Why did the Soviet Union squander the political leverage afforded by its trade subsidy to Eastern Europe? Why did Soviet officials fail to bargain with resolve, to link subsidies to salient political issues, to make credible commitments and to monitor the satellites' policies? Using formerly secret documents housed in archives in Moscow, Warsaw and Prague, as well as interviews with former Communist officials across Eastern Europe, this book attempts to answer these and other questions. The book argues that trade politics revolved around the incentives created by distorted prices on the Western market and those in the Soviet bloc. The Soviet Union made numerous attempts to reduce its implicit trade subsidy and increase the efficiency of the bloc, but the satellites managed consistently to outmanoeuvre Soviet negotiators. Drawing upon recent developments in bargaining and principal-agent theory, the book argues that the incentives created by domestic institutions weakened Soviet bargaining strategies. In effect, it suggests, perverse incentive structures in the Soviet economy were exported into Soviet foreign policy.Futhermore, the book argues, incentives to smother information were so deeply entrenched that they frustrated numerous attempts to reform Soviet institutions.