AS PREDICTED, A ‘DECEMBER SURPRISE’ FOR U.S. TAXPAYERS; G-7 DEBT RESCHEDULING REWARDS KREMLIN FOR GAIDAR’S OUSTER

(Washington, D.C.): As predicted by
the Center for Security Policy in July
1992, the Group of Seven (G-7)
industrialized nations waited until after
the U.S. elections in November to
offer the former Soviet Union a generous
debt rescheduling package — one that
will surely wind up costing the U.S.
taxpayer billions in unrecoverable loans.

These losses are the direct result of
foolhardy credit guarantees and other
financial assistance primarily extended
to the Gorbachev regime. They
were ill-advised — and possibly illegal
— when they were made by the Bush
Administration. Worse yet, their
deferment (and possible future
forgiveness) at this juncture amounts to
a generous infusion of cash into the
Kremlin just as old line communists
and other reactionaries are returning to
power there.

The Shoe Drops

Within hours of the successful
overthrow of the reformist government of
Acting Russian Prime Minister Yegor
Gaidar by a Congress of People’s Deputies
dominated by the former Soviet nomenklatura,
the G-7 offered the former USSR what it
had effectively denied Russia during the
period non-communists were in charge:
multi-year debt relief which effectively
limits Russia’s payments to Western
governments to $2.75 billion for the
balance of this year and 1993.

The G-7 offer, made under the auspices
of the Paris Club of official creditor
nations, reportedly postpones for 5-10
years over $15 billion of ex-Soviet debt
payments due Western taxpayers.
Importantly, it includes for the first
time loan obligations incurred after 1
January 1991. As a result, some $5.75
billion in agricultural loan guarantees
obligations extended by the U.S.
Department of Agriculture’s
scandal-ridden Commodity Credit
Corporation would be ultimately affected
over time. Scarcely any of this amount
has been repaid to date.

You Heard It Here First

Losses to the American taxpayers from
bad loans to the former Soviet Union were
forecast by the Center for Security
Policy throughout the period that
President Bush insisted on extending
these taxpayer loan guarantees —
primarily to former President Gorbachev
— despite overwhelming evidence of the
former Soviet Union’s
non-creditworthiness in Western financial
markets. (See attached
selected list of relevant Center
papers on the subject.)

Notably, on 7 July 1992, the Center
for Security Policy warned in a Decision
Brief entitled “Summit-Scam:
Munich Response on Debt Relief Undercuts
CIS Reformers, Sets Stage for U.S.
‘December Surprise'” that a
write-down and probable loss of billions
in U.S. taxpayer funds would be
deliberately staved off until after the
U.S. presidential election in November.
As the Center put it:

“In all likelihood, the Bush
Administration will try to
portray the Munich understanding
on debt relief as one that fully
safeguards American taxpayer
interests. In truth, it will not
be possible to avoid the
rescheduling of the billions
President Bush ill-advisedly
pumped into a doomed effort to
prop up Mikhail Gorbachev’s
communist regime.

“Given the crushing hard
currency cash flow crisis in the
former Soviet Union, it is
inevitable that the build-up of
arrearages associated with the
excluded principal and interest
for 1991 will compel their
rescheduling, as well. In the
absence of honesty and
accountability on the part of
official Western creditors,
however, the American people are
not going to be informed of the
true status of their equities in
this debt until after the
election — what might be
thought of as a “December
Surprise.”

The fact that U.S. officials were fully
cognizant last summer of Russia’s
inability to service its debts makes all
the more reprehensible U.S. Agriculture
Secretary Edward Madigan’s additional
offer of $900 million in loan guarantees
in September. Incredibly, it is only over
the past few weeks that Agriculture has
quietly conceded that Russia is more than
ninety days in arrears on at least $40
million in payments due on
taxpayer-guaranteed loans made by
commercial banks. That admission was
made, however, only when the Department
was obliged under U.S. law to suspend
further Russian access to CCC credits.

Russia’s arrearages are likely to balloon to over
$170 million in the next 30 days. The
Agriculture Department is attempting to
put a rosy face on Russia’s default by
suggesting that the suspension is only
temporary. For example, Secretary Madigan
said in early December:

“We are treating it as a
temporary situation as we have
done in the past with them and
with other countries that were
temporarily in arrears. We expect
that they will catch up.”

In fact, it is highly unlikely that
Russia will be able to meet payments due
this year — or, for that matter, next
year. (In 1993, over $2 billion in
principal and interest will come due on
USDA loan guarantees to Russia.) Lest
there be any doubt on this score, it
should be put to rest by a 1 December
statement by Alexander Gatsenko, deputy
head of foreign credits in the Russian
Finance Ministry: “We could make all
possible efforts and pay our debts to the
United States — but by doing this we
would neglect other creditors.”

The only question now is: Will Congress — or
the Justice Department — “catch
up” with Madigan’s blatant
violations of the provisions of the Farm
Act of 1990? In particular, will the
Senate Agriculture Committee which has
initiated a General Accounting Office
investigation into the matter, or Justice
determine that he has breached the Farm
Act’s statutory prohibitions on the
extension of taxpayer loan guarantees
under the CCC program to other than
creditworthy sovereign borrowers?

A Tragically Missed
Opportunity

The Center for Security Policy has
long argued that generous, multi-year
debt relief — indeed selected
debt forgiveness — should be extended on
a disciplined, transparent and
conditional basis to those
engaged in demonstrable, genuine
structural reform in the former
Soviet Union.⁽¹⁾
Unfortunately, the Bush Administration
and its allied counterparts declined to
do so.

Indeed, Western creditors refused to
grant the victims of and successors to
Soviet totalitarianism significant
rescheduling of debts incurred by their
oppressors. This was particularly
outrageous in light of the fact that such
debts arose from loans that served
primarily to perpetuate Moscow
center’s repressive, authoritarian
misrule.

Instead, Washington and allied
capitals chose to offer more
loans. In the process, Western taxpayers
were made liable for further
unrecoverable loans even as the Soviet
successor states were saddled with still
greater hard currency repayment
obligations. The United States
and its allies are only just beginning to
come to grips with one utterly
predictable consequence of this bizarre
and irresponsible Western approach: It
has provided a justification — and
powerful impetus — for Russia’s frenzied
marketing of even the most advanced
military hardware and related technology
to virtually any pariah state. href=”#N_2_”>⁽²⁾

Incredibly, the decision to offer the
very debt relief denied Gaidar and his
reformers to those who would restore the
ancien communist regime is about to
compound, perhaps exponentially, the
adverse strategic consequences of this
misbegotten Western policy. An
urgent course correction is in order
before billions in hard currency still
owed to sovereign creditors in the West
becomes available to support the
nefarious domestic and international
agenda of Prime Minister Chernomyrdin and
his ilk.

Bottom Line

The Center believes that the United
States and other Western nations should
immediately announce that the
rescheduling of former Soviet debt,
further G-7 bilateral assistance
(including new distributions under the
CCC program), new loans from the IMF,
World Bank and European Bank for
Reconstruction and Development and other
forms of cooperation will not be possible
unless and until demonstrated progress is
made in the following areas:

• institutionalization of private
  property rights;
• a more disciplined approach to
  the money supply;
• a rise in oil prices
  toward market levels;
• free national elections
  for a new Congress;
• an end to Russian
  supplier credits for
  nuclear and other international
  projects, particularly with
  respect to China, Iran, Pakistan
  and Cuba; and
• the curtailment of
  weapons proliferation and
  dramatic down-sizing in the
  military-industrial complex.

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1. See, for example, How Not to Screw Up Aid to the Former USSR: Robinson Advocates
Conditionality and Debt Relief, 9 January 1992, No. 92-P 4; ‘Welcome to Washington’ (Part
II): Robinson Points Way to a Constructive Conference on Aid to Former USSR, 21 January
1992, No. 92-D 8; ‘Breathing Space’ for a Democratic Russia: Bush Should Offer Debt
Relief/Forgiveness, 31 January 1992, No. 92-D 16; Debt
Relief for Democratic Russia: Doable U.S. Aid in ‘A Time of Constrained Resources, 12
March 1992, No. 92-D 24; Flash: Former Soviet Union Drowning in Red Ink; R_x: Debt
Relief, Not More Debt, 7 April 1992, No. 92-D 33; High Drama in Moscow Underscores
Reform Program’s Reversibility, Shows Need for Reconfiguring Aid Plan, 25 April 1992, No.
92-D 43; Center’s Robinson Tells Congress How to ‘Spell’ Aid for Reformist States of Ex-USSR: D.E.B.T.-R.E.L.I.E.F.,
4 May 1992, No. 92-P 48.

2. See for example, testimony by Center Board of Advisors member Roger W. Robinson, “Former Soviet Union Debt Rescheduling,”
Senate Finance Subcommittee on Deficits, Debt Management, and International Debt, 1 May 1992.