Higher Oil Prices Will Hit Hard in Cash-Poor Eastern Europe

Higher oil prices brought on by the Middle East crisis will hit hard in East Europe, where cash-poor countries in the early stages of economic reform are totally dependent on imported oil.

The shock of higher oil prices comes on the heels of the Soviet Union’s decision to reduce its supplies of oil to East Europe in exchange for consumer goods.

The Soviet cutback, averaging about 30%, forced countries in the region to turn to the world market to make up the shortfall.

For most of them, Iraq had become a major source, largely because of sizable debts that Iraq had run up with Poland, Hungary and Bulgaria during the eight-year Iraq-Iran War. Much of this was for arms and other military equipment--in 1986, Iraq owed Poland $700 million for military supplies--but food and other consumer goods were also involved.

Last month, Iraq sent about 565,000 barrels of crude oil a day to the countries of East Europe.

Under an agreement signed in May, Iraq was to reduce the debt by sending Poland about 3.8 million barrels of oil in the second half of this year. At the time of the agreement, the oil was valued at $105 million. Only part of it had been delivered when a multinational embargo was imposed on Iraq because of its invasion of Kuwait.

In January, Hungary agreed to take about 1.4 million barrels of Iraqi oil in partial payment of an outstanding debt of $16.5 million. Bulgaria signed a contract for 35 million barrels of Iraqi oil as payment on a $1-billion debt.

Despite the arrangements with Iraq, the East European governments appear to be in sympathy with the U.N. trade embargo against Iraq.

“Poland is not going to react to this aggression differently from the rest of Europe,” the Polish government’s Council of Ministers said in a statement issued this week. “As we enter Europe, we accept the attitude adopted by the Europeans. It is not by chance that the attitude of Europe toward Hitler’s aggression is being recollected on this occasion. We were victims of this aggression, and we know well how it feels.”

Poland has a hard-currency debt of about $39 billion, Hungary $20 billion, Bulgaria $10 billion. Czechoslovakia and Romania have negligible foreign debts, but shopping for oil in the spot markets will bring sharp reductions in the cash reserves of all of the East European nations, and will probably bring renewed pleas for Western assistance.

At a price level of $25 a barrel, oil purchases could take virtually all of Bulgaria’s export earnings, 75% of Czechoslovakia’s, more than 50% of East Germany’s, and nearly a third of Poland’s.