CRISIS IN THE KREMLIN : Europe Economies Seen Threatened by Soviet Upheaval

The global economy, just beginning to recover from a wrenching slump in the United States and other key industrial nations, has shuddered once more in response to the political and economic reverberations of the coup in the Soviet Union.

The dramatic events in Moscow have roiled the world’s financial markets and threaten to inject new uncertainties into world trade as well.

To promote calm in the wake of the coup, some analysts believe that the Federal Reserve Board, in coordination with the Bank of Japan, may move quickly to cut interest rates. The Fed’s key policy-making committee met Tuesday to discuss interest rate policy and outside economists said they believe that the central bank decided to cut rates to ensure that the U.S. recovery is not derailed by the Soviet crisis.

To be sure, the U.S. economy is not heavily dependent on trade with the Soviet Union; economic links between the two nations did not have enough time during the Mikhail S. Gorbachev era to develop and deepen.

At the same time, however, America’s European allies have significant links with Moscow, and analysts expect those nations to suffer much more from the coup’s economic repercussions than the United States. In fact, a cutoff of trade with the Soviet Union could push Europe over the edge into recession.

Germany, Europe’s dominant economic powerhouse and a nation that so far has avoided the slump affecting the United States, seems especially vulnerable to disorder in the Soviet Union. German officials are increasingly fearful that they may be hit soon by a mass exodus of refugees from the East, just as they are trying to come to grips with their own reunification with East Germany.

Analysts believe that Germany may be forced to raise interest rates dramatically to calm the fears of foreign investors over the political and economic uncertainties facing Central Europe. A rate hike, however, would slow the German economic engine that has been pulling much of Europe along behind it throughout the last year.

“The uncertainties around this whole situation may be enough to push Germany over into recession,” predicted Kathryn Eickhoff, founder of Eickhoff Economics, a New York consulting firm.

That, in turn, could damage U.S. exports, one of the key economic forces leading this nation toward recovery. In addition, the turmoil in Moscow could put a damper on consumer and business confidence here and in Europe, just as Iraq’s invasion of Kuwait did a year ago.

That mix of factors may not be enough to plunge the United States back into recession. The U.S. economy is widely expected to show relatively strong growth in the third quarter, which began in July. Yet economists warn that the Soviet crisis at least threatens to slow the pace of the recovery.

“This is not the biggest problem facing the American economy, but you have to remember that our fledgling recovery really is fledgling,” said Allen Stoga, an international economist with Kissinger Associates in New York. “So this can’t help.”

The most direct impact on the U.S. economy will be felt in the Midwestern Farm Belt, analysts said. The Soviet Union is the biggest export market for American agricultural products, and the Bush Administration earlier this summer had extended $1.5 billion in credits and loan guarantees to help the Soviets finance additional grain purchases. Roughly $600 million of those purchases already have been made, but the final $900 million is expected to be put on hold as part of White House efforts to freeze trade and economic ties with the Soviets until the situation in Moscow is resolved.

All bets will be off for American agriculture, however, if President Bush imposes the first grain embargo on the Soviets since 1980, analysts warned. “This was not going to be a banner year for farmers anyway, so an embargo would be a fairly severe blow,” said Robert Kohlmeyer, an international agriculture expert with World Perspectives, a Washington consulting firm.

Apart from agriculture, other worldwide markets may avoid severe disruptions in the short run. For example, analysts do not expect the coup to have a major impact on world oil supplies, despite the fact that the Soviet Union is the world’s largest producer. After a brief surge Monday, oil prices settled back down again Tuesday as traders realized that Soviet production was not likely to be completely shut down.

Western analysts believe that the oil fields will keep pumping largely because Soviet oil workers are not as militantly politicized as Soviet coal miners, many of whom are heeding a request by Russian Republic President Boris Yeltsin to go on strike to protest the coup.

“The oil workers are very much free-lance guys, like oil field workers in Alaska or the North Sea, who go to Siberia for short stints for high wages and then go home,” said Simon Blakey, an expert on Soviet energy in the Paris office of Cambridge Energy Research Associates. “They are not as homogenous a group as the coal workers, and so they are not likely to follow them out on strike.”

Still, Blakey warned that a widespread and prolonged coal strike could force the Soviets to divert oil earmarked for export to its domestic markets, reducing supplies available in Western and Eastern Europe.

Perhaps the most vulnerable economies are those of Eastern Europe, where reformist governments are likely to find it more difficult to attract badly needed Western investments now that the Soviet coup has created new uncertainties about the pace of change in the East. Faced with the massive problems of trying to transform crumbling, centrally planned industries so that they can compete in newly liberated free markets--and to do so with even less Western aid than Eastern European leaders originally anticipated--seems like an impossible task.

“I think if you stood up in a board of directors meeting today anywhere in the Western world and argued in support of a $100-million project in Poland or Hungary, someone else in the room might mention something about tanks rumbling around Moscow,” noted Stoga.

Investments in the Soviet Union President Mikhail S. Gorbachev’s ouster by military hard-liners has undermined the alredy fragile relationship many Western businesses have with the Soviet Union. Here’s a look at how the Western world has invested in the Soviet Union:

As of April 1, 1990:

Western partner county Number of joint ventures Investment in joint ventures, in millions (US) W. Germany* 244 $284 Finland 175 $194 U.S. 172 $288 Austria 99 $113 Great Britain 96 $118 Italy 95 $279 Switzerland 69 $60 Sweden 56 $102 France 54 $244 Canada 37 $75 Japan 27 $49 Spain 21 $30 Australia 21 $117 Netherlands 20 $38 Other 70 $173 Total 1,256 $2,165

*Former West Germany Source: PlanEcon Research Associates Inc.

U.S. Imports From U.S.S.R. Alcoholic Beverages: 3% Inorganic chemicals: 5% Radioactive materials: 12% Refined oil: 38% Silver and other platinum group metals: 39% Uranium and related ores: 3%

U.S. Exports to U.S.S.R. Computers: 3% Meat: 4% Fertilizers: 9% Animal feed: 15% Wheat: 23% Corn: 46% Source: Commerce Department