mostly these periodic meetings seem designed to test the real commitment of a Western firm to East-West cooperation and to elicit a prior contribution of technological data before the conclusion of profit-generating cooperation deals. Most of the large companies have hesitantly entered into such agreements, even though they are aware that they do not necessarily produce hard money deals and that they could lead to an intelligence breach in the company's defense of valuable information. Nearly 200 such agreements have been entered into with the USSR State Committee for Science and Technology, whose Vice-President, G. Vishioni, is simultaneously co-chairman of the US-Soviet Trade and Economic Council. The agreements thus help to strengthen the network of Vodka-Cola relationships and the framework of detente against those who still remain hesitant or opposed to the process. They are also effective transmission belts for the political objectives and strategies elaborated by the high-level Vodka-Cola institutions seeking to transform the perspectives and consciousness of operational management and of technicians habituated to the basic ideology that capitalism is still an adversary of class-based international socialism.
Cooperation at Level of Plant and Production
As we said above, because of the numerous pragmatic and ad hoc relations which can be created by cooperation deals, precise definition is not possible. There are, however, some main types of cooperation which have developed that can be usefully categorized. All have the common base that they entail lasting relations between enterprises and involve the exchange of goods for technology. There is little legislation in the West governing industrial cooperation of a specific nature. Partly, this is because such deals grew independently of government and faster than official awareness and concern, but partly also, it is due to the insistence of its promoters upon as little public discussion as possible in order not to provoke ideological traumas or public opposition. As both Eastern and Western protagonists stress the need for secrecy and non-intervention in their affairs as a normal condition, maintaining public ignorance has been relatively simple.
In the East, however, the reverse is the case. Virtually all the COMECON countries have adopted strict legislative provisions governing the various forms of East-West cooperation. The most detailed is a Yugoslavian law, reflecting that country's greater experience and development of this form of undertaking. As cooperation expands, legislative cover will increase. Cooperation in practice is, therefore, a controlled and formal expression of Eastern state policy which explicitly spells out its limits and conditions its relationship to the centrally-planned economy. Within such a relationship, the more cohesive, carefully controlled Eastern approach will invariably impose itself upon the still disparate, private and competitive positions of the Western multinationals. Both in economic and political terms such a biased strength favours the East in exacting concessions and advancing its interests. And the legislative framework of the deals is more binding than the simple commercial contracts.
The following descriptions of the major types of cooperation center around the fundamental ingenuity of transforming barter, previously a trait of primitive and underdeveloped economies, into a modern technique for overcoming the problems posed by the impenetrable monetary policy of the Eastern countries, and for transferring profits--the sustenance of wealth and private ownership—from the heartland of socialism.
Barter and Switching
Every exchange of goods between foreign customers which omits any currency element from the transaction represents classic barter. In varying degrees barter underpins industrial cooperation. Apart from the credits advanced for financing the purchase of machine tools, the inputs of equipment and know-how, and the overheads of training, supervision and transport, for example, are valued and repaid proportionately in the sharing of goods output. Classic barter transactions or quasi-barter forms are still prevalent. In detente jargon barter is called "counter-purchase." Under counter-purchase a Western firm has to take products as part of full payment for its exports, and this usually means accepting payment in kind from a list of goods selected for export by the foreign trade organizations. This form of cooperation has been strongly emphasized by the USSR and is being increasingly demanded by all other Eastern countries in face of the growing credit deficits and their inability to export, already discussed.
Many of the products offered for counter-purchase are general goods or difficult-to-sell machinery and equipment, relatively unsophisticated industrial products being generally pushed hardest by most countries. Most often the Western exporters cannot use such products and turn to a Western trading house (or "switchhouse") specializing in finding customers for such items at an appropriate discount. Counter-purchase barter covers a wide range of transactions: in one such case, Greek lemon and orange juices were accepted in part-exchange for selling Fiat Polish-made automobiles.
Counter-purchase, already urgently demanded of Western suppliers by the USSR, is to be greatly intensified to become the basis of all Soviet-West cooperation deals. Though not more than 30% of the value of Western exports is presently demanded for repayment in this form, the proportion will in practice be very much higher, especially for industrial projects under which the Western firm is paid with the products of his equipment. More than fifty major and over a hundred minor counter-purchase projects have been concluded. Eastern Germany is putting more pressure on Western firms to agree to counter-purchases and to accept a large percentage of the price in products. In many cases they are looking for levels approaching 100%. Poland's critical situation is also compelling the government to press for more counter-purchases. Some experts predict that counter-purchases will cover between 60% and 75% of total imports within five or six years. Rumania requires the highest percentage of counter-purchase for plant, equipment and other products supplied by Western firms, who often complain that artificially high prices and poor quality make "switching" Rumanian products particularly difficult.
French firms like Renault, Michelin and Rhone-Poulenc, and Italian firms like Fiat, Pirelli or Montedison, have concluded such accords. Renault, Fiat and BMW have received components and automobile supplies to be sold in their home markets under counter-purchase conditions. An example of the extent to which barter and switch-trade can reach, is the use of barter between Gulf Oil and Rumania for the sale of a nuclear reactor in 1973. Gulf General Atomic, a subsidiary of Gulf Oil, contracted for the supply of a Triga-type dual-core nuclear reactor to become operational in 1976 or 1977. Gulf Oil is owned by the Mellon interests and the Mellon Bank who have major participations in Westinghouse. The project, worth $4.1 million, was financed by the US Exim Bank and private banks. In return, Gulf agreed to accept Rumanian products for the equivalent of the purchase price over a period of ten years.
In a recent cooperation barter-deal between General Motors and the Bulgarian state-concern Balkancar, heavy duty trucks are to be traded for fork-lift trucks. According to General Motors' British subsidiary, Bedford Trucks, who are to supply the new range of GM vehicles, the attraction of the deal is that it gives access to Europe's largest truck fleet. Between 3,500 and 4,000 Bulgarian trucks operate on international routes. In return, Balkancar will be supplying to GM fork-lift trucks for use in its own plants throughout the world, providing therefore a guaranteed outlet. The Bulgarian state organisation obviously expects this exchange to lead to wider outlets in the West through GM's world-wide marketing network. It will be interesting to observe whether the might of GM will be able to achieve such a breakthrough for its Bulgarian partner's truck (which is already causing concern on grounds of quality) in a crowded European market already offering 160 different makes of fork-lift trucks.
Subcontracting and Contracting Capacity
A more complex form of counter-purchase or buy-back is the growing practice of subcontracting and direct contracting for manufacturing between a Western firm and an Eastern enterprise. Under these agreements the Eastern enterprise produces finished products or parts according to the Western firm's specifications for incorporation into the Western sales and distribution plan. Payment is usually in output over and above the delivery quotas required by the West. Most frequently, the Western firm supplies only specifications and design blueprints for production on Eastern machinery. Such agreements offer Western firms expanded capacity without supplementary investment and enable them to profit from lower labour costs. If capacities are large and the ability exists to produce efficiently up to Western quality control standards and specifications, the Western firms sometimes agree to sell an extra portion of the output as exports in their markets for the account of the Eastern firm. The opportunity to earn hard currency from this exchange of commodities has stimulated keen interest in Eastern Europe for this type of contracting. It is difficult to know how many such deals have been quietly concluded, but it can be conservatively estimated to run to several hundred. Though it is a political principle in Eastern Europe that available plant and products are used exclusively for internal consumption, Communist authorities are increasingly awarding such contracts and turning plant capacity over to production for capitalist markets. A more recent type of sub-contracting openly uses the more efficient management systems of Western firms in Eastern Europe. This new means of merging capitalism directly into the local economy is particularly evident in the construction industry. For example, department stores in Prague, foreign trade centers in Moscow and East Berlin, Olympic Games projects in Moscow, hotels in Warsaw, Budapest and Prague, and apartment buildings in Moscow and Yugoslavia are being built by Western contractors. Reciprocally, where labour costs are the determining factor, construction labour from Yugoslavia and Bulgaria is being employed in the West under the direction of Eastern contractors who ensure lower wages and social benefits than prevail for Western workers.
Classical Soviet idealogy held invention and scientific discovery to be a collective achievement belonging to society as a whole and therefore not subject to individual reward by payments or royalties but by bestowing honours and position. On this premise the Soviets not only repudiated individual rewards at home, but refused to acknowledge any patent obligations when appropriating Western innovations and discoveries. In the present situation of urgently needed, intensive qualitative expansion rather than extensive quantitative development, Eastern policy on licensing has changed. Recognizing that Western licenses could be a major means of acquiring modern technology, the Soviet Union (followed by all the other COMECON countries) has given top priority to buying licenses from the West. All the East-bloc countries have established special agencies to develop such licensing deals. Since the early sixties when there were only a few important Western licenses utilized in Eastern industry, licensing has assumed important proportions. Sales of licenses in the last five years actually exceeded all previous similar sales. Over 2,000 Western licenses have been bought since 1960, the largest number by Yugoslavia (nearly 600), followed by the USSR, Poland and Hungary (around 300 to 400 each). The product ranges cover virtually all branches of industry, but recently issued licenses have tended to concentrate in the advanced technology industries: communication equipment, quality controls, chemicals and electronics in particular. This invasion of capitalist technology has been an important factor in the overall growth in East-West trade as licenses cover about 90% of the total machinery and equipment transferred along with designs and specifications. One of the reasons for such swift development in this area has been an early willingness on the part of the East to pay in cash, necessarily in hard currencies. Both lump-sum or royalty payments for licenses in cash have been the exceptions to the insistence on barter-based cooperation. Only Bulgaria and Poland pressurized Western firms to allow at least partial payment in exported local products.
However, there have been important exceptions to this policy, particularly in respect of very large projects from which long-term benefits could be expected to flow westwards. Most automobile deals, for example, were negotiated on the basis of licenses and have been repaid in cars, parts or supplies: the operations of Fiat in the USSR, Poland and Yugoslavia, Renault in the USSR and Poland, and Volkswagen in Yugoslavia are examples. British Leyland and Berliet (Renault) bus deals were similarly arranged. In cases where "turn-key" plants have been provided, licenses covering some of the processing technology have also been subject to repayment in production from the plants in the wider context of the larger contract or co-production deal. In these circumstances licensing may also become a form of barter or buy-back. Advantages to the internal economics of the receiving Eastern licensee of Western technology are extensive:
-Speeds up application of new techniques and permits production of higher quality products, especially in the case of consumer goods
-Allows large economies to be made in Research and Development expenditures
-Permits concentration of own R and D effort on limited, high potential objectives
-Facilitates import-substitution and hard currency earnings from exports of licensed products.
Poland, which has over 20% of its industrial production based upon Western licenses, has directed that future purchases be tied to export-promotion. Hungary and Czechoslovakia too intend to substitute export-oriented and buy-back arrangements for the payment of royalties in hard cash. So far Western firms have been happy to sell licenses to Eastern Europe, because the licenses released have generally covered relatively dated technology and not the most up-to-date modifications. If licenses are now to be tied to export-connected products which must be re-sold in hard currency markets before profit accrues, and if the East is to insist upon having the most up-to-date technology, the growth of licensing as such is likely to slow down. But the amount of production already taking place on Western monopolist licenses indicates the pervasive dependency on Western multinational invention which exists in the East and which is likely to seek cooperation of the more integrative type in order to maintain the flow of technology.
Even Czechoslovakia has now abandoned its iron policy of self-sufficiency in the face of weak economic standing relative to its COMECON neighbours. Together with East Germany, Czechoslovakia began its period as a Communist satellite of the USSR as the most advanced industrial country of the bloc. Its role as principal supplier of machinery and equipment to other COMECON countries was enhanced by its being virtually the sole East European country able to export significant quantities of manufactured goods to the West. In recent times, however, its refusal to purchase up-to-date Western technology or to engage in cooperative ventures with Western firms and its consequent separation from Western sources of credit have caused a visible decline in Czechoslovakia's internal and external economy. This is especially apparent when compared to the rapid growth which its COMECON partners have achieved by piggy-backing Western enterprise. According to Czechoslovak Premier Strougal:
"Czechoslovakia in 1965 accounted for 18% of all engineering goods exports in COMECON: by 1975 our share had decreased to a mere 12%. The research and development basis of our engineering industry has at its disposal considerable resources capable of tough international competition, but international comparison of results is far from favourable. The result is that numerous goods are exported to the world market at prices considerably below the going price and numerous industries are unable to sell their production at all. The principal reason for this state of affairs is the low technico-economic level of our goods."
The remedy was finally presented to the meeting of the Czechoslovak Communist Party Central Committee by Strougal in September 1976:
"The necessity of speeding up technical innovation is closely connected with our licensing policy. Czechoslovak engineering and research employ as many resources per capita as the most developed Western countries. However, there are important differences between the share of expenditures on research and on purchases of licenses. In Czechoslovakia, we allocate on licenses for the engineering sector only 4% of total expenditure on research and development. Most other countries at a similar level of development allocate some 30-40% of total research and development expenditures. Much too often we prefer our own research, which can be very expensive and without concrete results, against relatively cheap purchases of licenses which already represent verified results of R & D. Therefore we have to activate our policy for sales and purchases of licenses. We have to reconsider our R & D targets, compare them with the possibilities of purchasing licenses and try to find the most effective solution. Our engineering and metallurgy sectors, enterprises and the Federal Ministry for Technical Development are now required to propose a new concept for license purchases coordinated with the plan of technical development and reflected in targets for production and foreign trade."
So fell a final Eastern bulwark against the encroachments of capitalism.
Leasing is a recent innovation even in Western economies. The technique consists simply of renting or leasing equipment to a user instead of selling it directly. This permits the user to utilize the plant, equipment, computer, hotel, boat, aeroplane, etc., without having to dispense large lump sums of capital. The ownership, of course, remains with the lessor. Leasing is most widely practiced in the electronics industries, where IBM, ITT and Rank-Xerox, for example, rent equipment in preference to selling it. Many large banks and financial institutions have entered leasing on a large scale. Its extension to East-West cooperation is just beginning, but will probably extend. First, the technique offers the enterprises in Eastern Europe the possibility of securing modern technology without having to dispense scarce hard currency reserves. Leasing can also be made self-financing if goods or services produced from the leased equipment are used for rental payments. For the lessor, cheap, low-wage operations make some buy-back deals an attractive form of rental, as the difference between buying and selling prices on the Eastern goods can be manipulated to turn a handsome profit.
Several joint East-West leasing companies have been established. One is a UK company called City Leasing in which the very conservative capitalist Morgan Guaranty Trust Company is involved with the Moscow Narodny Bank. A second is Promalease, founded in Paris by the Credit Lyonnais, a French state-owned bank, and the Paris-Soviet Banque Commerciale pour l'Europe du Nord. The operations of these companies raise some interesting theoretical and ideological conundrums. Though such companies as IBM and ITT, for example, widely implanted in the East, are known to be pressing for leasing rights in COMECON, there is still understandable hesitation on the part of the Eastern governments, for they fully realize that a lessee is not an owner--title to the ownership over the means of production remains with the lessor. Leasing would, therefore, represent a new form of effective capitalist ownership within the socialist economy. Despite the ideological subversion which leasing will represent, however, ways will be found to cosmetize the facts for ideological home consumption, simply because the technique will probably prove too attractive economically to be refused in the face of mounting Eastern indebtedness. In the meantime, the two mixed leasing companies mentioned above are concentrating on financing leasing deals for a series of products and equipment (including hydrofoils, Russian-made Fiats and Yak aircraft) in the United States, where such ideological hangups do not prevent a profit. Exploiting capitalist markets for capitalist currency in partnership with capitalists seems now a tenet of neo-Marxist-Leninist doctrine..
A number of leasing deals in transport and shipping are holding the door open to future expansion of this particularly fascinating example of cooperation. Container Transport International of the USA, for instance, has leased 2,500 sea-freight containers to the Soviet Union over a three-year period at a total leasing fee of around $2 million. Soninfiot also leases some 4,000 containers from the Belgian Company Brugeoise et Nivelles.
In another container leasing deal, Interpool of the USA has leased 2,000 intermodal cargo containers to the Soviet Far Eastern Shipping Company (FOSECO), which has only recently--and half-heartedly--agreed to join the world shipping "conference" (or cartel) for its region of operation, having previously bought its way into a 7% share of the US ocean-freight market at give-away rates. FOSECO will pay $5.5 million in advance monthly payments to lease the containers for five years, with an option to buy them on expiration of the lease.
The Soviet-owned Baltatlantic Line is still the target of strong charges of "dumping" for its cut-price traffic in roll-on/roll-off vessels between the East Coast of America and Northern Europe. Among the most strident critics are West German shipowners. Nevertheless, a joint venture company between Soviet and West German interests, Transnautik, which operates from the FRG, has leased 400 chassis to Sovinflot over an eight-year period for handling huge cargoes on the Baltatlantic Line. Though the USSR has used leasing only to acquire containers and ships so far, it is certain that the capitalist technique will expand rapidly. For one thing it will help the Vodka-Cola deals avoid the US Jackson-Vanek Amendment limiting credits to the USSR. Leasing will make it possible to enlarge the number of US Banks and credit organizations which could take part in financing Soviet projects on a leasing rather than formal credit basis, thus evading the letter of the law. For another, it facilitates a de facto joint venture for the life of the lease which could run from fifteen to twenty years, if necessary, with legal ownership vested in the capitalist "lessors" but with a physical "unowned" existence in the USSR.
In February 1977 Tass News Agency reported the study of a project which, if completed, would represent a major breakthrough in leasing deals.
The Lummus Corporation, a major engineering multinational, it reported, is studying the possibility of supplying plant and equipment to the USSR under a leasing arrangement. Lummus believes that lease financing would be compatible with the compensation deals that Western suppliers conclude with Soviet importing organizations under which the suppliers accept payment in the products made with their equipment.
Lummus, according to Tass, believes that a lease could run ten to fifteen years or longer, and when the term expires the Soviet Union would have the right to buy the leased property at the present price. One of the questions under study is how to preserve the lender's right of ownership. According to Tass, the Lummus proposal caused interest among Soviet specialists and banks and is now being studied. A working group has been formed to prepare specific recommendations which will certainly be accepted, thus ushering in the "leasing" era of socialism: capitalist ownership of the means of production located in a socialist state.
The foregoing forms of East-West cooperation, based in varying degrees on barter and counter-purchase, stop short of creating a physical and lasting presence of the Western multinationals within the Communist economy. Barter, licensing, sub-contracting and production agreements involve little or no physical presence beyond the loan of representatives or technical personnel necessary to carry out contracts. A major impediment to the further expansion of cooperation has been the reluctance of multinationals to provide up-to-date technology without safeguards over their proprietary and commercial rights. Technology in modern industry is, after all, the most valuable asset of a company and it will not be merely handed over to the Eastern partner to exploit as he wishes. Related concern over the quality of output and over the universal exploitation of licensed processes throughout the country stemming from even a single purchase, increase Western fears about loss of control. Therefore, in most of the previously described forms of cooperation, Western firms have provided less than up-to-date technology.
Recognizing, however, that imported technology was the key to further development of their economies, East European countries have understood the importance of conceding proprietary and corporate rights to the Western partner. This has led to two forms of corporate presence in Eastern Europe, co-production and joint ventures. The essential difference between these forms is that joint ventures entail equity ownership by the Western firm in a joint undertaking, while co-production does not. Co-production involves arrangements whereby the cooperating parties to a project agree by contract to carry out complementary production using Western techniques, tools and dies. The output is then shared between them in differing ways. Although no equity sharing is involved, co-production usually entails the presence of the Western firm in the management, production and distribution of the total undertaking. An example of the complexity of some of the co-production projects is a major nitrogen fertilizer complex being built in East Germany:
"Soviet ammonia will be used as feedstock. Plans call for the construction of a new storage terminal at Rostock, the big East German port on the Baltic. Ammonia will be taken 10km by a pipeline to a new grass-roots fertilizer complex comprising nitric acid, ammonium nitrate and calcium ammonium nitrate units. Cost of the whole scheme--terminal, pipeline and fertilizer complex--will be in the region of $200m.
"Ammonia shipments will total 350 000 ton annually and the complex will produce 2400 ton/day of nitric acid (two lines), 3 400 ton/day of calcium ammonium nitrate (also in two lines), 150 ton/day of porous ammonium nitrate and 70 ton/day of crystalline ammonium nitrate. Both ammonium nitrate units will produce explosive grade material.
"Six groups are involved in the bidding for the complex in the prequalification stage. These will be whittled down to three by the middle of . The contract is expected to be signed before the end of .
"The contractors are Creusot-Loire (France); Voest Alpine (Austria); Klockner of Vienna in a consortium with Davy Powergas GmbH and International Handling of Amsterdam; Thyssen Rhinestahl Technik with Uhde of West Germany; Mitsui/Toyo of Japan and Coppee Rust of Belgium.
"Payment will be mostly in product and several contractors have incorporated traders into their consortia [in order to organize Western distribution]."
The Soviet Union is especially favourable to this form of cooperation as it saves face ideologically by denying the legal existence of Western equity capital. Co-production principles have been operative as the base for a number of major undertakings between leading Western multinationals and the East. Among the most important have been the planning of huge deals with the American Occidental Petroleum Company, to develop natural resources in Siberia, the new large-scale resource development projects with a Japanese consortium of firms in the Yakutsk region, the massive petro-chemical complexes, aluminum works and automobile plants being constructed in collaboration with such firms as Montedison of Italy, Pechiney of France, Fiat of Italy and soon General Motors of the USA. In the Soviet version the practice is referred to as compensation rather than co-production. This is due to the Soviet emphasis on getting the Western partner to accept goods, in toto or in part, other than those produced by the new Western technology. For example, some 400 French companies have created a new Association for Compensation Trading (ACECO) which has been set up under the sponsorship of the Employers' Association, a number of professional organizations and several state banks. At present only French companies are eligible to join, and they pay a membership fee of 2,000 francs a year. The new organization resembles Vienna's Evidenzburo which was set up primarily at the instigation of Austria's Association of Industrialists in 1968 to assist local companies in carrying out countertrade commitments in Eastern Europe. ACECO's basic function is to inform trading firms and banks of goods which the association's members (unnamed) have to offer. ACECO charges a commission only when its services result in a sale.
Compensation deals involving purchase of Western plant equipment, with repayment in end products and self-liquidating credit arrangements, account for roughly 40% of the Soviet overall Western debt, which in 1976 amounted to around $14 billion.
Soviet Deputy Foreign Trade Minister Vladimir Sushkow stated that more than fifty large industrial projects are under way in the Soviet Union with Western participation based on compensation arrangements. Projected exports of six major product groups under such arrangements are as follows (in millions of dollars): [East-West Markets, March 7/77]
Product 1975-1980 1980-1985
Natural gas 4,700 10,000
Chemicals 700 1,600
Timber and paper 1,300 100
Aluminum 100 400
Coal 80 700
Steel products 450 1,000
As with the various other forms of cooperation, co-production is also based upon the Western firms supplying management know-how, licences, machines and equipment, and the Eastern firms supplying labour, physical plant and components. Co-production arrangements cover all aspects of production and are virtually limitless in application. Though the beginnings of equity cooperation have taken place, it can be assumed that non-equity forms of cooperation of this type will remain the most important vehicle for capitalist participation in East-West trade. Currently, co-production agreements cover most sectors of production in Eastern Europe from automotive vehicles, nuclear installations, computer manufacturing, metal alloys and fabricated machine tools to consumer articles, such as cosmetics, publications, and even including the recent Western export of pornography. According to ECE (Sc. Tech./10/p. 19) the following co-production arrangements are observed in East-West relations:
(i) co-production of a final product by specialization in components
(ii) co-production in which each party manufactures components belonging to a final product, the technology coming from one of the parties
(iii)co-production in which each party manufactures component parts according to its own technology
(iv) co-production in which each party manufactures component parts of the final product, the technology being the result of joint R and D. Co-production thus defined may involve the provision of joint sales and services.
As the following table indicates, co-production is the leading form of cooperation in the GDR, Hungary, Poland and Yugoslavia. (ECE/UN, Sc. Tech., Sem. 3, 1975.) From the size and scope of the co-production ventures already identified in the USSR, that country will not lag behind for long.
Classification of East-West Cooperation Agreements
Cooperation (A) (B) (C) (D) (E) (F) (G)
agreement: Supply Deliv-
of ery of
change, ment in
at least exchange, Joint
partially, at least Co-pro- Tender-
for partially, duction ing or
products for parts and Sub- Joint Joint
or or spe- Con- Ven- Ven-
compon- compon- cializa- tract- tur- tur-
Country ents ents tion ing ing ing Total
% % % % % % %
Bulgaria 62.5 25.0 12.5 ---- ---- ---- 100
Czechoslovakia 35.7 ---- 28.6 7.1 ---- 28.6 100
cratic Republic ---- ---- 66.7 ---- ---- 33.3 100
Hungary 32.3 13.2 44.1 7.4 ---- 3.0 100
Poland 25.0 16.1 37.5 3.7 1.8 16.0 100
Rumania 22.8 34.3 8.6 14.3 14.3 5.7 100
USSR ---- 56.6 34.8 4.3 ---- 4.4 100
Total 26.1 21.7 33.3 6.8 2.9 9.2 100
Yugoslavia 18.5 9.2 20.0 3.0 47.7 1.5 100
Total 24.2 18.7 30.2 5.9 13.6 7.4 100
Because of the combination of different forms of cooperation together, in single projects, it is difficult to set an exact figure on the number of co-production based agreements. But general cooperation figures provide a reasonable measure of their frequency by the fact that they are already qualitatively and quantitatively the most important form of East West industrial cooperation. The total number of agreements concluded can be estimated at 300 in 1970, 300 in 1973, 1,000 in 1974, 3,000 in 1976 and 4,000 in 1977.
The approximate figures at the head of p.54 for cooperation agreements refer to 1977.
The list of major Western multinationals involved in these deals is constantly expanding and includes practically the whole of the 1,000 leading world companies, which account for around 80~o of total production in the West. Co-production is particularly appropriate for the large-scale projects which the Soviets favour and for the predilection of all East European countries to deal with the larger multinationals.
To pretend that integration with these new global enterprises has no impact on the Socialist integrity of the economic and social system is to play with words. To claim (as do the Soviets) that East-West economic relations are a matter of political, government-to-government cooperation is transparent window-dressing, and to allege that all that is entailed in detente is acquiring capitalist technology without conditions and strings is whistling Dixie in Siberia.
Bulgaria 70 active projects
Czechoslovakia 40 active projects
(over half with FRG)
with 60 permits issued
German Democratic Republic 22 active projects
with 60 permits issued
Hungary 350 active projects
with 450 permits issued
Poland 350 active projects
with 300 permits issued
Rumania 300 active projects
USSR 200 active projects
with 250 permits issued
Yugoslavia 525 active projects
Western Multinationals with Moscow Offices (By Countries of Origin)
Chromalloy American Corp.
E.I. du Pont de Nemours and Company Inc.
Engelhard Minerals Chemicals
First National City Bank
Grace Italiana SpA
International Business Machines (IBM)
International Harvester Co.
Occidental Petroleum Corp.
Brown & Root
Oilfield Technology International
Sperry World Trading Inc.
Cie Generale d'Electricite
Cie Generale Transatlantique
Cie Internationale pour l'Informatique (CII)
Regie Nationale des Usines
Speichim & Creusot-Loire Enterprises
Union of French Machine Builders (Comite de Coordination des Constructeurs Francais de Machines Outils)
Compagnie Generale de Constructions Telephoniques
Compagnie Generale Maritime
Chori Co. Ltd.
Gunze Sangyo Inc.
C. Itoh & Co. Ltd.
Japan Sea Trading Co. Ltd. (Nihonkai Boeki)
Kawakami Trading Co. Ltd.
Nissho-Iwai Co. Ltd.
Progress Trading Co. Ltd.
Toyo Menka Kaisha
International Trading Co.
Bison-Werke Baehre & Greten GmbH
Deutsche Babcock & Wilcox
Gildemeister & Co. AG
Alfred Hempel KG
Farbwerke Hoechst AG
Industriewerke Karlsruhe-Augsburg AG
Kuhne & Nagel
AMK Anlagenvertrieb Mueller & Korff
Bochako Bochum Chemie
M & D Gertner KG
Gertner Fuhrmeister & Co.
Glahe International GmbH & Co.
Alfred Hempel KG
HOMAG Hornberger Maschinenbau
IPS International Processing System
Kloeckner & Co./KHD AG
Dr. Knab & Co.
Liebherr Holding GmbH
Machintorg Maschinenhandels GmbH
Metorg KG/ Invex
NUR Neckermann & Riesen
Carl Prior Internationale Spedition
Ente Nazionale Idrocarburi (ENI)
Finsider/Istituto per la Ricostruzione Industriale
Grace Italiana SpA Montedison
Ing. C. Olivetti & Co. SpA
Coe & Clerici SpA
IMEX-Compagnia per il Commercio
International Computers Ltd (ICL)
Rank Xerox Ltd
M. Golodetz (Overseas) Ltd.
Oxy Metal Industries
Quest Automation Ltd.
The Axel Johnson Group
Peja Holdings NV
Wisse & Co.
Ciba Geigy Ltd.
Industrial Trading Trust SA
Inter-Indreba Co. Ltd
Commercial Bureau Pty
Hind Exports International
A giant modern multinational will not usually be beguiled from its present and future technology, whatever its willingness to sell its out-of-date and uneconomical garbage. To secure modern technology and its regular improvements in a lasting manner, Brezhnev will have to accept into the Communist bosom both the multinational companies and their cabals of Overworld strategists. Current resistance to permitting legal, private-property joint ventures in countries like Yugoslavia, Hungary, Rumania and Poland is receding rapidly. For the smaller countries, a capitalist presence through co-production and joint ventures is fundamental to the development of their semi-industrialized economies. The Soviet Union is viewing such ideological dilution and closer bilateral relations between its satellites and the power centers of capitalism with growing concern and misgiving. It would like to arrest the speed of integrated production forms and to extend the old counter-purchase and buy-back deals which would protect socialist autarky from capitalist penetration, at least in appearance and for its ideological stance and credibility, particularly in the eyes of China and Western Communist Party members. The latter are not likely to grasp the nuance that whilst to the West of Berlin the multinationals are the ideological adversary and oppressors of the working class, yet somehow their transmigration to the East of Berlin sanctifies them as the technological architects of a new Communism.
However, initial sensibilities to ideological virtues have rapidly given way to the imperatives of Vodka-Cola economies. In May 1977, a decree issued by the Hungarian Finance Ministry explicitly extended joint ventures to production. Henceforth, production joint ventures will be encouraged beyond sales and service organizations, in which Western partners may hold up to 49% of the equity.
A major reason for this drastic change of policy in respect to capitalist ownership of the means of production has been the painful failure to attract joint ventures under the prevailing regulations. Despite almost 500 cooperation agreements, the failure to permit capitalist ownership and control of technology resulted only in three joint ventures up to 1977. In addition to explicitly permitting joint ownership of production facilities, the decree authorizes three key changes:
(1) majority control for Western partners in investment companies, whose main role would be to raise capital for Hungarian enterprises and other joint ventures
(2) a standard tax of 40% on profits with reductions for reinvestment
(3) a flat 35% payroll tax on wages and salaries to cover all other tax and social security obligations.
"The purpose [of the decree] is not to raise capital," a spokesman for the National Bank of Hungary explained. "But we recognize that some Western firms are reluctant to become involved without being able to manage the product as well. The new decree offers conditions comparable to those for setting up joint ventures in Western Europe." The number of Hungarian joint ventures rose to nine by 1978.
Italy's Extensive Involvement
Despite its chronic financial instability requiring increasingly larger injections of Western foreign loans, Italy is a major supplier of credits to Communist Europe. Elsewhere we describe the almost simultaneous acceptance of a $530 million IMF loan to bolster its shaky if not insolvent monetary system and announcement of another massive credit line of $650 million being opened to the Soviet Union. All the COMECON countries and Yugoslavia have extended Italian credits with the largest part allocated to the Soviet Union. The cumulative debt of the USSR to Italy is—or will soon be--around $3 billion while the combined acknowledged debt of the others stood at around $2 billion as from the end of 1976. Most of this debt of the Communist countries is the counterpart of credits for Vodka-Cola multinational co-production and cooperation deals. Along with the Federal Republic of Germany, Italy has led the movement to cooperation with the Communist countries. Besides the well-publicized deals of Fiat, virtually all of Italy's leading enterprises, including those of the Italian Communist Party, were into Vodka-Cola early.
The Pirelli Rubber Company was in the Soviet Union along with Fiat in the fifties (six rubber plants worth $50 million), while Olivetti was one of the first capitalist advisers to the Soviets on automation of office systems. Olivetti computerized the Pirelli Tyre plants, using American General Electric equipment and processes, and later concluded a $100 million deal for production of automation equipment and office machines (exact replicas of Italian models) at Oryol, south of Moscow. In Rumania Pirelli built a $12 million rubber plant and has operations in Hungary, Czechoslovakia, Yugoslavia and Poland as well. It scored a coup in 1975 with Soviet contracts worth $63 million. One was to furnish production lines for steel-belted radials: the other, a turn-key plant for manufacturing components for Fiat-built auto plants at Togliatti and on the Volga. Pirelli's trade with the Russian FTO Techmashinimport since 1960 is close to $200 million. Like all such projects they entailed massive public credits and compensation or buy-back arrangements much of which took place at a time when Pirelli was restructuring operations and laying off personnel in Italy. ENI, the state-owned oil and energy monopoly, has signed cooperation agreements with most of the COMECON countries. Its overseas engineering subsidiary, SNAM Progetti has been extensively involved in the petroleum, petro-chemical sectors. SNAM Progetti has, for example, built refineries in the USSR, Poland and Rumania, and has put up Czechoslovakia's first ethylene glycol plant followed by similar plants in Poland and East Germany.
Total Italian projects in Eastern Europe, including all degrees of importance, number nearly 400--many of them implemented through the Italian Communist Party trading organizations at profitable commissions "to finance the overthrow of capitalism at home."
But even more than Fiat, ENI and Pirelli, it was Montedison which pioneered the co-production-compensation deals in the COMECON countries and buy-back deals in the Soviet Union. It has, in fact, become the major foreign partner of the USSR in chemicals. Montedison's relations with the USSR extend back nearly forty-five years and it was one of the first capitalist companies to establish an office in Moscow in 1968. This despite the fact that the Vatican and American banks were important shareholders with seats on the boards of directors while the anti-clerical, anti-American ideological hysteria was at a peak in Eastern Europe.
In June 1971, Montedison signed a contract for two complete plants worth around $50 million for producing triacetate of cellulose and polypropylene and other copolymers. Plants for producing vinyl chloride, methanol terphtalic acid and synthetic fibres followed. Subsidiaries under the parent umbrella, such as Industrie Macchine Elettronite (IME) which does about 20% of total USSR imports of table calculating machines, Farmitilia, its pharmaceutical subsidiary, Standa, its supermarket and department store chain, and Pavesi, its restaurant and bar division, have expanded activities in the Soviet Union, and progressively throughout the region. In 1973, an important corporation agreement with the Polish Ministry for the Chemical Industry called for long-term cooperation covering nearly all chemical branches, industrial cooperation and joint exploitation of markets in Third World countries. Concluded for an initial period of five years with renewals thereafter, the execution of the program is supervised by a special joint committee. With the Hungarian Chemolimpex, Montedison and its associated textile company (SNIA Viscosa) have set up a joint company to market Hungarian chemical goods in Italy and internationally. Initially Chemolimpex will supply an annual $7 million worth of olefins and aromatic compounds while Montedison will furnish $20 million of synthetic raw materials and organic and inorganic chemicals and SNIA aromatic compounds and petro-chemical materials for transformation and marketing of $8-10 million annually.
Montedison's "Russian Manager," Mario Reale, told TASS in April 1977 that the company "had some seven chemical plants under construction in the USSR based upon the buy-back principle." Taking into account sales of equipment, buy-back of products, Reale "reckoned the total value of the seven-plant deal at $1.2 billion." (Soviet Business and Trade, 24th April, 1977.)
The total two-way trade in 1976 with Soviet FTOs, including buy-back, added up to about $150 million with the figures expected to rise to nearly $200 million in 1977 and $300-400 million in 1978--if Italian credits still remain available in 1978.
Among the Montedison-Soviet cooperation projects are joint plants for:
- Ethylene-propylene rubbers
- Chemical fibres and textiles
- Joint development of a second-generation sulphamide drug
- Polycarbonate plastic plant and PUC plant
All these products are admittedly cheaper to produce in the USSR than in Italy and there are in addition no strikes nor union problems to contend with. The eventual sale of this production in Italy is one of the causes for closure of plants and increased layoffs.
Colourful and controversial Eugenio Cefis submitted his resignation as chairman of Montedison to the 1977 stockholders' meeting after he pushed through a contested $400 million share-capital expansion. Before this, his attempt to split off the company's profitable, though patently illegal, banking network failed, forcing him to threaten retirement. Cefis worked closely with the CP both politically and commercially in many sectors. But with near bankruptcy of its Montefiltre Division, need to shut down obsolete plants, its diversion of new plants to off-site locations in the United States, UK, Belgium and, above all, Communist Europe, and its cash-flow manipulation in friendly tax-free havens such as Luxembourg, Switzerland, the Bahamas, Liechtenstein, etc., profits have turned to massive losses—a $104 million loss on sales of $5.4 billion in 1976. Even in Italy, the land of ultra refinement in business manipulations and fiscal and monetary evasion, this is some performance. With Montedison shares down to a dismal low, few private stockholders (outside of the Rovelli group buying shares on the Swiss market secretly) are willing to risk investing in the vanishing Italian part of the company. Unfortunately, its Russian plants and Luxembourg holding companies are still not capitalized in share capital. When will there be a Kremlin stock exchange for trading in shares of the profitable part of Montedison instead of its loss-leaders in the West? The question of the share of the state in Montedison, which has a direct 18% interest, became a very litigious issue, but it will stay with the state and be limited to 18%. As for the private owners, and probably the ICP, including Fiat, Pirelli, the Vatican, Lazaire Stores, Rovelli, etc., they know that the most profitable way is to continue supplying the Russian and East Communist partners with credits for co-production deals for supplying the Italian market and hiding profits in tax havens, and accelerate the closure of Italian plants.
In Western markets today success lies not only in productive technology and production management, but also in marketing and distribution skills. An ECE research paper (research note on industrial cooperation, p. 8, iii) on industrial cooperation, states "given the disparity between market conditions and types of techniques employed, between the East and West European countries, it is quite natural that East-West industrial cooperation agreements of a more advanced type should include the marketing stage." Co-production gives partners the opportunity of penetrating the trade area to which they do not belong and may also involve sales networks in third countries. For Eastern companies this permits the extension of after-sales services which are important for establishing regular markets for their production. In general, therefore, it can be said that the leading multinationals and the leading banks which dominate Western production, sales and finance are all involved to some degree in co-production projects in Eastern Europe. Most indeed have direct participations in several countries. Facing is a list of the East European participations of the top world corporations.
The computer experience is a particularly good example of Vodka-Cola's rerouting of Western technology back to the West under Communist labels. Soviet authorities openly admitted in the late sixties to hopes of improving hopelessly inefficient sectors of the economy through the wide-scale application of computers. Previous reforms around decentralization begun in the early sixties were discarded in favour of merging firms into very large units in two or three level structures: ministry-industrial production association-enterprise. The coordination of the system at the very top level of party-controlled planning was made dependent upon computers.
Cooperation in Eastern Europe Among Leading World Corporations
Company 1975 sales Cooperation ties in Eastern Europe
Country of Origin ($000s) Bul Czech GDR Hun Pol Rum USSR Yug
oil, petrochemicals 44,864,824 X X X
autos, trucks, arms 35,724,911 X X X X
oil, petrochemicals 32,105,096 X X X X X X X
autos, trucks 24,009,100 X X X
oil, petrochemicals 20,620,392 X X X X
oil, petrochemicals 17,285,854 X X X X X X
food, chemicals 15,015,994 X X X X
computers, office machines 14,436,541 X X X X X X X X
oil, petrol products 14,268,000 X X
electrical engineering 13,399,100 X X X X X
telecommunications 11,367,647 X X X X X X X
electronics 10,746,485 X X X X X X
Cie Francaise des Petroles
oil, petrochemicals 9,145,778 X X
metallurgy 8,764,899 X X X X X X
chemicals 8,462,322 X X X X X X X X
petrochemicals 8,334,432 X X X X X X X
autos, trucks 8,194,271 X X X X X
metals, mining 8,167,269 X X BASF
chemicals 8,152,318 X X X X X X
autos, machinery 7,831,330 X X X X X X
electricals, electronics 7,759,909 X X X X X X X X
autos 7,680,786 X X X
chemicals 7,223,302 X X X X X X X