‘It’s Time For Change’: The West Can’t Afford Any More German ‘Leadership’ On East-West Ties

German Chancellor Kohl’s first meeting with President Clinton was billed as an opportunity for the veteran in East-West relations to school the neophyte about how best to promote the prospects for reform in Moscow and "save" its leader. Ironically, if Bill Clinton genuinely wants to foster the structural transformation of Russia along democratic and free market lines, Helmut Kohl is one of the last people he should take advice from.(1)

After all, it was thanks in no small measure to Kohl’s "leadership" on G-7 ties — and the Bush Administration’s obsequious deference to it — that Soviet communism was perpetuated for years beyond when it would otherwise have become economically non-viable. This was primarily accomplished by Germany’s undisciplined, non-transparent and largely unmonitored lending of tens of billions of deutsche marks to the Gorbachev regime. The total of these loans came to comprise the preponderance of a national hard currency debt that more than doubled during the Gorbachev years to roughly $70 billion.

Insofar as Germany’s leading financial institutions refused to make such loans to the non-creditworthy Soviet Union in the absence of 100 percent government guarantees to cover the transactions, the German government and taxpayers now find themselves the nation holding the bulk of non-performing credit exposure with the former Soviet Union. Interestingly, just yesterday, President Yeltsin made clear that Russia has no interest in "making good" on these foolhardy taxpayer loan guarantees; he proposed an outright moratorium on any payments due on its over $80 billion foreign debt over the next six months. That payment period will inevitably be rescheduled, perhaps repeatedly, into the distant future before it is forgiven wholesale.

It is against this backdrop that one must scrutinize German efforts to drum up new, emergency Western lending and other cash aid to Russia. Consider, for example, Kohl’s statement yesterday before the German Bundestag in which, according to today’s Financial Times, he sharply upbraided his G-7 allies:

"We expect our partners to get more actively involved than they have up till now …. We Germans have provided more than 50 percent of all Western help so far, with more than DM 80 billion …. But with that, we have already reached the limits of what we can afford."

Other Reasons for Eschewing German Demands for Further Undisciplined Western Aid

Inevitably, a substantial part of any future undisciplined, unconditioned Western support for Russia — the sort Kohl is urging be offered to "save" Yeltsin — will be used either directly or indirectly to repay credits extended by the German government to the Old Guard. It is for this reason that all indebtedness accumulated by the former Soviet Union should be subordinated to new money loaned to Russia since the end of 1991 (i.e., the date of Gorbachev’s resignation).

Scarcely less appetizing is the prospect that Western assistance will be absorbed by a lucky few in Russia — particularly those in a position to milk the system and to line their own pockets. This concern was forcefully articulated by the International Monetary Fund’s managing director Michel Camdessus in an interview reported in the 8 March 1993 Reuter European Business Report:

"There’s no sense sending limited resources to Russia if, in the absence of more coherent, more effective monetary and financial policies, the credits are immediately going to end up in bank accounts in Zurich, Paris or London."

For those who are well-connected former Communist Party or KGB officials, regional bosses, factory or mine directors — or simply criminals — it has become possible to amass great wealth through such corrupt practices. Persons able to bribe officials for export permits or smuggle raw materials like oil or copper or weaponry abroad are successfully turning large profits in hard currency which conveniently disappear into foreign bank accounts.

According to a 24 February 1993 report by the Sacramento Bee, Russia’s Security Agency (the successor to the KGB) estimates that one-third of Russia’s oil exports and one-half of its nickel exports are stolen state property. Experts on London’s commodity exchanges claim that so much Russian nickel, aluminum and copper is being dumped on the market that world prices are depressed. Certain officials in the Central Bank and Finance Ministry are believed to be enriching themselves through inside trading and speculation on the ruble. From 1991 to 1992, some $30 billion is estimated to have hemorrhaged in the form of "capital flight" from Russia, much of it to discrete foreign accounts of corrupt officials.

President Yeltsin is acutely aware of this problem. In a 12 February 1993 speech to a group of government, police and regional officials he said, "Organized crime has become the No. 1 threat to Russia’s strategic interests and national security. [Official corruption] is corroding the state body of Russia from top to bottom."

The fact that the majority of Western aid has been going into a sinkhole is widely recognized — if rarely publicly acknowledged — in Western government circles and multilateral institutions. It is instructive that no one can provide a comprehensive or accurate accounting of how much aid has been committed or delivered to the former Soviet Union and what became of the aid and credit flows that did arrive. Today’s Financial Times, for example, reports that "The true state of Western support for Russia is unclear to experts who have been monitoring the flows for years." And why not? Figures from the European Commission do not jibe with those of the International Monetary Fund. The Organization for Economic Cooperation and Development — the institution charged with monitoring concessionary assistance — hopes to publish its account of 1991 Western aid flows by mid-1993 "subject to agreement from member governments."

In short, the present lack of accountability for past aid to Russia — like previous, undisciplined German assistance to the old Soviet Union — is serving to provide a financial cushion actually to delay structural reform. It is the height of fiscal irresponsibility and strategic folly, under these circumstances, to accede to German and other G-7 nations’ demands that still more taxpayer resources be thrown willy-nilly at Boris Yeltsin.

Solutions Must Come From Within — ‘Forty Acres and a Mule’

Rather than turn anew to this tried-and-false (albeit expedient) measure of squandering Western resources in undisciplined lending to Russia, the Center for Security Policy recommends that solutions be explored which bypass centralized bureaucracies and that will improve the lot of the Russian people directly.

One way to do this is to press President Yeltsin to offer his citizenry — and especially his troops — the equivalent of "40 acres and a mule." At present, Russia’s dire economic circumstances — especially in agriculture — threaten to destroy public confidence in the virtues of democracy and free markets. The farm sector has been handicapped by myriad difficulties, among them a lack of essential inputs, such as fuel, working farm equipment and seeds, and a deplorable distribution system.

As Eliza Prokolova, a city council member in the town of Pushkina, put it recently on the MacNeil-Lehrer NewsHour: "Everyone wants land…if the President promises to give land to everyone, then they should vote for the president and give him power."

A program to convert those who bear arms into those who produce food could be a highly achievable objective. For example, military trucks — now in large supply — could provide the nucleus for an entrepreneurial distribution system. The Russian government could contribute from its fuel stockpiles and convert selected military depots into agriculture storage facilities.

Such a bold initiative would simultaneously accomplish several objectives, among them:

• Stabilizing and developing Russia’s agriculture sector;

 

• Nurturing private ownership and giving the population a stake in free market reforms;

 

• Development of a rural political base for Yeltsin and other democratically-minded national, regional and local policy-makers;

 

• Private production and distribution;

 

• Enhanced quality of life and nutrition;

 

• Reduced dependence on imported commodities and foodstuffs;

 

• Cheaper food prices for the population;

 

• Freed up hard currency for debt servicing and imports of machinery and consumer goods;

 

• Alternative — and potentially prosperous occupations — for excess military troops;

 

• Reduced military threat to Russia’s neighbors and other nations; and

 

• Lessened demand on Western taxpayers’ resources for agricultural credits and other forms of life-support for the vestiges of the old Soviet centralized system.

Western governments could contribute to this process in numerous ways. For example, technical assistance on the construction of storage facilities such as silos and warehouses, irrigation, roads and agricultural extension programs could be provided. The West could help in supplying seeds for new agricultural crops and equipment for food processing.

The Bottom Line

While such an approach may cost Western governments — and the agribusinesses they tend to coddle — future guaranteed and taxpayer-underwritten commodities sales, the end result will almost certainly be a Russia that is better fed; is more self-sufficient; enjoys greater self-esteem; is less aggressive; and is more firmly rooted in Western traditions of democracy and free enterprise.

These are, after all, the very sorts of objectives Germany and its other G-7 partners are supposed to want to advance. Now is the time for them to stop trying to do so through failed and discredited approaches and to encourage one that might just succeed.

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1. The Center for Security Policy has long documented Germany’s self-serving and dangerous policies toward the former Soviet Union and repeatedly urged the U.S. government not to abdicate leadership on East-West relations to Bonn. See for example, Economic and Financial Security: Gorbachev’s Perestroika and How the West Should Respond (25 January 1989, No. 89-05), and ‘Dear Helmut…I Press Your Hand’: Gorbachev Letter Reveals Shakedown Scheme; G-7 Forewarned, Forearmed? (25 June 1991, No. 91-P54)