Reference no: EM131607311

Question: In 1980, before the unification of Germany in 1990 and the introduction of the Euro, West Germany made a loan of 20 billion Deutsche Marks to the Soviet Union, to be used for the construction of a natural gas pipeline connecting Siberia to Western Russia, and continuing to West Germany (Urengoi-Uschgorod-Berlin). Assume that the deal was as follows: In 1985, upon completion of the pipeline, the Soviet Union would deliver natural gas to West Germany, at a constant rate, for all future times. Assuming a constant price of natural gas of 0.10 Deutsche Mark per cubic meter, and assuming West Germany expects 10% annual interest on its investment (compounded continuously), at what rate does the Soviet Union have to deliver the gas, in billions of cubic meters per year? Keep in mind that delivery of gas could not begin until the pipeline was completed. Thus, West Germany received no return on its investment until after five years had passed. (Note: A more complex deal of this type was actually made between the two countries.)