Every year the managers of Minosegi, Hungary's leading producer of women's shoes, bargain with the Soviets over the quality and quantity of footwear they will send to the Soviet Union the next year.
The Russians used to be content to get whatever shoes they could from the Hungarians. Style didn't matter much; durability did. Lately, Soviet purchasers have gotten choosier. They want more fashionable models. They want what Hungary has been selling to America.
Across Eastern Europe, factory managers and government officials say the Soviets are becoming more demanding about the quality of manufactured products they receive from their allies. Up to now, Moscow has traded oil and natural gas with its socialist partners in return for machinery and equipment, consumer items and food. It was no secret to Kremlin officials that many of the top-of-the-line items produced in Eastern Europe were being set aside for hard-currency sales to the West. Now, an economic slowdown in the Soviet Union has made Moscow less tolerant of this fact.
This threatens to upset Minosegi's East-West balancing act. Its best shoes -- designed with the help of an Italian studio and manufactured from Italian or Spanish leather -- are reserved for the U.S. market. The company's "Innocence" brand recently made it onto the shelves at Bloomingdale's, Lord & Taylor and Woodward & Lothrop. Dollars earned from these sales go toward easing Hungary's foreign debt and buying modern western machinery.
The Soviets, meanwhile, end up with simpler shoe styles, crafted from Hungarian leather and featuring plainer colors, less fancy stitching and fewer bows, straps and snaps. These sales earn rubles, which do not count as much as dollars. But the size of the orders is enormous, reaching five to seven times the volume requisitioned from America for a given shoe type. Such mass orders ensure Minosegi a steady, dependable workload, which stabilizes the firm against the often unpredictable swings of the U.S. market.
So far, the Hungarians have persuaded the Soviets to stay with less complicated, cheaper shoes. But the negotiations get tougher every year.
This change in Soviet attitude toward trade with its allies was spelled out at a meeting a year ago of leaders of the Soviet-led trade group, the Council for Mutual Economic Assistance (Comecon). It was reaffirmed in November by Soviet Premier Nikolai Tikhonov at a Comecon conference in Havana.
"All the goods that are traded must reach comparable quality to the best available in the world," he told delegates. Subsidies From Moscow
Except for Romania, East European states import about 80 percent of their energy and 90 percent of their oil from the Soviet Union. The cost of the oil is based on a five-year moving average of world oil prices. This time-lagged formula cushioned Eastern Europe from OPEC prices when those prices were rising sharply.
For the items that the Soviets buy from Eastern Europe, prices are not so easy to figure. Much of the machinery and consumer goods are substandard, yet the East Europeans manage to barter at prices pegged to top-notch equivalent products in the West.
Moscow thus shoulders huge implicit trade subsidies for its allies: selling underpriced raw materials and fuels in exchange for often overpriced, antiquated, shoddy East European manufactured products.
"The Soviets complain about the poor goods they get for the oil they sell," said Hans Georg Heinrich, an authority on the Soviet Bloc at the University of Vienna. "The East Europeans frequently claim that the Soviets exploit them. But the Soviets themselves feel exploited."
Weighing heavily on the Eastern Europeans is not only a toughening Soviet attitude. To compound matters, the rolling price formula for Soviet oil, which protected Comecon members when world prices were escalating, has become a burden as OPEC prices have fallen in the past two years.
Gradually, the cost, on paper at least, of Comecon oil has come to equal the world price. Ever larger quantities of Eastern European goods are now needed to barter for Soviet energy deliveries.
"For 1 million tons of Soviet oil, we paid the equivalent of 800 Ikarus buses in 1972. Last year, that same amount of oil cost us 4,000 buses," said Prof. Ivan Berend of Budapest's Karl Marx Institute.
Unable to come up with enough buses and other goods to meet Moscow's terms, the Eastern Europeans have run up large deficits with the Soviet Union. According to the Vienna Institute for Comparative Economic Studies, the deficits surpassed $2.4 billion in 1984 and have totaled $18 billion since 1975.
Other signs of tightening economic links between Moscow and its socialist partners have emerged as well. During the past year, Poland and East Germany signed long-term agreements with the Soviets, broadening trade and scientific exchanges through the year 2000. Moscow is imposing new demands on all its East European allies to assist in the extraction of frozen natural resources in Siberia.
"I think the hardening of Soviet demands is due to the fact that Soviet economic management is thinking in a more businesslike way," said a senior Hungarian communist party official who spoke on the condition that he not be named. "In the short run, this means problems and concerns, particularly for the less developed allies."
The Soviets are known to play favorites. Bulgaria, long the most empathetic ally, continues to enjoy the privilege of reexporting for hard currency appreciable amounts of Soviet oil it buys at ruble prices. On the other hand, East Germany, which has by far the strongest economy in the bloc, apparently has had to settle accounts with the Soviets. It was the only Eastern European state not to run a deficit with Moscow last year.
The hope here is that Moscow will not call in its debts but instead will continue to give its hard-pressed allies some financial leeway, in the interest of maintaining political stability in its empire.
But the strengthened economic interlocks between Moscow and its allies are bound to keep Eastern European officials sensitive to Soviet concerns and restrain initiatives that could bring the Kremlin's disapproval. Paying for Past Mistakes
Soviet Bloc governments blame the West for pushing them into closer economic relations with Moscow by closing off credit and restricting access to western technology. This, officials say, has left no alternative but to cooperate more intensively with Moscow.
But misguided strategies of the past do more to explain the region's current predicament. Until the early 1970s, the countries of the Soviet Bloc experienced what economists call "extensive growth." High rates of economic development were the result of rebuilding an industrial structure devastated by World War II and shifting workers from farms into factories. The centrally planned Stalinist model proved effective in directing this recovery effort.
Command economies are, however, ill-equipped for the challenges of "intensive growth" -- upgrading outdated technology, improving labor productivity, using energy more efficiently. Yet, rather than loosen their rigid planning structures, the communist regimes embarked in the 1970s on programs of heavy borrowing from the West aimed at importing technical change.
Moscow's suppression in 1968 of the Czechoslovak reform movement made communist officials wary of systemic overhaul. They found it easier to borrow from overeager western banks and governments infused with the spirit of detente.
Poland's collapse in 1981 forced a period of retrenchment. The West's credit tap was turned off. The Eastern Europeans reacted by slashing imports and adopting austerity measures.
Not counting Poland, which is still in bad financial shape, the combined net debt of the other five states dropped 40 percent from $32.5 billion in 1981 to $19.3 billion at the end of 1984. The appreciation of the dollar somewhat exaggerated the scope of this adjustment, and U.S. bankers are still leery of making Soviet Bloc loans. But the Western Europeans and Japanese have regained much of their lost banking confidence in the region.
Recent statistics show Eastern European economies recovering from their 1981-82 slump, thanks to favorable harvests last year and some Soviet assistance. Trade with the West has revived as well. Even Czechoslovakia, formerly the most ideologically opposed to contact with the West, announced a planned jump of 14 percent in western imports this year, consisting mostly of machinery to modernize aging factories.
But the long-term economic prognosis for the bloc is dim. After scoring some of the world's highest growth rates in the years after World War II, Eastern Europe generally has faced declining rates of national income growth since 1970.
Debt servicing for Romania and Hungary, as well as for Poland, remains burdensome. Much of the apparent improvement in recent East European exports to the West reflects higher sales of energy products (Polish coal, Romanian oil) rather than manufactured goods. Soviet Bloc producers face mounting competition in world markets from newly industrialized countries in Latin America and the Far East.
The Reagan administration has impeded the flow of high technology to the region, raising the costs of circumvention. The Western Europeans continue to reject overtures for an accord between the European Community and Comecon, seeing little to gain by lowering tariffs and quotas for Eastern Bloc goods.
Under such circumstances, the East Europeans have felt compelled to stick more closely together and lean more on the Soviet Union. At the same time, they worry that this trend could stifle national initiative and permanently hobble their countries technologically.
"About 55 percent of our machines come from the West, dating from the 1970s," said Ryszard Wojna, chairman of the Polish parliament's foreign affairs committee. "Many lack spare parts and are not being used. Soon we'll have to get rid of the machines and replace them from whatever sources are available."
As Alan Stoga of Kissinger Associates in New York has observed, Eastern Europe is back to where it was at the beginning of the 1970s, facing two alternatives to avoid economic stagnation. One is comprehensive reform toward market-oriented economic structures. The other is to turn to the West for a new influx of technology, goods and credits.
Some Soviet Bloc states have in fact been increasing their deposits in western banks, hinting at plans to resume expansive trade with the West. But no clear strategy has emerged.
"They seem to have decided at least to keep their options open and not cut themselves off from the market," reported Stan Rudcenko, a loan officer and specialist on Eastern Europe at the Bankers Trust Co. in London. "But I don't think they've decided which way to go." Risking Reform
In about half the Eastern European states, there is now agreement on the need for some management decentralization, some real role for prices to allocate resources rather than having central planners do it, and some link between pay and output.
But only in Hungary does there seem to be a national consensus solid enough to carry out major reforms. Even here, the Central Committee, in announcing a broad set of new measures last year, avoided mention of the term "reform." The committee worded its decision this way in a communique: the door, it said, would be "open for all progressive systemic transformations."
One of the "transformations" ties wages more closely to productivity, recognizing that some people deserve to get richer than others, despite the old socialist tenet about worker equality.
Poland also has adopted some ambitious economic modifications, surpassing even the Hungarians on the issue of rights for workers' councils. But the Polish reforms are stymied by bureaucratic obstacles and by chronic shortages that keep government ministries intervening heavily in economic life.
Bulgaria has taken limited steps toward modifying economic controls. It has introduced some private market elements, including a piecework system, and is trying to prod large firms out of their lethargy by setting up a number of small, flexible -- although still state-owned -- enterprises.
In contrast to these experiments in free-marketeering, East Germany has tinkered with its central planning to show that the system can be made to work more efficiently without drastic restructuring. Ironically, this strategy, which relies on increased shift work, energy conservation and other moves, has yielded better results so far than the reforms attempted in Hungary, Poland and Bulgaria.
But western analysts question the applicability elsewhere of the East German measures. Much of Berlin's success is attributed to the East Germans' discipline and organization. Also, East Germany enjoys a privileged relationship with West Germany, which has provided large loans totaling nearly 2 billion marks, or nearly $650 million at current exchange rates, during the past two years and serves as a channel for East German goods into European Community markets.
Romania and Czechoslovakia also remain committed to the traditional Soviet system of central planning and control. A faction in Czechoslovakia sometimes identified with Premier Lubomir Strougal is said by western diplomats to favor some economic liberalization. But the majority of the Prague leadership appears unwilling to risk change.
Communist conservatives justify their opposition to reform by arguing that there is no proof decentralization would be a panacea. They point to Yugoslavia, where worker self-management has been taken to an extreme, to warn against doing away with central planning. Yugoslavia's 85 percent inflation rate is Europe's highest.
"We doubted what the Yugoslavs would achieve when they set out, and today western papers say it is a failure," remarked Richard Dvorak, a senior adviser at Prague's Foreign Ministry. "In general, we think it is better to keep waiting and not make the same mistakes as were made here in 1968." Command Decision
How far to go with reforms is a decision each Soviet Bloc state must weigh for itself. But it is also an issue the bloc must weigh collectively. Each member does at least 40 to 50 percent of its trade within Comecon and therefore cannot let its system diverge too far from the others. Already, tensions arise when firms in, say, reform-oriented Hungary try to deal directly with companies in orthodox Czechoslovakia.
"I won't say it's easy -- it's difficult," acknowledged Ede Horvat, director of Hungary's giant Raba works and a member of the party's policy-making Central Committee. "Let's take the Czech firm Skoda. We've been selling them axles for more than a dozen years. Here, I'm free to decide when and how much we're going to sell. But there, the managers need time to consult with higher-ups in the ministries before making a decision. I can do whatever I want regarding a sale to them. But their hands are tied."
Mikhail Gorbachev, the new Soviet leader, may help smooth out such differences. He appears to appreciate the need for change and is widely expected to tolerate if not foster economic reform throughout Eastern Europe -- so long as reforms promise efficiency and do not threaten the political monopoly of the ruling elites.
But as a supertechnocrat whose top priority is getting the Soviet economy moving again, Gorbachev could prove very tough with his socialist allies on economic issues, trimming the subsidies and other privileges enjoyed by Eastern Europe in the past.
For the Soviet Union, the plight of its bloc partners has a double significance. On the one hand, the failure of the command economy has acted as a cohesive force, making individual bloc governments more dependent than ever on Soviet assistance and markets. On the other hand, it has created centrifugal pressures within the Soviet empire by fueling popular unrest with the communist system.
How hard Gorbachev turns the screws at his end is apt to spin things one way or the other for his socialist partners.