MOSCOW’S BROKE — AND WANTS TO BREAK OUR BANK: NO CREDIT WHERE CREDIT IS NOT DUE
(Washington, D.C.): Over the past
forty-eight hours, the Bush
Administration has struggled to make two
things perfectly clear: First, the
Soviet Union is a lousy credit
risk, in large measure because
the Gorbachev regime has failed to
undertake necessary structural reform of
its political and economic systems. And
second, notwithstanding that fact, the
Administration is anxious to find a way
to give the Soviet
central authorities more U.S.
taxpayer dollars — even if
doing so makes the adoption of
such reforms by the Kremlin still less
likely. The Center for
Security Policy believes
the Administration has been long overdue
in recognizing the first and
must not be permitted to do the second.
Flash: Moscow is Broke.
Just four months ago, on 12 December
1990, President Bush extended $1.3
billion in U.S. agricultural credits and
export guarantees to Moscow center. At
that time, he expressed no
reservations about the Soviet
Union’s creditworthiness or the low
probability that these loans would
actually be repaid.
Now, by contrast, with those funds
nearly exhausted — and a new Soviet
request in hand for a further $1.5
billion in Commodity Credit Corporation
(CCC) credits — the President is
suddenly expressing concerns about Moscow
center’s credit rating. At a White House
press briefing for farm editors on
Monday, Mr. Bush evinced apparent regret
when he observed that a U.S. statute
designed to protect the taxpayer from bad
loans to foreign governments would
inhibit him from extending further credit
to the USSR. He said, “[The Soviets
have] got to move forward to be
creditworthy if we’re going to [extend
additional agricultural export
credits].”
The fact that President Bush has
become seized with the Soviets’ bad
credit rating is all the more
striking given that he has
recently made Ed Hewett his top Soviet
specialist on the National Security
Council staff. Hewett, formerly
associated with the Brookings
Institution, has compiled an impressive
track record in recent years of
consistently over-estimating Moscow’s
creditworthiness. In the past, he has
maintained that the Soviet Union could
double or triple its debt without any
debt servicing problems.
Clearly, such fatuous propositions are
untenable today. Ask any of the Western
companies who find themselves part of the
USSR’s current $6 billion in
payment arrearages. Or
ask Deutschebank — the most
forward-leaning Western bank when it
comes to underwriting business with
Moscow: Deutschebank insisted on nothing
less than 100% government guarantees
for its most recent Soviet transactions;
the bank complained bitterly when Bonn
asked it to take a mere 5% commercial
exposure in a deal insured through the
German government’s Hermes export
guarantee program.
Indeed, concerns about Soviet
creditworthiness were every bit as
justified in December
1990 as they are today. As the
Center reported that month,
a major IMF-led study commissioned by the
G-7 nations at last year’s Houston
economic summit revealed that the Soviet
Union was a basket-case economically and
would remain so in the absence of
wholesale structural reforms.
Unfortunately, the Bush Administration
chose to ignore this warning when it
decided to reopen the U.S. official
credit window for Moscow.
One might well ask: On what basis did
the Bush Administration do so? Where
was the credit assessment the President
now seems to feel is legally required
before U.S. agricultural credits may
be extended? Did the Eximbank
perform one as well? If so, did
these analyses actually conclude
that the USSR was a good credit
risk in December 1990 when
just four months later they are
transparently not one?
The truth of the matter is that there
almost certainly were no such rigorous
assessments performed for,
if they had, they would have arrived at
the same conclusion the Bush
Administration evidently has now
reluctantly come to. In any event, the
question is begged: If the
President’s lending to Moscow
underpresent circumstances would violate
the law, how could his action of
four months ago have been legally
appropriate?
More Ways to Skin the
Taxpayer’s Cat.
Unfortunately, the Bush Administration
has signalled its determination — despite
the law — to expose the American
taxpayer to additional liabilities in the
unreformed, bankrupt USSR. As the
President put it to the farm editors:
Now, there may be — and we’re
thinking about this — there may
be some way to extend
credits….And if we can find
ways to encourage forward
movement on these credits, or
find ways to make [the Soviet
Union] creditworthy any other
way…. Market reform is a good
way to do it. There are other
ways that perhaps they would make
the credit more secure.
The Administration seems to have two
strategies in mind to provide additional
assistance to the Soviet Union. The
first, which would be consistent with the
President’s notion of making the USSR
creditworthy has been floated by the
Senate Minority Leader, Sen.
Robert Dole (R-KA). On 30 April,
Sen. Dole introduced a resolution
scheduled to be considered by the Senate
on Tuesday of next week which
asks the Soviets to provide assurances
that American agricultural export credits
will be distributed in an “equitable
and humanitarian” manner to
“the peoples of the Soviet
Republics.” It would grant Moscow
initially only $500 million of its latest
CCC request, the remainder to be provided
in two tranches and, ostensibly,
“contingent upon the acceptable
distribution and/or repayment of previous
credits.”
Yesterday,
presidential press spokesman Marlin
Fitzwater went even further. In
his briefing to the White House press
corps, he suggested that the
Administration might simply finesse
the law, dispensing with any
illusion that the loans will be repaid
by rendering assistance in the form
of “direct food aid…along
the lines of what we’ve previously done
in terms of providing grain directly to
the [USSR].”
Neither of these approaches will
protect the American taxpayer against
further, immense losses in the
Soviet Union. As outlined by Sen.
Dole, his approach would ensure that
at least a
further half-billion dollars worth of
credits are squandered; its
vaguely worded conditions do little to
inspire confidence that the remaining
billion would actually be denied Moscow.
The approach described by
Fitzwater, while more forthright, still
would amount to pouring precious
U.S. resources down a black hole. Worse
yet, the predictable effect
of either of these stratagems will be to
postpone, rather than catalyze, needed
structural reform in the USSR.
No Further U.S. Aid to
Moscow Without Fundamental Reform.
The Center for Security Policy believes
that additional taxpayer
resources should be provided to the
Soviet Union only if that
assistance is tied directly to the
adoption of systemic political and
economic changes. The Center’s
preferred approach would be to withhold
granting additional U.S. credits for a
minimum of six-months following the
adoption of needed, wholesale
political and economic reforms — so as
to permit performance to be demonstrated.
If, alternatively, the United States
is determined to provide assistance prior
to the introduction of structural
reforms in the USSR, the Center
recommends a strategy that
would both safeguard the
taxpayer’s investment and add to —
rather than detract from — the pressure
on Moscow center to effect such reforms. This
approach would involve the following
elements:
- The Soviet Union should
be obliged to put up collateral
to secure U.S. credits, government
guarantees and other loans. Such
collateral should be in the form
of gold bullion
— not promises of future
oil deliveries and the like,
whose value is uncertain at best
in view of the dilapidated
condition of the Soviet energy
and transportation sectors. - Collateral should, in
the first instance, be posted for
the loans made to Moscow last
December. This
would, of course, be in addition
to gold deposits required to
secure future credit arrangements
for Moscow center. - The Federal Reserve or
U.S. Treasury must take physical
possession of such gold —
not simply accept Soviet currency
deposits in Western banks as
collateral, given their ability
to be “disappeared” via
wire transfer on a moment’s
notice. - This is particularly important
insofar as the Center has long
believed that Western estimates
of Soviet strategic gold reserves
have been overstated. In all
likelihood, these assets have
been substantially drawn down
since 1986 — perhaps sharply in
the past two years. While U.S.
government agencies and private
research institutes generally
carry a figure of $25-32 billion
as the value of Moscow center’s
strategic gold reserves (as
though these reserves have never
been siphoned off), the Center
estimates the actual value to be
worth no more than $15-17
billion, or less. - The amount of gold
transferred in collateral should
be sufficient to provide a
“shrinkage
margin” — that is,
as with commercial banking
transactions, not sized on a
dollar-for-dollar basis but in
excess of the amount of
American commodities to be
purchased. This arrangement would
ensure that funds would be
available to cover both principal
and interest payments even
though, over the three years CCC
credits take to mature, there may
be substantial erosion in the
price of gold. - There must be full data
disclosure on Soviet hard
currency reserves and deposits,
including strategic gold
reserves, to be
independently verified. There
also should be full scrutiny of
Soviet hard currency cash-flow
management — specifically, the
“sources” and
“uses” of such
currency, both domestically and
abroad (e.g., such anti-Western
activities as technology theft,
aid to client states, military
modernization, and
disinformation). Clearly, the
U.S. taxpayer is entitled to a
full assessment of the
creditworthiness and spending
practices of so significant a
would-be borrower. - A precondition to new
loans should be prompt payment
required to “clean-up”
the estimated $100 million in
arrearages owed by Moscow center
to U.S. companies. - Assurances about an equitable
distribution of the American
commodities purchased with such
credits will not be sufficient. Physical
delivery and distribution of the
grain and other
foodstuffs to republic capitals
should be independently monitored
and relevant
money transfers made to republic
banks so as to ensure that the
center is not
able once again to abscond with
— or otherwise abuse for
political purposes — the
proceeds of American largesse.
The Center for Security Policy
regards the Bush Administration’s
decision on the latest Soviet request for
additional credit as a litmus
test of the U.S. commitment to promoting
in the Soviet Union a more economically
viable and less strategically dangerous
nation, a process that depends in part on
the devolution of power away from
the center and to the republics. It
believes that neither the long-term
strategic interests of the United States
nor the short-term interests of its
taxpayers will be served if American
resources continue to be squandered in
ways that retard, rather than advance,
this process.
– 30 –
1. See
“‘Don’t Bother Us With the
Facts’: Allies Preempt IMF-led Study on
Soviet Economy,”
19 December 1990.
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