2007
University of Manchester
Thesis
Nick Blackbourn
[ Soviet Defence Spending Estimations in the US and the USSR, 1981 –
1989: The Importance to Policy Creation Under Reagan and Gorbachev]

Nick Blackbourn 1
Introduction
Late American scholar Aaron Levenstein is said to have remarked that, “Statistics are like a bikini.
What they reveal is suggestive, but what they conceal is vital.” The impact of Soviet defence
spending estimations in the late 1980’s was no different to Levenstein’s bikini analogy. On the
surface the statistics appeared to unveil proof that the Soviet Union could be deemed an ‘Evil
Empire’ but further examination complicates matters considerably. These calculations are regarded
as having had “…an important impact on US defence policy…” and the extent to which this is true,
in both America and the former Soviet Union, is at the centre of this thesis.1
Current research regarding Soviet defence spending in the mid-1980’s is heavily focused on
the mechanics of their calculation. The value of this focus is limited in that it offers little to the
understanding of how these statistics actually influenced the politics of Cold War governance in
both the United States and the Soviet Union. In the post-Cold War climate the focus of study can
now shift, with actual influence rather than degree of accuracy driving research. Today’s historians
are therefore able to address how these estimates, however accurate, affected Cold War governance.
How did Mikhail Gorbachev and Ronald Reagan use this information? Did they in fact use it at all?
How much influence did the authors of such information hold? In considering the final chapter of
the Cold War in the 1985 to 1989 period it is now apt to consider the relevance and importance of
statistical information, such as Soviet defence spending, rather than exclusively looking at how this
information was compiled.
Comprehensive studies both advocating and dissimulating the Central Intelligence Agency’s
(CIA’s) Direct Costing effort to evaluate its accuracy exist and these studies are useful for this
1
Firth, N., & Noren, J., “Soviet Defence Spending: A History of CIA Estimates, 1950 – 1990”, (College Station: Texas
A&M University Press, 1998), p.xii

Nick Blackbourn 2
particular purpose and will be drawn upon during the course of this particular study.2 The general
function of these studies, the majority conducted pre-Soviet collapse, was to offer an appraisal of
methodology in the hope of improving accuracy. What is now needed, however, is a link between
the statistical analysis of Soviet defence spending and the way this information was then used by the
two Superpower administrations. To achieve this objective two sections will address, firstly, the
leaderships of Reagan and Gorbachev and the relative importance of the defence sector within
them, and, secondly, how useful these Soviet defence spending estimations were to these
administrations in driving policy.
The first section will examine how the ideological drive of the individual leaders can be
interpreted, which will enable the rationale behind decision-making to be examined. Their
objectives for the military sector will also be discussed, to show how intelligence estimations may
have subsequently been used to justify such actions. Finally, the influence of the military sphere on
the leadership will be considered; this will scrutinise the extent to which proponents within the
military establishment were able to influence policy. In addressing these aspects of Ronald
Reagan’s and Mikhail Gorbachev’s leaderships I hope to demonstrate how they approached defence
spending estimations and the relative importance within each administration they held.3
The second section will address how useful the calculation of Soviet defence spending was
in assisting policy formation and the determination of Soviet aims. The dearth of Soviet-created
defence spending statistics will be considered as well as the costing estimation efforts of the CIA.
2
See Firth, N., & Noren, J., “Soviet Defence Spending: A History of CIA Estimates, 1950 – 1990”, (College Station:
Texas A&M University Press, 1998) and Rosefielde, S., “False Science: Underestimating the Soviet Arms Buildup. An
Appraisal of the CIA’s Direct Costing Effort, 1960 - 1985”, (Oxford: Transaction, 1987)
3
For a study of Reagan’s and Gorbachev’s impact on the Cold War as individuals see, Matlock, J., “Reagan and
Gorbachev: How the Cold War Ended”, (New York: Random House, 2004), and also Gaddis, J., “The Cold War”,
(London: Allen Lane, 2007), especially Chapter Six, “Actors”.

Nick Blackbourn 3
This section will reveal the actual importance and relevance of Soviet defence estimates, within the
two Cold War rivals.
This thesis will conclude that the premise of calculating a monetary figure for Soviet
defence spending was flawed. At best such a figure was a general, and very vague, guide to the
trend of Soviet defence spending for American decision makers. In reality the lack of a market
system to set prices meant valuations of defence procurement were essentially meaningless to the
Soviet government. Many have scathingly remarked, Gorbachev himself included, that the
inefficient government and economically predatory Soviet Defence Council failed to produce useful
price valuations of defence spending and that this limited the scope of Politburo governance. But
then why should they have created such figures? Prices were meaningless to the government; they
set them. Of more concern and of greater practical use was to gauge the opportunity cost of
approving certain procurement programmes.
In this context it is clear how defence spending in monetary terms was unimportant to the
Soviet leadership. Gorbachev, whose premiership began in March 1985, distrusted the military and
sought to reduce its influence in the political and economic sphere. His Perestroika programme to
reform the Russian economy included reducing the heavy economic burden of defence, the purpose
of which, Kotkin has argued, was “…reclaiming the ideals of the October revolution.”4
Reagan, on the other hand, openly sought to increase the power of the American military
and was consequently increasingly open to its influence. The estimates of Soviet defence spending
were used by Reagan in “…one of the biggest and most enduring political battles in Washington:
the annual struggle over the size of the US defence budget…”5 However, it will be shown that such
calculations were beset with inaccuracies, pure guesswork, and were cherry picked by an
4
Kotkin, S., “Armageddon Averted: The Soviet Collapse, 1970 – 2000”, (Oxford: Oxford University Press, 2001), p174
5
Firth & Noren, “Soviet Defence Spending”, p.xii

Nick Blackbourn 4
administration determined to spend heavily on defence. Reagan chose to use the aspects of CIA
estimations that demonstrated what he wanted to see: communist militarism against which he could
lead a ‘crusade’.6
This study will conclude the work of the evaluations regarding CIA estimates of Soviet
Defence spending and assess the importance of these estimates on the Superpowers’ leadership. In
America, such estimations were crude and often hopelessly inaccurate throughout the Cold War,
particularly in its closing stages. These studies were unhelpful and misleading as the true costs of
maintaining Soviet military capabilities were revealed under ‘glasnost’. In the Soviet Union, such
statistics, for the most part, did not exist. The impact of Soviet Defence estimations on the decision-
making process was limited. The actions of Reagan and Gorbachev are better explained by their
own preconceptions as a staunch anti-Communist and a faithful Communist respectively.
Chapter I – The Administrations of Mikhail Gorbachev and Ronald Reagan
To understand how defence-spending estimates were used, the ambitions of the two Superpower
leaders for their relevant countries are an important area to consider. The statistics themselves were
simply numbers on paper, but it is how they were subsequently acted upon that makes them
significant. In this section I will demonstrate what Reagan and Gorbachev saw as the purpose and
direction of their time in power, particularly within the defence sector. To achieve this I will
examine their worldview (i.e. how they viewed their perspective positions within the Cold War, and
how this would change over time), their objectives for the military, and the influence held by the
defence sector within each administration.
6
Kengor, P., “The Crusader: Ronald Reagan and the Fall of Communism”, (New York: Regan, 2006)

Nick Blackbourn 5
There is a clear contrast between the dynamics of leadership in the US and USSR between
1985 and 1989. Reagan led his country towards militarism, and thus the sector may be presumed to
have held significant influence over the president, but in the Soviet Union the opposite was true as
Gorbachev sought to demilitarise his country and reduce its influence within government.7 By
examining the interactions between the military and the decision-making processes of the Reagan
and Gorbachev leaderships we can scrutinise the military-politico relationship in both the US and
the Soviet Union.
The Worldviews of President Reagan and Premier Gorbachev
In the Soviet Union, Reagan saw a powerful adversary and a sworn enemy of the United States of
America. He was passionately anti-communist, so much so that after his January 20th 1981
inauguration as President he actively sought to end détente and take the offensive and bring about
the end of communism. This was outlined in his National Security Decision Directive seventy-five.8
“Reagan wanted to take the strategic initiative and not be forced into a reactive position.”9 These
views were fermented in Reagan’s Hollywood years, during his time as a ‘one man battalion’ facing
communists during their alleged ‘takeover of Hollywood’ in the 1950’s. 10 Reagan had ‘learnt what
communists were capable of’ and henceforth despised them.
“Now I knew from firsthand experience how communists used lies, deceit, violence or
any other tactic that suited them to advance the cause of Soviet expansionism. I knew
7
For details on Reagan’s Military build up, see Wirls, D., “Build Up: The Politics of Defence in the Reagan Era”,
(Ithaca: Cornell University Press, 1992)
8
See Bailey, N., “The Strategy That Won the Cold War”, (Virginia: The Potomac Foundation, 1998)
9
Schweizer, P., “Victory”, (New York: Atlantic Monthly Press, 1994), p130
10
Reagan, R., “An American Life”, (London: 1991), p114

Nick Blackbourn 6
from the experience of hand-to-hand combat that America faced no other more insidious
or evil threat than that of communism”11
Reagan was keen to instigate the downfall of the Soviet Union. How much credit he can
individually command for the fall of communism is a topic beyond the scope of this study, however
there is no doubt that the president actively sought to end the rule of the Communist Party in the
Eastern Bloc. It was an individually driven ambition within his administration. “At the time no one
in the administration (with the exception of Ronald Reagan) ever articulated a vision of a collapsing
Soviet edifice.”12 This is not to suggest that Reagan was indeed a ‘one man battalion’ in the fight
against communism, but with his clear distain for the communist system any decision that would
weaken the USSR would be looked upon kindly by the president. A classic case in point is
Reagan’s own brainchild, the Strategic Defence Initiative, and his rationale behind undertaking such
a project is ably outlined by Schweizer,
“While the president’s interest in SDI was largely based on his vision of a world no
longer facing nuclear peril, the system was also pursued because of the strain it would
place on the Soviet economy”13
The policies and spending initiatives undertaken during the Reagan presidency, wherever possible,
included aspects that could undermine the Soviet system. Another example is Reagan’s relationship
with Saudi Arabia, which ultimately lowered world oil prices and devastated Soviet foreign
currency earnings as a result. These anti-Soviet initiatives undoubtedly represent the tone of
Reagan’s years in the White House. The release of National Security Decision Directive seventy-
five on January 17th 1983, signed by Reagan, clearly summed this subversive attitude towards the
Soviet Union, which highlighted the key objectives of policy to be,
11
Ibid., p115
12
Schweizer, “Victory”, p282
13
Ibid., p135

Nick Blackbourn 7
“…external resistance to Soviet imperialism, internal pressure on the USSR to weaken
the sources of Soviet imperialism…the US must convey clearly to Moscow that
unacceptable costs will incur costs that would outweigh any gain…”14
Although Garthoff has questioned the true significance of NSDD seventy-five (“…the ambiguity in
the president’s directive reflected Reagan’s ambivalence.”15) there is no doubt that President
Reagan did believe that the Cold War could be won, and the policy choices he made reflected this
attitude. Five thousand miles away in Moscow, Gorbachev viewed the future of Cold War tensions
in very different terms.
Mikhail Gorbachev, appointed General Secretary of the Communist Party on 11th March
1985, was a faithful communist and, according to Kotkin, a “…true believer…”16 He still thought
that the Party “…was a force capable of uniting society…”17 The Premier was also a realist,
stemming from his days as a student at Moscow State University’s law faculty. His pragmatic
approach meant he,
“…wanted to see a world bound by sensible codes of conduct. He was also a deal-
maker by nature and preferred to create a world in which he could haggle and persuade
rather than be locked in military confrontation.” 18
In order to achieve his goals for the political and economic restructuring under ‘Perestroika’, he felt
the Soviet Union was obligated “…to change our relationship with the West, particularly the US,
and bring the costly and dangerous arms race to an end.”19 A Cold War de-escalation was necessary
14
National Security Council, January 17, 1981, “National Security Directive Decision 75”, “Federation of American
Scientists: Intelligence Resource Program”, <http://www.fas.org/irp/offdocs/nsdd/nsdd-075.htm> [accessed 19/04/07],
see also Bailey, N., “The Strategy That Won the Cold War”, p29
15
Garthoff, R., “The Great Transition: American – Soviet Relations and the End of the Cold War”, (Washington DC:
The Brookings Institute, 1994), p33
16
Kotkin, “Armageddon Averted”, p31
17
Gorbachev, M., “Memoirs”, (London: Bantam, 1996), p168
18
Galeotti, M., “Gorbachev and His Revolution”, (Basingstoke: Macmillan, 1997), p60
19
Gorbachev, “Memoirs”, p171

Nick Blackbourn 8
to give the Soviet economy breathing space to lower its defence commitments and re-orientate itself
away from economic militarism.
“Yes, we’ve achieved strategic military parity with the Unites States. And no-one
counted how much it cost us…Let’s make a thorough analysis of what a strong modern
army is, what ensuring security means, what the quality of security consists of. And
when we know how much all this costs, we can cut out the rest.”20
To ideologically justify these cuts in military spending to the Politburo and Defence Council, who
remained convinced of western hostility towards them, Gorbachev attempted to lower the external
threat presented by the US.21 This was not an uncommon practice; according to Meyer “…Soviet
military doctrine can be changed to fit economic assumptions. In essence: if you can’t afford the
requirements, change the threat.”22
Much of Gorbachev’s rhetoric emanated from his professed distain for conflict and nuclear
proliferation, “The arms race, like nuclear war itself, cannot be won…Security is a political
problem, and it can be solved only by political means.”23 Gorbachev was too young to remember
the horrors of the Second World War that dominated the decisions made by the older members of
the Politburo. He rejected the policy of continued military build-up to prevent a repeat of the
surprise Nazi invasion in June 1941 and instead highlighted the importance of farsighted diplomacy
to ensure Soviet security.24 On April 26th 1986, the “Chernobyl disaster” furthered his anti-military
disposition, which was regarded by Gorbachev as “…a ‘final warning’…Chernobyl has left a strong
20
Gorbachev, M., in Cherniaev, A., “My Six Years With Gorbachev”, (University Park: Pennsylvania State University
Press: 2000), p192
21
See Gorbachev, M., “Perestroika: New Thinking for Our Country and the World”, (London: Collins, 1987)
22
Meyer, S., “Economic Constraints in Soviet Military Decision-Making”, in Rowen, R., & Wolf, C., (Eds.) “The
Impoverished Superpower: Perestroika and the Soviet Military Burden”, (San Francisco: 1997), p217
23
Gorbachev, “Memoirs”, p185
24
Gorbachev, “Izbrannye Rechi i Stati” (Moscow: 1987) cited in Colton, T., & Gustafson, T., “Soldiers and the Soviet
State: Civil-Military Relations from Brezhnev to Gorbachev”, (Princeton: Princeton University Press, 1990), p78

Nick Blackbourn 9
anti-nuclear streak in Gorbachev’s thinking.”25 The Soviet Premier was forced into demilitarisation
by the economic straitjacket the Soviet Union found itself in, but it was a measure he was more than
happy to pursue in his attempts to attain a ‘human face’ for Socialism.26
Aside from a shared distain for nuclear weapons, we can see a marked contrast in how the
two leaders viewed the world and their position within it. Reagan wanted a final victory whereas
Gorbachev hoped to back down and alleviate Cold War tension to provide breathing space for
structural reforms to take effect. We now turn to how these views were manifested in the two
leaders’ military objectives and outcomes.
The Military Objectives of President Reagan and Premier Gorbachev
Reagan wanted to escalate and ‘win’ the Cold War, and thus proceeded to practise confrontation in
foreign policy, backed by increased arms spending. Reagan stated as late as 1986 that,
“…the threat from Soviet forces, conventional and strategic, from the Soviet drive for
domination, from the increase in espionage and state terror remains great. This is reality.
Closing our eyes will not make reality disappear.”27
In a tongue-in-cheek address on August 11 1984, he quipped, “I’m pleased to tell you today
that…bombing [of Russia] begins in five minutes”28 Albeit a joke, the address shows the hostile
mentality of the president. To defeat the Soviet Union, even without a ‘hot’ war, military strength
was vital. Building military strength was a signal of intent. It provided an increased capability of
25
Reagan, “An American Life”, p710
26
Kotkin, “Armageddon Averted”, p57
27
Reagan, R., “Address Before a Joint Session of Congress on the State of the Union, February 4, 1986”, “The Ronald
Reagan Presidential Library”, <http://www.reagan.utexas.edu/archives/speeches/1986/20486a.htm>, [accessed
13/04/07]
28
Reagan, R., “Begin Bombing”, “The National Public Radio Archive”,
<http://www.npr.org/news/specials/obits/reagan/audio_archive.html>, [accessed 13/04/07]

Nick Blackbourn 10
military action and also presented an economic challenge to Soviet Union to maintain parity (and
later, as doctrine altered, sufficiency). Creating strong Armed Forces was obviously a military
decision, but the impact on the USSR was perhaps most importantly, economic, and Reagan was
well aware. William Clark, Reagan’s National Security Advisor between 1982 and 1983, explains
that,
“Ronald Reagan wanted a complementary relationship between the US military
buildup…and economic security policies directed at Moscow…Frankly, our intention
was to divert priority Soviet resources to meeting future US capabilities beyond their
grasp and to persuade Moscow that they would not prevail in a toe-to-toe technological
competition.”29
These may well be the words of a man attempting to cement his own contribution to the downfall of
the Soviet Union, but his summary of the intentions of the Reagan build-up are corroborated by
Soviet Marshal Ogarkov is his book ‘Always in Readiness to Defend the Fatherland’, in which he
highlights his own concerns over the pace of American technology.30
Aside from his desire for freedom to “…transcend communism…” Reagan’s goal was to
restore American national pride following the negative reaction to the Vietnam years and the
apparent successes of communism in the 1970’s such as the recognition of Soviet dominated
Eastern Europe after the Helsinki Accords on August 1st, 1975 and the advancement of
Communism in Latin America throughout the decade. 31 One way Reagan sought to achieve this
29
Schweizer, “Victory,” p132
30
Ogarkov, N., “Always In Readiness to Defend the Fatherland”, (Moscow: 1982), see also Weickhardt, G., “The
World According To Ogarkov”, in “International Security 8”, (Spring: 1984), pp182-5
31
Reagan, R., “Address at Commencement Exercises at the University of Notre Dame, May 17, 1981”, “The Ronald
Reagan Presidential Library”, <http://www.reagan.utexas.edu/archives/speeches/1981/51781a.htm>, [accessed
13/04/07]

Nick Blackbourn 11
goal was to shake-up the American military and restore its prestige in society, in addition to
strengthening its physical power.
“…there were many problems facing our nation; the tragic neglect of our military
establishment, high unemployment and an ailing economy, the continuing expansion of
communism abroad…But to me none was more serious than the fact America had lost
faith in itself.”32, “I told the Joint Chiefs of Staff that I wanted to make our men and
women proud to wear their uniforms again.”33
For Reagan, the military held an important position within American society and as such he actively
sought to improve the power and standing of the Armed Forces. In his opinion, a military revival
would spearhead a spiritual revival.34 The strengthening of the defence sector was in many ways
independent of the confrontational foreign policy that was outlined in NSDD seventy-five; in its
own right the president wanted America to be ‘proud’ once again. Thus, the build-up of US armed
forces was a keystone of domestic policy as well as being a vital component of foreign policy.
The same was not true in the Soviet Union. Gorbachev was not as sympathetic to military
concerns as previous Soviet leaders; his priorities clearly lay away from the defence sector and he
sought to remove this hitherto ubiquitous bias within the Soviet system. Gorbachev referred to a
meeting where,
“Dmitry Fedorovich [Soviet Defence Minister 1976 - 1984] remarked casually that
he was fully aware that ‘defence and bread’ were the key issues. I corrected this
statement: to me ‘bread and defence’ was the right order of priorities”35
32
Reagan, “An American Life”, p219
33
Ibid., p235
34
Ibid., p219
35
Gorbachev, “Memoirs”, p136

Nick Blackbourn 12
Though we can question the reliability of his memoirs, which may well be presented in a
self-promoting manner, Gorbachev’s actions in this period lend credence to his claim. For example,
the easy removal of military figures from power “…clearly show[s] that Soviet political leaders
[did] not instinctively agree with the priorities of the military establishment…”36 The Soviet
Premier was committed to reducing the grip of militarism over Soviet society and this was achieved
by delivering “…a series of deliberate symbolic slights of high command.”37
Behind his desire to thaw the Cold War lay Gorbachev’s goal to demilitarise the Soviet Union
both economically and politically. As Anatoly Chernayaev, personal advisor on foreign affairs to
Gorbachev, recalls
“[It was] an imperative for Gorbachev that we had to put an end to the Cold War, that
we had to reduce our military budget significantly, that we had to limit our military
industrial complex in some way. For him, it was absolutely clear that would have to
negotiate with President Reagan…”38
The rationale for bias in Chernayaev’s testimony is limited. His statement reveals the emphasis of
policy rather than any of his own potential prejudice for or against Gorbachev as a person or as a
leader. Furthermore, the removal of the uncooperative military leader, Soviet Defence Minister
Sokolov in 1987, demonstrates this trend. Thus, Gorbachev, in his attempts to reform the Soviet
Union, sought to instigate a decline in the power of the military first politically and then physically
in order to reduce the economic burden that such a large force placed on the Soviet economy.
Evidently there was a clear contrast in geopolitical aspirations between the two
Superpowers. Reagan harboured ambitions to increase America’s military power in order that she
36
Meyer, S., “Economic Constraints in Soviet Military Decision-Making”, in Rowen, R., & Wolf, C., (Eds.) “The
Impoverished Superpower”, p217
37
Colton & Gustafson, “Soldiers and the State”, p32
38
Schweizer, “Victory”, p238

Nick Blackbourn 13
may take the initiative and end the Cold War. Schweizer, a contemporary political journalist in
Washington, believes “Reagan had deeper ideological commitments and a strategic agenda that
went beyond real-politik…Reagan not only spoke of the ‘evil empire’ and Marxism-Leninism’s
ending up on the ‘ash heap of history’, he believed it.”39 The situation was quite the opposite in the
Soviet Union. Gorbachev, a pragmatist, wanted hostilities to subside in order to allow the economic,
and indeed political, restructuring to permit the reduction of the military burden in the Soviet
Union. His unilateral demobilisation of five hundred thousand Soviet troops announced at the UN
in 1988 shows his commitment to this direction in policy.
The contrasting trends of militarization in America and demilitarization in the Soviet Union
would suggest a similar contrast in the influence of the military within each regime and this will
now be considered.
Influence of the Defence Sectors in the USA and the USSR under Reagan and Gorbachev
The question of the influence of the military sector in Reagan’s and Gorbachev’s administrations
was an important one. Reagan was much more open to the information presented to him from
within the military sphere than was Gorbachev. Immediately following his inauguration Reagan had
authorised a thirty-three billion dollar increase in defence spending without even consulting the
military for their needs40. With this level of fiscal commitment to the American defence sector,
Reagan was likely to utilise the information provided by his intelligence services. Reagan’s
appointment of Bill Casey to head the CIA offers an insight as to the role of the Pentagon in the
Reagan administration.
39
Ibid., p171
40
Garthoff, “The Great Transition”, p33

Nick Blackbourn 14
Prior to his acceptance of position Casey demanded an office in the White House and his
inclusion in policy discussion. Reagan accepted.
“Casey demanded an office in the White House complex. He wanted easy access to
White House personal and the president, not exile in Langley. In politics, as in
commercial real estate, location is everything. He could drop by the Oval Office and
informally influence policy.”41
The CIA chief now had direct access to the president. He presented raw data on the Soviet
economy, and defence-spending patterns were regularly passed onto the president. Reagan was
guided towards ‘shocking’ statistics on Soviet military spending which required urgent US
attention. These reports, Reagan said, led him to muse that, “…someone in the Kremlin had to
realize [sic] that in arming themselves to the teeth, they were aggravating the desperate economic
problems in the Soviet Union…”42 However, one must question whether these reports actually lead
to this conclusion, or whether they simply corroborated the president’s own view. Did the CIA
provide information that helped determine America’s spending policies under Reagan, or did it
simply justify policies Reagan had already chosen prior to Office? It appears that rather than
assisting the formulation of policy directly, information from the intelligence community was used
because it “…proved useful in supporting the US defence buildup…”43 Ronald Reagan’s
‘crusading’ attitude towards ending communism meant that he leant much credence to CIA findings
when it supported his anti-Soviet Union view. His intelligence budget increase of thirteen percent in
1981 perhaps ensured America’s defence analyst community to follow Reagan’s own hard-line
view of the Soviet Union, lest they politically weaken the hand that had increased their funding.44
41
Schweizer, “Victory”, p2
42
Reagan, “An American Life”, p268
43
Firth & Noren, “Soviet Defence Spending”, p87
44
Schweizer, “Victory”, p62

Nick Blackbourn 15
Firth and Noren dispute this accusation contending that Soviet defence spending estimations were
“…never cooked for political purposes.”45 However, Firth and Noren were themselves part of the
CIA team that created such data and as such are unlikely to slight their own professional integrity.
As Freedman recognises, it is important to consider that "Estimators do not work in 'ivory towers'
but in a community with its own political structure. They find themselves amongst colleagues who
share a particular adversary image and come, perhaps subconsciously, to adopt this image as their
own."46
Intelligence integrity aside, Reagan selectively utilised the information provided by his
military advisors. Facts and figures presented to him, particularly by the CIA, were an important
tool in policy justification. Schweizer argues that “[Casey] was a key figure in the emerging United
States foreign policy…his effect on policy is hard to underestimate.”47 However, when CIA
information did not lend credence to Reagan’s own worldview, it was disregarded. The influence of
the military over Reagan is questionable, its importance in the justification of policy rather than its
determination, is not. The stature, if not the influence of the military in American politics, grew
during the 1980’s.
There could be no greater contrast to this trend of the increasing importance of the military
in politics than Gorbachev’s Premiership in the Soviet Union from 1985. Gorbachev was the first
Premier to have achieved his position without association with the military sector in his political
career. For the first time in the history of the Soviet Union, no serving military official sat in the
Politburo. The reason for historian Galeotti was that “[Gorbachev]…lacked patience with his
generals and soon realized [sic] that he would have to rely on outmanoeuvring rather than
45
Firth & Noren, “Soviet Defence Spending”, p7
46
Freedman, L., “US Intelligence and the Soviet Strategic Threat”, (London: Macmillan 1977), p185
47
Schweizer, “Victory”, p14

Nick Blackbourn 16
persuading them.”48 The military under Gorbachev clearly were losing capacity to influence
decision-making in the Soviet Union. Defence spending was cut by fourteen point two per cent and
weapons production declined nineteen point five per cent.49
This move was part of Perestroika, which sought to restructure the Soviet economy away
from the military.50 Gorbachev made conscious efforts to scale down the problems emanating from
the military industrial complex.51 Not only were military appointments by the Soviet Premier
lacking, outspoken military commanders were removed from office. Sergi Sokolov, Minister of
Defence, was relieved of duties in 1987.52
Gorbachev did not simply remove military influence from the Politburo in the form of
physical representation he also questioned the paper information and statistics that emanated from
the defence sector. He had little faith in the relevance and accuracy of the data and recognised that
the climate of fear that had surrounded defence concerns had removed any form of accountability
from the defence procurement and spending procedure.
“…new policy undermined the psychology of confrontation that had developed during
the Cold War years, and affected the interest of those who fed on it. Proposed
reductions in military production meant a reduction in allocations, subsidies and jobs.”53
Gorbachev was well aware he was operating against long established Soviet party line. The
military-industrial complex in the Soviet Union had benefited a great number of people and as such
these beneficiaries had a vested interested in maintaining the status quo. Gorbachev felt he could
48
Galeotti, “Gorbachev and His Revolution”, p62
49
Rowen & Wolf, “The Impoverished Superpower”, p6
50
See MccGwire, M., “Perestroika and Soviet National Security”, (Washington DC: Brookings Institute, 1991)
51
See Checinski, M., “The Soviet War-Economy and the Conversion of the Arms Industry”, in Blank, S., & Kipp, J.,
(Eds.) “The Soviet Military and the Future”, (London: Greenwood Press, 1992), pp89-114
52
For more on Gorbachev’s relations with the Soviet High Command, see Herspring, D., “The Soviet High Command,
1967 – 1989”, (Princeton: Princeton University Press, 1990), pp265-96, and also Green, W., & Karasik, T., (Eds.)
“Gorbachev and His Generals: The Reform of Soviet Military Doctrine”, (Boulder: Westview Press,1990)
53
Gorbachev, “Memoirs”, p238

Nick Blackbourn 17
not trust the statistics presented to him from this sphere. He noted the inherent biases of the defence
sector, “…although the defence ministry was well aware of the price the arms race exacted from the
country, in all the years of my work in Moscow they never made any suggestions for cuts in
defence spending.”54
It is clear that under Gorbachev the military in the Soviet Union witnessed a sharp decline in
influence and importance within the political and economic decision-making process. Military
personnel were removed from the Politburo and conscious efforts were made to introduce
accountability and transparency in defence spending as part of ‘glasnost’. Gorbachev implied that
he had little confidence in the reliability of the defence spending figures the secretive Defence
Council presented him, that this was unacceptable and would be changed.
Unsurprisingly, given the differing aspirations for the military and the progression of the
Cold War, the trend of military importance within government contrasted between the two
superpowers. In America the military establishment had been neglected since McNamara’s ‘system
analysis’ cost reduction methods in the 1960’s and even more so following the Vietnam withdrawal
in 1972.55 American armed forces would experience a revival in funding and consequently strength
from 1981 after Reagan’s election victory. In the USSR the opposite was true as a vastly influential
defence sector had its importance in the political arena curbed by Gorbachev as he sought to
‘accelerate’ and then ‘restructure’ the communist state’s economy, whose ailing condition was
becoming increasingly apparent.
Summary
54
Ibid., p405
55
For details on McNamara’s defence spending policies see Enthoven, A., & Smith, K., “How Much is Enough?:
Shaping the Defense Program 1961-1969”, (New York: Harper Row, 1971)

Nick Blackbourn 18
Reagan’s military build-up resulted in the increasing importance of the defence sector in politics, if
not for informing decision-making, for justifying it to Congress. This focus meant more funds for
intelligence services and this financial incentive, coupled with a subconscious alignment with the
prevailing view of the administration, meant that Reagan could use such information to justify his
anti-Soviet policies. Gorbachev, on the other hand, was much less receptive to the military sector as
Soviet Premier. He was aware of the unwarranted importance of the military in Soviet social,
political and economic life and made a conscious effort to reverse this trend. As a result, the
importance of the military in Soviet governance markedly declined after Gorbachev’s ascension to
power.
In turning towards the examination of the figures that the CIA and Soviet Defence Council
actually presented to their prospective leaders, it is possible to further justify this conclusion.
Chapter II – Soviet Defence Estimations; Problems, Impact and Relevance
So far this thesis has shown how the US administration and the government of the USSR in
the 1980s viewed the prospects of the Cold War, the objectives they held for their own military
forces, and, consequently, what importance the respective military and intelligence hierarchies held
over the leaderships of Ronald Reagan and Mikhail Gorbachev.
In this chapter the focus of study turns to the information each leader received with regard to
Soviet military expenditure and how it influenced policy. Firstly, the lack of accurate data received
in the Kremlin from the Defence Council will be considered. Why was there such a dearth of useful
information, and why was the information that was presented to the Politburo and even the General
Secretary himself so unhelpful? Secondly, the CIA’s own effort to estimate Soviet defence costs

Nick Blackbourn 19
will be considered. How they were compiled will be briefly discussed (such analysis has been
completed in detail elsewhere in work by Firth and Noren) and then the value of these estimates to
the policymaking process in Washington will be deliberated. Scrutiny of these factors will reveal
that in the final analysis the importance of Soviet defence estimations was limited. Gorbachev could
not trust the figures that he was presented with, but in many cases relevant information did not exist
anyway. “It is probably true that Soviet leaders never had in their policy deliberations an articulated
set of defence spending figures in constant prices.”56 Reagan had already formed his views on the
Soviet Union independent from the information presented to him. He used CIA estimates to back up
his policy, but not to formulate it in the first instance.
In considering the Soviet case, the simple reason why internal ‘western style’ Soviet
defence-spending statistics were so scarce in Moscow was that they were fundamentally of little use
to decision-makers. Soviet economic decision-making was not made on a basis of real cost; prices
were not the value indicators they represent in a free market economy and instead procurement was
decided on the basis of input / output tables used for economic planning.
As shown in studies elsewhere, the Direct Costing effort of the CIA was flawed.57 This
thesis does not challenge this conclusion, but focuses instead on the impact that CIA figures had on
Reagan’s perceptions of trends in Russian defence procurement. The range of estimations and sheer
guesswork used severely limited the usefulness of the statistics. In the last hectic years of the Cold
War these inaccuracies become obvious as Soviet published figures began to reflect reality. The
premise of cost estimations of Soviet defence-spending will be critically evaluated on the basis of
these conclusions.
56
Firth & Noren, “Soviet Defence Spending”, p142
57
See Rosefielde, S., “False Science: Underestimating the Soviet Arms Buildup. An Appraisal of the CIA’s Direct
Costing Effort, 1960 - 1985”, (Oxford: Transaction, 1987)

Nick Blackbourn 20
The Lack of Official Soviet Spending Statistics
There was a distinct lack of western style accounting in the Soviet Union’s defence sector
throughout the existence of the communist state. Many historians and politicians viewed this gap in
sinister terms, the lack of information supposedly representing the totalitarian nature of the system
that embodied a complete lack of transparency and accountability.58 This interpretation of Soviet
statistical practice may well be warranted. There is little doubt that statistics were manipulated to
serve a political purpose, however we should be wary of other mitigating circumstances behind the
lack of comparable Soviet data.
Common practice in the West has been to release statistics pertaining to the physical cost of
spending and procurement and subsequently the percentage of national income that this expenditure
represented. Gross National Product, or total national output, is a familiar term to western
economists but to Soviet economists the term and concept would have been much less useful.
Calculation of national output requires the price level of each individual production item to be
added to create a total. However, such information was meaningless in the Soviet planned economy;
price levels of individual items were designated by the state. Price did not reflect the value of a
given commodity and consequently GNP was an arbitrary figure within the Soviet command
economy. The Politburo would not want nor need to see spending statistics because it was they who
set prices. National accounts simply reflected what prices had been set and the quantity of produce
that had been created; an essentially meaningless figure for decision making purposes. Much more
useful would have been the calculation of the opportunity cost of certain procurement decisions.
58
Aslund, A., “How Small Is Soviet National Income?”, in Rowen, R., & Wolf, C., (Eds.) “The Impoverished
Superpower”, p26

Nick Blackbourn 21
Politburo members would then have been able to make better procurement decisions if they could
determine if x tanks were produced, the production of x tractors would be foregone.
In reality the Soviet hierarchy had access neither to western style spending calculations nor
even detailed breakdowns of the productive impact of defence procurement and expenditure to the
economy as a whole. The military held exalted status in the Soviet Union and attempts to instil
notions of accountability into the defence sector were met with fierce resistance and suspicion.59
Gorbachev has revealed the attitude towards appraising the military even at the highest echelons of
Soviet government was extremely hostile.
“Taboo areas included everything to do with actual military expenditure, the situation in
the army in general, the state of scientific research in the military-industrial complex,
and data on how efficiently financial and material resources for defence were being
used. Not even the politburo members knew the full picture. They often authorised
decisions on top secret matters without the right to question or discuss them.”60
Though seemingly conclusive in its scathing view of the Soviet military-industrial complex we
should be wary of Gorbachev’s testimony as he could have been using the defence sector as a
scapegoat for his own economic mismanagement which some later suggested hastened the fall of
Soviet Union.61 Despite these concerns, Gorbachev’s remarks have been verified elsewhere, by both
Politburo advisor Chernyaev (who recalls “No one had even had a remote idea, nor had they any
right to know [military spending affairs…]”62), and also political-historian Galeotti63.
59
“…it seems quite clear that Marxist-Leninist systems generally show a marked tendency to accord their systems
military establishments relatively high priority and favoured treatment in comparison with that granted by other political
systems.” In Rowen & Wolf, “The Impoverished Superpower”, p6
60
Gorbachev, “Memoirs”, p203
61
See, Keeran, R., & Kenny, T., “Socialism Betrayed: Behind the Collapse of the Soviet Union”, (New York:
International Publishers, 2004) and also Garthoff, R., “The Great Transition: American-Soviet Relations and the End of
the Cold War”, (Washington DC: Brookings Institute, 1994)
62
Chernyaev, “My Six Years with Gorbachev”, p118
63
Galeotti, “Gorbachev and His Revolution”, p61

Nick Blackbourn 22
Mark Harrison, in his recent research, has uncovered the so-called ‘Konoplev Report’.64
Though the authenticity of the report is in doubt, it outlines expenditures for defence for the Central
Committee of the USSR in the early 1980s. But as already noted this information was regarded as
top secret, leading Harrison to ponder “If the information in the Konoplev Report was so sensitive,
it is not clear why a joint commission of the parliament and ruling party was appointed to compile
it.”65 He suggests that perhaps the report was either propaganda, to confuse Western analysts, or a
genuine attempt by the Central Committee to find out was really being spent on defence. Either
way, the report demonstrates the problems Gorbachev encountered in his premiership.
In considering the notion of Soviet statistical inaccuracy, it maybe more useful to look at what
the Soviet leadership felt constituted the ‘defence’ sector. Statistical manipulation in most cases did
not simply involve plucking numbers from thin air, it evolved from shifting certain figures from one
accounting headline to another. Wiles in his study of the economics of Soviet arms notes of Soviet
accountants “Their extreme reluctance to falsify totals, and strong preference for distributing the
item they wish to conceal all over the place in penny packets…”66 Furthermore, a number of
defence activities were considered ‘productive’ and not simply a sunk cost for national defence;
developing nuclear technologies, for example. Such activities were not classed as defence
expenditure because they supposedly contributed to the economy rather than extracting from it.
Accounting for defence expenditure in the Soviet Union is therefore an extremely complex matter;
not only must we consider the presence of deliberate and calculated statistical manipulations, but
also the nature of what actually constitutes ‘defence’ within the budget. Even the composition of
‘defence’ accounting amongst Western states differs. Wiles observes,
64
“The Konoplev Report”, “Warwick Economic Research Papers”,
<http://www.warwick.ac.uk/fac/soc/economics/staff/faculty/harrison/papers/konoplev.pdf>, [accessed 13/04/07]
65
Harrison, M., “How Much Did the Soviets Really Spend On Defence? New Evidence From the Close of the Brezhnev
Era”, “Warwick Economic Research Papers, No 662”, (Warwick: 2003), p15
66
Wiles, P., “The Economics of Soviet Arms”, (London: London School of Politics, 1985), p6

Nick Blackbourn 23
“There is a fundamental lack of concern in the west with capital accountancy in the non-
market public sector…In the USSR depreciation…is a large issue…By contrast British
official statisticians have been, since 1948, extremely reticent about depreciation
anywhere…”67
In the US all expenditure within the defence sector was regarded as defence spending, irrespective
of whether it contributed to the economy. In the Soviet Union, however, classification was far less
transparent. Was this was an accounting decision or a propaganda initiative? Military research had
positive externalities on the general scientific knowledge of the Soviet Union as a whole and
therefore, despite its primary military purpose, can be seen to be a contributor to the value of the
Soviet economy and not listed simply as a ‘defence’ expenditure. Similarly was the Baikal-Amur
Railway primarily a military endeavour with civilian capabilities or vice versa? Should this be a
military or civilian expense? The simple charge of continued gross malpractice is not clear-cut.
It would appear that the authorities entertained a statistical balancing act. Simultaneously,
they had to convince the West of the peaceful intentions of the Soviet Union, thus stating lower
defence spending figures, but also to reveal such levels of expenditure so as to justify to the Soviet
population their relatively low standard of living in return for a strong national defence force. At
other stages the Soviet would publish high spending figures to exude strength, as they did before the
Reykjavik arms limitation talks in 1985, to create a position of strength from which to bargain with
the West. Clearly there was a propaganda nature to spending statistics, military and otherwise,
within the USSR. Maddock goes as far as to suggest “The official data, designed to confuse as
much as clarify, must be largely symbolic having a mainly propaganda function.”68
67
Ibid., p114
68
Maddock, P., “The Political Economy of Soviet Defence Spending”, (Basingstoke: Macmillan, 1985), p1

Nick Blackbourn 24
The lack of detailed Soviet information on defence statistics was not simply a result of the
government withholding accurate spending figures. It is imperative to remember that defence
statistics in the form of monetary output were not the most useful indicator to the leadership of a
command economy. Released statistics were thus not of great significance to the leadership due to
the fact that “…information for top officials was handled with an appalling lack of
professionalism…”69 The statistics’ ineffective contributions to policy decision-making meant that
figures were often tweaked and released primarily for propaganda purposes so as to be of at least
some worth to officials.
In the late 1980’s, statistics were re-examined and corrected under ‘Glasnost’, and an
apparent, albeit artificial, increase in spending resulted. This sparked both alarm and confusion in
the West. The Soviets were by now claiming a commitment to peace and disarmament but the
released official statistics did not appear to support this claim, because they seemed to show a
twelve per cent increase in defence spending.70 In real terms it is important to consider how these
statistics were compiled – it is not only rearmament and the purchase of munitions that costs
money, but demobilisation too. Weapon decommission, troop reduction and altered manufacturing
processes any from the military all impose additional costs before a long-term savings can be made.
As a result of these measures the 1985/86 fiscal year saw a rise in the defence budget, but after this
year, in real terms, the Soviet defence budget dropped significantly. This initial rise in defence
spending, though actually used to dent military power, gave Gorbachev substantial goodwill from
military circles. The secrecy of actual spending destinations became a blessing. For a time,
Gorbachev hid his demobilisation objectives and thus avoided a backlash from the military
hierarchy at a time he was still manoeuvring to secure unrivalled power in the Kremlin. With no
69
Gorbachev, “Memoirs”, p409
70
Michaud, N., “The Paradox of Current Soviet Spending”, in Rowen, R., & Wolf, C., (Eds.) “The Impoverished
Superpower”, p114

Nick Blackbourn 25
accurate base year to work from, now that past costs were revealed as false, this actual trend of
defence cost reduction was impossible for western analysts to appreciate. The confusion was
compounded as the new Soviet statistics were wildly different to the CIA’s own calculations, which
had been regarded by former CIA director Robert Gates as having “…performed admirably in
meeting the challenges of assessing Soviet strengths and weaknesses.”71 This significant
discrepancy between actual Soviet spending, as published under glasnost, and the statistics
produced by the CIA’s Direct Costing effort, will now be considered.
Direct Costing; Methodology and Reliability
Direct Costing as a statistical process has been assessed elsewhere, notably by Firth and
Noren, and is not the focus of my study.72 As they highlight, “CIA estimates often had an important
impact on US defence policy…” the analysis of this, however, they “…gladly leave to others”.73 I
intend to take up the mantle and investigate the consequences of how the Direct Costing effort may
have been inherently flawed in providing the Reagan administration with information about trends
in Soviet defence-spending. This, of course, will include a limited examination of Direct Costing
methodology, but also how the process as a whole managed to significantly misinform the US
President about the levels of Soviet defence-spending.
The Direct Costing programme was a yearly statistical study in which the CIA attempted to
value Soviet Defence spending. The premise was to be able to provide the president with ‘a view
from Moscow’; an insight into Soviet strategic decision-making. Soviet figures were regarded by
71
Gates, R., “Preface”, in Haines, G., & Leggett, R., (Eds.) “CIA’s Analysis of the Soviet Union, 1947 – 1991: A
Documentary Collection”, (Washington DC: Government Reprints Press, 2001), p vii
72
Firth & Noren, “Soviet Defence Spending”
73
Ibid., p xiii

Nick Blackbourn 26
the US as bearing little resemblance to actual military expenditure, and so were implicitly rejected
by the CIA and played no part in its own calculations. It is interesting to note that despite this
rejection Swain, chief of economic issues at the CIA, felt it was a sign of accuracy “…that our
spending estimates are consistent with Soviet data…”74 But perhaps the Soviets deliberately
manipulated their own figures to give the CIA false assurances to their incorrect estimates. The
theoretical procedure used by the CIA to achieve a figure for Soviet defence expenditure was to
estimate the physical quantity of Soviet military procurement, and then attribute a production cost
to each item. In this way the programme could build up a balance sheet for the Soviet military and
calculate the level of expenditure within it year on year.
In theory the Direct Costing programme appears to be a sound measurement of expenditure;
if you know what military hardware is being produced and how much it costs an accurate picture of
defence spending can be compiled with the greatest accuracy. In reality, however, the CIA did not
know exactly what was being produced (though spy Colonel Oleg Penkovsky did provide detailed
order of battle information75) nor was it aware of production costs of Soviet hardware constructed in
Soviet factories. Lee has observed that “Conceptually all is in order, but empirically there are many
problems.”76
There was no open international arms trade that allowed the CIA to calculate the cost of any
particular Soviet weapon. To price each piece of hardware the CIA would break down the
equipment in question and then get an American manufacturer to quote its cost. This is a major
shortfall in the Direct Costing method. American factories, we know, were much more efficient
than their Soviet counterparts. Pravda’s economic editor, Parfenov, demonstrated how a Soviet
74
Swain, D., “The Soviet Military Sector: How It Is Defined and Measured”, in Rowen, R., & Wolf, C., (Eds.) “The
Impoverished Superpower”, p109
75
Haines & Leggett, “CIA’s Analysis of the Soviet Union”, p7
76
Lee, W., “The Estimation of Soviet Defence Expenditures, 1955 – 75: An Unconventional Approach”, (New York:
Praeger, 1977), p7

Nick Blackbourn 27
engine factory in Mogilev employed three thousand five hundred workers whereas the same factory
in Italy hired just nine hundred.77 If we consider this example to be endemic in the Soviet Union the
larger labour force would obviously result in significantly higher overhead costs in the Soviet plant,
which would logically lead to a higher ‘price’ of the final product. Thus the Direct Costing method
of price creation is, as a method of true calculation, inherently flawed. Obviously not all production
factories would require a labour force that was almost four times larger than their western
equivalents, but it is an important point to note. Whilst most Soviet consumer industries operated
within monopoly conditions and faced no competition, and thus no incentives for efficient
production, the Soviet military sector was, in actual fact, subject to competition; a global
competition with America that we call the Cold War. This competition contributed to the defence
bias within the Soviet economy and perhaps made the sector more internationally competitive than
consumer industries in the Soviet Union. Quite clearly though, regardless of what relative
inefficiencies both between sectors within the USSR and between the Superpowers themselves
were, the CIA figures provided to Reagan using the Direct Costing method had severe limitations.
Costing Soviet weapons in American factories could not possibly have accurately reflected the costs
associated with production in the Soviet Union.
Additional inaccuracies arose where the CIA had no detailed information on a particular
item of Soviet hardware. In these cases it ‘Sovietised’ the technologically nearest piece of
equipment within America’s own armoury. ‘Sovietisation’ meant American hardware was
substituted for Soviet hardware for the purpose of Soviet procurement estimations. In effect,
Reagan received statistics that included estimated production costs for estimated technology
produced in estimated quantities. This cannot be regarded as an accurate representation of the
77
Parfenov, in “Pravda”, January 31, 1987, (Moscow), in Rowen, R., & Wolf, C., “The Impoverished Superpower”,
p22

Nick Blackbourn 28
defence procurement costs of the Soviet Union. Whilst standard issue hardware such as planes,
tanks, guns and ordinance could be counted with relative accuracy, the cost of production was
unlikely to be exact. More sensitive weaponry such as biological warfare technology, nuclear
technology, missile technology, military satellites and electronic weapon systems, would have been
much harder to calculate both in number and cost. Satellite imagery could not peer into
underground bunkers and quantity weaponry, nor could the number of paid man-hours required to
crack a missile technology be calculated, for example. Even if numbers of individual missiles could
be counted accurately, to build a complete picture of expenditure the quantity and costs of spare
parts and components would need to be gathered and this was nigh on impossible to compile.
Operations and maintenance costing is another source of error within the CIA figures.
Analysts attempted to calculate what it would cost for the Soviet armed forces to maintain its
hardware and conduct ‘normal’ operations. This expenditure was unknown and to quantity it the
costs incurred by US armed forces to maintain and service a force of similar size doing similar
things was calculated and then attributed to Soviet armed forces. Soldiers’ wages, fuel costs, and
operational procedures involving them are all likely to be significantly different in the Soviet
Union. Once again, a troubling source of inaccuracy is evident in Soviet defence spending
estimations.
“There are many data gaps and uncertainties inherent in the CIA’s Direct Costing approach
to estimating USSR national security expenditures past and present”78With so many assumptions
and estimations used to compile the CIA figures for defence spending – what the head of research at
the CIA called the ‘Inventory of Ignorance’ - this method in estimating defence expenditure in the
Soviet Union cannot be regarded as being an accurate representation of defence costs incurred by
78
Lee, “The Estimation of Soviet Defence Expenditures”, p1

Nick Blackbourn 29
the USSR79 Having highlighted the many flaws and inaccuracies to the CIA estimations, we now
turn to the implications for the Reagan administration. What did the estimates reveal and how
relevant was this information for the purposes of policy formation under Reagan?
Direct Costing; Use and Relevance to the Policy-making of President Reagan
In revealing the limitations of the CIA Direct Costing effort, it would be useful to revisit the
actual purpose of these estimates – in other words, what were they supposed to reveal to President
Reagan? Earlier, we explored the relationship of the CIA to Reagan and determined that he ‘cherry-
picked’ the information that matched his own expectations of Soviet actions and objectives in the
defence sector. In this final section I will show that the premise behind these CIA estimates, used by
Reagan to justify his worldview and policy formation, was flawed. A direct defence spending price
comparison between the US and USSR was not particularly useful for a number of reasons. Firstly,
spending statistics do not show military capabilities. For example, the Soviet Union could have
been spending billions of roubles on a missile research programme without any success. The
accounting balance sheet of defence-spending would have subsequently revealed large defence
expenditure but the actual threat to the US would have remained unchanged. Secondly, as hinted at
elsewhere, the Soviet government did not know what their current defence spending in price terms
actually was - as Aslund suggests “…the Soviets themselves may not have an accurate or full
accounting of their national security expenditures…”80 CIA figures were supposed to give ‘a view
from the Kremlin’, they did not; defence estimates were at best educated guesswork. Maddock
believes that the CIA was “…unable to provide acceptable rouble estimates of American defence-
79
Firth and Noren, “Soviet Defence Spending”, p13
80
Michaud, N,. “The Paradox of Current Soviet Military Spending”, in Rowen & Wolf, (Eds.) “The Impoverished
Superpower”, p113

Nick Blackbourn 30
spending, since it lacks sufficient data on Soviet production and costs.”81 Thirdly, the Direct
Costing method required extensive ‘Sovietisation’ with US factory costs, which disregarded
production factor valuations; labour was expensive in the US, with hi-technology relatively cheap.
In the USSR the opposite was true. By pricing production costs accordingly CIA estimates would
overestimate the cost of weapons requiring labour-intensive production, an area in which the USSR
enjoyed a comparative advantage over the US. The reverse is true of high-technology production
costs. Finally, the CIA assumes a clear and distinct separation between the civilian and defence
sector. But the heavily militarised Soviet economy often blurred the boundaries between them.
Many civilian projects, for example, included military aspects to them; the BAM railway has
already been mentioned, civilian factories were built partially underground to preserve defence
production in a potential war, commercial ships were a ‘roll-on-roll-off’ design which was less
commercially viable than a container design, but better suited to military needs.82 General Odom
goes as for to suggest that the Soviet military was a sector “…around which all the economic
activity is done and planned.”83 This is a vital point and will be expanded upon later.
Spending statistics do not reveal military capability. The main benefits of such analysis are
politico-economic. They show the economic burden of the military and allow for a spending
comparison between two countries. But on both these counts the CIA figures are lacking. Over the
course of the Direct Costing effort the military burden of the Soviet Union was stated as being
between six and thirteen percent.84 The true burden was nearly three times this upper limit at forty
percent. As for providing a spending comparison, not only did the figures represent a large
undervaluation of Soviet spending but the authors even acknowledged a ten percent inaccuracy
81
Maddock, “The Political Economy of Soviet Defence Spending”, p18
82
Swain, D., “The Soviet Military Sector: How It Is Defined and Measured”, in Rowen & Wolf, (Eds.) “The
Impoverished Superpower”, pp130-134
83
Firth and Noren, “Soviet Defence Spending”, p147
84
Maddock, “The Political Economy of Soviet Defence Spending”, p15

Nick Blackbourn 31
range85, which considering the amount guesswork involved in its calculation seems extremely
optimistic. Ten percent is no small sum, especially when the statistics would be used in part to
calculate America’s own defence budget. Whether Cold War defence strategy was to seek either
‘superiority’ or ‘parity’, these strategies were based on Soviet spending estimates and it seems
astonishing that a major indicator informing policy had such a large margin of error. Because of
this, somewhat ironically, the CIA figures, which underestimated Soviet defence expenditure, may
have severed to temper the intensity of the Cold War arms race. Firth and Noren suggest that
without the understated Direct Costing figures US views on the USSR “…would be been more
alarmist and US defence spending during the Cold War would have been much higher.”86 This
would appear to be an admission of Direct Costing inaccuracy, inconsistent with the view
throughout the rest of their study that stresses the ‘usefulness’ of Direct Costing. If Reagan had
been informed that the Soviet defence burden was forty per cent of GDP, rather than the eighteen
per cent that the CIA had informed him of, his rhetoric, foreign policy, and military build up would
have been much more severe and intense to match this high level of militarisation. The fallibility of
CIA estimation may have done the world a favour.
The Direct Costing effort was at best a crude guide to the general trends of Soviet defence
spending. CIA analysts themselves conceded this point. “...we generally have more confidence in
data that represent trends than in data for absolute levels, especially the levels for individual
years.”87 For the period on which this thesis is focused this had important implications. An
assumption that the main use of CIA Soviet defence estimates for Reagan was to reveal the general
trends in expenditure is fair, as this was the area in which the authors themselves considered their
85
Swain, D., “The Soviet Military Sector: How It Is Defined and Measured”, in Rowen & Wolf, (Eds.) “The
Impoverished Superpower”, p108
86
Firth and Noren, “Soviet Defence Spending”, p202
87
Swain, D., “The Soviet Military Sector: How It Is Defined and Measured”, in Rowen & Wolf, (Eds.) “The
Impoverished Superpower”, p108

Nick Blackbourn 32
study to be most accurate. Following Gorbachev’s drive for ‘openness’, official Soviet data began
to represent reality and were no longer falsified propaganda instruments. Therefore, in 1985
“…there was an announced increase of 12 per cent…”88 in the defence budget despite, in reality, the
actual budget having been reduced by some fourteen per cent89. The inaccuracies of the Direct
Costing effort had been exposed. Their estimates were, and had been, greatly understated; when
Reagan saw official Soviet defence expenditure figures well in excess of the CIA figures he could
conclude either that Gorbachev had suddenly enacted a massive defence procurement programme,
or that his own intelligence was, and had been for many years, flawed. With no observed physical
build up of military forces, it was clear that the estimations were wrong.
The CIA valuation through its ‘Sovietisation’ practices significantly altered the perceived
spending pattern of Soviet military procurement. Leaving aside the aforementioned costing
inaccuracies these practices created, from a military-strategic standpoint the Direct Costing effort
completely distorted the distribution of Soviet spending in the defence sector. If the CIA attempted
to calculate the production costs of a rifle in an American factory, the costing structure for such a
plant would be wildly different to the Soviet factory that, in reality, produced the weapon. The
American factory would most likely attempt to automate the production line. Robotic machines
would perform the monotonous tasks and operate at a great intensity and for longer hours than an
American worker could achieve either physically or legally. The prevalence of such robotic
technology in the United States relative to the Soviet Union in the 1980s, coupled with the relative
expense of labour, would make an automated factory economically efficient to run. The fixed cost-
base of such a plant and the purchase of robotic technology may have been high, but the variable
costs, including labour costs, would have been very low. To further consider that such robotic
88
Michaud, N,. “The Paradox of Current Soviet Military Spending”, in Rowen & Wolf, (Eds.) “The Impoverished
Superpower”, p114
89
Rowen & Wolf, “The Impoverished Superpower”, p6

Nick Blackbourn 33
technology was likely to be adaptable to various different production lines, the fixed cost base of
the factory over the long term falls further. The cost structure of an American factory to reproduce
Soviet arms is vastly different to the cost structure in the Soviet Union. The CIA figures as a result
“…undervalue that aspect of American defence spending where it has the greatest comparative
advantage.”90 There was no attempt to equate the cost-base between the two countries and from an
end-user in the American government’s point of view the composition of Soviet defence spending
was simply incorrect.
Cost overheads, we have seen, were different between the two Superpowers. The use of high
technology in production was relatively more expensive in Russia. However, the lack of a clear
divide between the civilian and defence sectors further complicated any attempt to calculate actual
Soviet defence spending. There is no doubt that the civilian sector subsidised the defence sector. In
a factory producing both tanks and tractors, for example, the overhead costs of machinery would be
disproportionately borne by tractor production and thus the cost of each tank would be lowered.91
An attempt to resolve this dilemma is fraught with difficulty. Was wear and tear on machinery used
to produce a tank more than for a tractor? Were tractors built in more months of the year and thus
used the equipment more? A CIA analyst could not possibly know and they had to estimate which
lead to further inaccuracy. Even contemporary CIA director Gates suggested “…that the Soviet
economy was about 15 – 20 [percent] purely military and 20 [percent] purely civilian, and the
remainder could not be broken down into civilian or military components.”92 This is by no means
an accurate breakdown of the Soviet economy, but it does demonstrate how even the head of
foreign intelligence in the US recognised the problems posed in establishing what actually
constituted the Soviet defence sector.
90
Holzman, in Maddock, “The Political Economy of Soviet Defence Spending”, p21
91
Firth and Noren, “Soviet Defence Spending”, p89
92
Ibid., p89

Nick Blackbourn 34
Rowen has noted that many civilian sector items incurred greater costs to make them ready
for military use. Planes, for example, were given strengthened undercarriages, at increased cost, to
allow military use in wartime. Civilian truck production favoured the military also. Worldwide the
average four-ton truck constituted three percent of total production, in the Soviet Union the figure
was eighty percent93. This was simply because a four-ton truck was the most useful from a military
standpoint. Therefore, it was the civilian sector that bore the initial expenses, but the military
obviously benefited. These costs weren’t included in the Direct Costing effort, but Soviet military
capability would benefit greatly from such spending. The militarization of the Soviet economy
along these lines contributed to the gross underestimation of Soviet defence spending.
Conversion from dollars to roubles and vice-versa presented further problems for the purpose
of spending comparisons for US government to review in order to judge their own spending
requirements. The Kremlin did not procurement military hardware in dollars, and nor did
Washington set its budget in roubles. As Aslund has recognised “A mole in the Kremlin could
never reveal the dollar cost of Soviet defence activities because…the Soviets don’t spend dollars.”94
The rouble/dollar conversion rate was thus key and an acknowledged source of significant error.
Hidden inflation in the Soviet economy meant the CIA was in a constant battle to set a realistic
conversion rate, indeed each year it attempted to better estimations of previous years.
“The r/$ ratios represent the weakest link in the procurement estimating equation. Since
Soviet rouble prices for weapons systems generally are not available, the r/$ ratios
93
Epstein, D., “The Economic Cost of Soviet Security and Empire”, in Rowen & Wolf, “The Impoverished
Superpower”, p130
94
Swain, D., “The Soviet Military Sector: How It Is Defined and Measured”, in Rowen & Wolf, “The Impoverished
Superpower”, p106

Nick Blackbourn 35
represent a set of estimates generated in order to assign a rouble price, itself unknown,
to both the identified and the estimated components of each Soviet system.”95
Thus the CIA figures underestimated the level of Soviet defence expenditure96. This led Direct
Costing end users, which included Reagan, to the conclusion that the Soviet defence sector was a
well-tuned arms manufacturer. It seems strange to suggest that by underestimating arms expenditure
the CIA overestimated the threat of the USSR, but that was indeed the result. By understating
procurement spending, but achieving better accuracy in assessing the actual Soviet order of battle
through utilisation of its spy network and satellite surveillance, it appeared that the Soviets were
able to support their military on a smaller proportion of national income than was actually the case.
Reagan remembers, “I had been given a briefing on the astonishing Soviet arms build-up which left
me amazed at its scale, cost, and breadth and the danger it posed to our country.”97 But at the same
time he “…learned that the Soviet economy was in even worse shape than I’d realized [sic].”98 This
apparent contradiction gave the somewhat distorted view of Soviet Union as a military powerhouse
but at the same time a system teetering on the brink of collapse. Indeed Rowen has commented that
“If the CIA assessments had been reasonably accurate, the Soviet economy would be a maturing
industrialised economy…There would be little need for a radical economic reform; Gorbachev’s
urgency would be incomprehensible.”99
Paradoxically, the understatement of Soviet defence expenditure by the CIA meant Reagan
was reacting to an exaggerated threat, but this fitted with his own perceptions of communist Soviet
Union being an “Evil Empire”.100 In reality, Reagan’s own views on the fragility of the Soviet
95
Lee, “The Estimation of Soviet Defence Expenditure”, p9
96
Rosefielde, “False Science”, p59
97
Reagan, “An American Life”, p551
98
Ibid., p237
99
Rowen & Wolf, “The Impoverished Super Power”, p15
100
Reagan, R., ‘Evil Empire Speech, June 8, 1982’, “Modern History Sourcebook”,
<http://www.fordham.edu/halsall/mod/1982reagan1.html>, [accessed on 13/04/07]

Nick Blackbourn 36
economy as a whole was matched in the defence sector; it too was costly, inefficient and backward.
Garthoff has highlighted “President Reagan’s notorious disregard for concrete facts…”101 which
seems to raise questions over whether Reagan was influenced by wayward statistical analysis by the
CIA. But he surely had to trust the information the professional national intelligence agency
provided, even more so if it matched Reagan’s own worldview. To do otherwise would question the
professionalism of its authors. His own beliefs concerning communism and the Soviet Union meant
he envisaged a militaristic and hostile adversary and the CIA Direct Costing statistics presented a
statistical model to support this, albeit by methodological errors.
Concluding Remarks
This thesis has shown is that cost estimations of Soviet defence expenditure had little influence in
dictating policy in the 1985 – 1989 period despite their apparent importance in government rhetoric
on policy justification.102
In the Soviet Union, Gorbachev was struggling to remove the unwarranted influence of the
military from the higher echelons of the Communist Party and the subsequent burden placed on the
Soviet economy and its people. The available statistical information upon his rise to power in
March 1985 was both lacking in substance and accuracy. Gorbachev was battling against the
military tradition of the USSR to restructure the economy. He adopted ‘Glasnost’ policies in an
attempt to secure his position as Premier by allying himself with the Soviet people, and actively
distancing himself from the military hierarchy. Glasnost forced the defence sector into greater
101
Garthoff, “The Great Transition”, p9
102
See Reagan, R., “Address to the Nation on Strategic Arms Reduction and Nuclear Deterrence, Nov. 22, 1982” in
“Public Papers of the Presidents, Ronald Reagan, 1982”, (Washington DC: United States Government Printing Office,
1983), pp1506-7

Nick Blackbourn 37
transparency over its procurement costs and this meant greater reliability of spending statistics as
Gorbachev’s tenancy as Premier progressed. More detailed spending statistics did not clarify to any
greater extent the fact that military expenditure was overly excessive and had to be cut. His policies
both before and after more accurate breakdowns of Soviet military spending centred around
slashing its budget and burden on the economy. Therefore the influence of spending estimates on
Gorbachev was extremely limited.
In America, Reagan had formed his objectives for his presidency without consulting any CIA
figures. He attempted to revive US military strength and pursued a confrontational foreign policy
against the Soviet Union even before he had set foot in the White House and reviewed any
intelligence documentation. Reagan is not the only American President who has been charged of
selecting intelligence to justify a predetermined policy. For example, accusations that President
Bush carefully selected intelligence to justify an already envisioned invasion of Iraq surround the
2003 ‘Operation Iraqi Freedom’.103 Reagan’s own preconceived goal in 1981 was to ‘transcend’
communism and witness the end of a “…bizarre chapter in human history whose last pages even
now are being written…” Reagan’s personal hatred of communism meant that statistical
confirmation of the threat of communism, though welcome, were not at the base of his policies.104
The CIA Direct Costing effort was inaccurate, but managed to portray the USSR as a dangerous
adversary who posed a threat to the American way of life. Political-scientist Freedman questioned
in 1986 “…to what extent is the produce of the intelligence community influenced by the political
requirements of policymakers?”105 The answer during the Reagan era may never be revealed, but
103
Hooker, G., “Shaping the Plan For Operation Iraqi Freedom: The Role of Military Intelligence Assessments”,
(Washington DC: Washington Institute For Near East Policy, 2005)
104
Reagan, R., “Remarks at the Annual Convention of the National Association of Evangelicals in Orlando, Florida,
March 8, 1983”, “The Reagan Presidential Library”,
<http://www.reagan.utexas.edu/archives/speeches/1983/30883b.htm>, [accessed on 13/04/2007]
105
Freedman, “US Intelligence and the Soviet Strategic Threat”, p184

Nick Blackbourn 38
Reagan’s own - very public - views on communism and of the Soviet Union itself no doubt
influenced the information with which he was presented. Freedman considers, that estimators,
“…in a hierarchical intelligence organisation may come to feel that their lives will be
easier and their careers will prosper if they close their minds to those hieratical notions
that contradict the images held by their superiors…Estimators may feel forced to adopt
adversary images which have been made official, not by senior professionals but by
senior policymakers.”106
The inaccurate defence estimations that were compiled by the Direct Costing estimators at the CIA,
thoroughly understated Soviet expenditure, yet the information was still presented in the most
alarmist terms for the President. Access to the President was severely limited; foreign policy
concerns are a limited aspect of the presidential remit. Rather than attempt to fully understand the
findings of the CIA, including all issues of accuracy and relevancy, the political leadership simply
wanted “…a shorthand yardstick to compare US and Soviet military spending…”107 The CIA, to
secure funding, maximised its limited exposure by stating the worse-case scenario, pandering to the
political ‘requirements’ of the administration. In the footnotes to a draft report on the Soviet threat
an anonymous author writes to CIA Director Robert Gates “I hope it at least captures the flavour
you were looking for.”108 This is not reflective of the impartial reports one might expect of the CIA.
Furthermore, James Locher, staff member of the Senate Armed Services Committee, highlighted
that many politicians “…believe [that] this analysis is intentionally misleading, that it somehow
comes out to exactly what it is that the Administration would like to argue on Capital Hill…”109
106
Ibid., p185
107
Berkowitz, et al, (1993) “Report of the Working Group; Report of the Methodology Panel of the Working Group on
Military Economic Analysis”, “An Evaluation of the CIA’s Analysis of Soviet Economic Performance, 1970 – 1990”,
Comparative Economic Studies 35, (Summer), pp 33 - 48
108
CIA/ SOVA Report, “The State of the Soviet Economy”, “Memorandum for the Director for Intelligence, April 22,
1987” in Firth & Noren, “Soviet Defence Spending”, p244
109
Firth & Noren, “Soviet Defence Spending”, p87

Nick Blackbourn 39
This accusation perhaps goes a little far, as in reality the administration simply disregarded the
aspects of the CIA estimates they did not like, rather than enforce all analyses to meet one particular
conclusion.
To give estimations of Soviet defence the scholarly attention they deserve, this thesis has
neglected the other Sovietological studies that were conducted by the CIA. Whilst Direct Costing
seemed to highlight the danger of Soviet militarism, other CIA reports were predicting, even as
early as 1981, that “[A] possibility is that the Soviets will reduce the level of military expenditure
absolutely (rather than reducing the rate of increase)…reductions cannot be excluded as a long run
possibility.”110 Putting the Direct Costing effort in this context explains the implications of
Reagan’s thirteen per cent intelligence budget increase in 1981. With the amount of money that was
allocated to American intelligence agencies as a result of the defence build-up, not just to the
Central Intelligence Agency but to the Defence Intelligence Agency and also to the National
Security Agency, the President could find somewhere a report that suited his aims. CIA Direct
Costing estimates of Soviet defence expenditure thus only added fuel to Reagan’s own ideological
fire; it did not start it in the first instance. Reagan’s hatred of communism formed decades before he
even entered politics in his Hollywood years.111 CIA estimates in the 1981 – 1989 period
contributed little to the direction of policy during Reagan’s presidency; it was used merely to justify
it. Even the Director of the CIA recommended against using Direct Costing in policy-formation.
“[Gates]…planned to urge DoD [Department of Defence] to rely on physical comparisons rather
than dollar comparisons of the defence programs.”112 Communism was destined for consignment to
Reagan’s “…ash-heap of history…” but the contribution of the Direct Costing effort, which offered
110
April 1981, Intelligence Assessment, “The Development of Soviet Military Power: Trends Since 1965 and Prospects
for the 1980s”, in Haines & Leggett, (Eds.), “CIA’s Analysis of the Soviet Union”, p308
111
See Vaughn, S., “Ronald Reagan in Hollywood: Movies and Politics”, (Cambridge: Cambridge University Press,
1994)
112
Firth & Noren, “Soviet Defence Spending”, p88

Nick Blackbourn 40
often a hopelessly inaccurate representation of Soviet defence expenditure, was negligible.113
Levenstein’s proverbial ‘bikini’ of Soviet defence estimations has been laid bare, and the discovery
is less than appealing.
113
Reagan, R., ‘Evil Empire Speech, June 8, 1982’, “Modern History Sourcebook”,
<http://www.fordham.edu/halsall/mod/1982reagan1.html>, [accessed on 13/04/07]

Nick Blackbourn 41
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