The Price of Empire

The Soviet Union's extension of a new $3.8 billion trade credit to Poland last week illustrated a truth that is centuries old: empires, ultimately, are expensive. Since mid-1980, when Polish workers staged the strikes that led to the creation of Solidarity, the Kremlin has pumped $4 billion into its neighbor, some of it in rubles that can be used only to settle bills within the Soviet-bloc Council for Mutual Economic Assistance (Comecon), some of it in hard currencies that can buy goods or pay debts in the West. But the Soviet Union also supplies its allies with oil, natural gas, iron ore, cotton, timber and other commodities, all at prices below those prevailing on world markets. In exchange, the Kremlin buys Czech shoes, Polish machinery and Rumanian textiles that are too poorly made to sell in the West. According to Jan Vanous, a specialist on Soviet-bloc economies at the Wharton Econometrics Forecasting Associates, the Soviet Union subsidized its six Eastern European satellites with more than $20 billion in 1980, an astonishing rise since 1971 (see chart).

In the first two decades after World War II, it was Moscow that exploited the economies of its satellites. East German factories were dismantled and moved to the Soviet Union. Czech uranium and Polish coal were shipped east and used in Soviet plants. But the relationship changed in the early 1970s, when the world price of oil and other raw materials rose dramatically and the Soviets decided to protect their Eastern European clients from the full brunt of the increases.

At about the same time, Eastern European countries began borrowing heavily from the West, mostly to build new factories that were supposed to boost economic performance. Not all of these modernization plans failed as spectacularly as Poland's, but there were shortcomings everywhere. The West's economic slowdown shrank markets for goods from the Comecon countries. This meant that the Eastern bloc had to borrow money to finance its growing trade deficit with the West. The debt of the satellites rose from $19 billion in 1975 to an estimated $62 billion at the end of last year. The annual interest alone is around $8 billion, and governments are turning to the Soviet Union for help.

Because of the Polish crisis, the Soviet Union's cash balance in Western banks dropped at least $5 billion last year, to a level of $3.6 billion. The Soviets were forced to sell an estimated 200 metric tons of gold, more than twice the 90 tons sold in 1980, to raise an estimated $2.6 billion in Western currencies. The sale of ingots is one of the main reasons that the price of gold, which reached a record $850 an ounce in January 1980, is now around $400.

Soviet citizens grumble about helping their Eastern European comrades, who in some cases enjoy a higher standard of living than the U.S.S.R. can offer. Trying to spread the burden more evenly, Soviet officials are cutting oil deliveries to Eastern Europe back to their 1979 level. Beyond that, there is little the Soviets can do but pull out their wallets and face up to the price of empire.

This file is automatically generated by a robot program, so viewer discretion is required.