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Market Confidence in ‘China Inc.’ Appropriately Shaken — G.I.T.I.C. Bond Default A taste Of What Is To Come?

October 29, 1998Center for Security Policy

(Washington, D.C.): In recent days, the global financial crisis rocking emerging markets has
fulfilled a long-standing prediction of the William J. Casey Institute: Communist China would not
be able to continue indefinitely to conceal its economy’s grave vulnerabilities.

According to an article prominently featured in the business section of yesterday’s New
York
Times, Guandong International Trust and Investment Corporation (GITIC) recently failed
to meet
an international bond payment to its agent, Chase Manhattan Corporation. Unlike Western
syndicated loans to investment trust corporations (or ITICs) like GITIC, bonds cannot be simply
rescheduled or restructured by the lenders. Bond repayments are either made on time or are
defaulted upon — denying creditors the option of rescheduling debt repayments.

This is largely because investment banks, which typically lead the underwriting of such bond
offerings, offload the bulk — or all — of the credit exposure on their books to other investors and
creditors in the so-called secondary market. This is why the Casey Institute has long warned
against that the purchase of certain Chinese bonds (e.g., those offered by China International
Trust and Investment Corporation (CITIC) run by the notorious Chinese arms-dealer, Wan
Jung.⁽¹⁾ Such investments are not only freighted with
national security-related implications.
They also pose a real danger of default, particularly given the non-transparent nature of such
enterprises.

‘Say Goodnight, GITIC’

The meltdown of GITIC, the PRC’s second-largest investment trust corporation, and the
Chinese
government’s response to it — namely, closing the Guandong concern’s doors — has generated a
shockwave of market anxiety. After all, the primary purpose of ITICs like Guandong’s is to
channel Western investment and liquidity into China, ostensibly to facilitate trade and exports. In
practice, they are often huge state-associated conglomerates, some of which borrow heavily in
foreign markets and use these funds for infrastructure projects, acquisitions and other corporate
expansion activities. Others, like CITIC, appear responsive to the priorities of China’s Military
Commission and security services.

With a little luck, the GITIC experience can be seen for what it is — “early warning” of a
looming
and much more serious financial crisis in China — and, therefore, may prove to have a silver lining.
What will be required is a serious and comprehensive review of the Chinese economy by Western
public and private sectors. If such an effort is promptly and conscientiously undertaken, it may
yet be possible to avert far greater economic and strategic costs to those who have heretofore
seen little downside risk to large capital flows to the PRC.

The Tip of China’s Financial Iceberg?

The Chinese government’s decision to close down the Guandong ITIC apparently came after
it
concluded that the investment trust company had no hope of extricating itself from a mountain of
short-term hard currency debt it had attracted on international markets (some of which is said to
have been “unauthorized”). It is striking that, in the wake of this official action (or, more
precisely, inaction), a number of prominent financial commentators, Western
investors and lenders
have gone to considerable lengths to portray the PRC’s willingness to step aside and watch one of
its flagships go under as a positive step — as it is. They contend that it is evidence that China is
maturing as a market-player and better understands the folly of propping up losing enterprises like
GITIC. Ironically, many of these same market players have privately acknowledged that the
Chinese government’s failure, at least to date, to bail-out GITIC is a source of disappointment
and concern to shareholders.

In fact, the closing of GITIC could well be the first step toward a debilitating, nation-wide
liquidity crisis. In the three weeks following the suspension of the Guandong concern’s
operations, several other ITICs have experienced a squeeze as nervous international creditors
have begun to refuse to “roll over” debt obligations coming due. This problem is exacerbated by
these Chinese institutions’ past affinity for borrowing short-term to finance long-term
infrastructure development projects — a problem bankers call a lack of “tenor matching.”

As international capital becomes harder to come by, one can expect more ITICs to hit the
wall on
their debt obligations. The next to go may be Fugian International Trust and Investment
Corporation, which the Financial Times yesterday reported is experiencing serious
liquidity
strains.⁽²⁾ As stated in a Wall Street Journal
editorial by Shan Li and Tian Zhu of yesterday, the
worse may be yet to come:

But with losses mounting and the ratio of non-performing bank
loans soaring, China now finds itself in a financial crisis.

Reviewing China Bonds

The repercussions of the growing financial distress of China’s ITICs may make themselves felt
first in the international debt and equity markets. As the Casey Institute has documented in the
past, the Chinese government and its extensive network of state-owned enterprises and banks
maintain a substantial presence on global bond markets.⁽³⁾
Specifically, these Chinese enterprises
and government-controlled entities have issued about 134 bonds in world markets since 1980
totaling roughly $25-26 billion. Of this total, some 66 have been dollar-denominated in the
estimated amount of $10.4 billion. In the past decade, GITIC has established a presence on the
U.S. bond market to the tune of roughly $400 million. The largest of these offerings was an
October 1996 bond led by Merrill Lynch for $200 million.

It is predictable that the political leadership in Beijing, anxious to preserve what remains of its
favorable image in world markets — will seek to distance itself from what is shaping up to be a
string of such defaults. Stand by to be told that these foreign borrowings by China’s ITICs have
been unauthorized “rogue” operations. After all, this euphemism has been routinely employed to
disavow obvious government connections to enterprises suspected (and in some cases, caught in
the act) of proliferating weapons of mass destruction and missile technology to pariah states.

Whatever technique is employed to obscure the full truth, the Chinese government
cannot afford
to be viewed by the markets as having detailed knowledge of GITIC’s foreign borrowing
activities and rapidly deteriorating financial status, as it could further soil its market
reputation.
Like the chief of police in “Casablanca,” the party line is sure to be that the PRC is
“shocked,
shocked” to discover that the nature and extent of its troubled ITICs’ problematic funding
practices.

The Rating Agencies Again Drop The Ball

Investors’ confidence can hardly have been enhanced by the performance of Moody’s and
other
rating services as the Chinese begin to experience widespread effects from the global financial
crisis. Consistent with the recent practice of several of these agencies — namely, that of
downgrading borrowers only when the whole world knows they are going belly-up — Moody’s
downgraded GITIC’s foreign debt last Friday, only days before the Guandong
concern’s bond
default. To its credit, Moody’s did, however, react to the GITIC collapse by down-grading
China’s largest investment trust company, China International Trust and Investment Corporation
(CITIC).⁽⁴⁾

This belated action may persuade investors already holding CITIC paper — or those
considering
the future purchase of its bonds — to evaluate the inadequacies of past CITIC prospectuses and
overall financial disclosure. Moreover, it would be a welcomed development if all of China’s
ITICs and so-called “red-chips” in Hong Kong and on the mainland could, at long last, receive the
kind of serious auditing that they have richly deserved, but never really received.

In a milestone of understatement, John Pinkel, head of China research at Merrill Lynch, stated
in
the New York Times article of yesterday: “I think that the Chinese government didn’t
do enough
to clarify the liabilities of these companies. But equally, many banks were seen to be imprudent in
their lending to offshore entities of Chinese organizations.” These remarks succinctly summarize
the two major themes to which the Casey Institute has seeking to draw attention since April 1997.

According to the Times, Pinkel went on to estimate that, “China’s total foreign
borrowers — by
provincial and municipal governments and by their affiliated companies — was $30
billion higher
than Beijing’s official number of $130 billion. GITIC alone may have total debts of
more than
$2 billion.” (Emphasis added). The point is that no one in the West has a precise figure for the
dimensions of GITIC’s financial morass, much less those of other ITICs or of China writ large. In
the end, the Chinese government may feel compelled to make GITIC’s foreign creditors whole —
lending new meaning to the banking term “Chinese clean-up.” It is certainly prudent, however, to
remain alert to the possibility that Beijing is testing the West to determine if it can avoid a further
drain on its partially-encumbered hard currency reserves.

The Bottom Line

The U.S. Congress needs to address the China financial situation in the immediate
post-election
period. It should make clear that it will not stand idly by while a Chinese financial crisis creeps
toward the wallets of U.S. taxpayers in the form of thinly-disguised bilateral or multilateral
bail-out schemes. Securities and Exchange Commission Chairman Arthur Levitt (not to mention
Treasury and Federal Reserve officials) should be called before the Senate and/or House Banking
Committee to offer an assessment of the Chinese financial situation and its potential impact on
American holders of Chinese bonds and equity issues.

In addition, Mr. Levitt’s organization should be given greater authority for monitoring and
reporting to relevant congressional committees. Such authority would have been mandated if
Capitol Hill had adopted “The U.S. Markets Security Act of 1997” (S.1315) during the
105^th
Congress.⁽⁵⁾ Given all that is at stake for U.S. and other
friendly nations — with respect to their
pension and mutual funds, insurance companies, corporations and even individuals — arising from
the multi-billion-dollar presence of Chinese corporations in the U.S. bond market, there
is no
time to waste securing more transparency regarding such capital flows and their national
security, as well as financial, implications.

– 30 –

1. See the Casey Institute’s Perspective entitled
Casey Symposium On Asia Illuminates High
Stakes In Debate On Renewal Of M.F.N. For China ( href=”index.jsp?section=papers&code=97-R_86″>No. 97-R 86, 23 June 1997).
Incidentally, the same warnings have been in order — and expressed by the Casey Institute —
concerning certain Russian bonds (for example, those offered by Russia’s energy monopoly,
Gazprom).

2. Conservative estimates place China’s non-performing loan
portfolios at roughly 20% of the
country’s total outstanding debt. A recent article in the Economist cited individual
accounts as a
main source of banking sector solvency.

3. See the Center’s William J. Casey Institute
Perspective entitled, Dangerous Upshot of
Clinton-Gore’s China ‘Bonding’: Strategic Penetration of U.S. Investment Portfolios
(No. 97-C 47, 1 April 1997) and the Casey Institute
Press Releases entitled Insight Magazine Breaks the
Code: Chinese Penetration of U.S., Global Financial Markets Has Strategic
Implications (No.
97-R 60, 3 May 1997), and USA Today Illuminates Case For Urgent Action
To Halt Chinese
‘Bondage’ (No. 97-R 68, 16 May 1997).

4. See The Dog That Didn’t Bark: Moody’s, Et.Al. Fail
Investors In Asian Markets, Miss
Warning Signs In China And Russia (No. 97-C
200, 23 December 1997).

5. This bill was sponsored in the House by Rep. Gerald Solomon
(R-NY) and in the Senate by
Sen. Lauch Faircloth (R-NC).

1998 Freedom Flame/Casey Medal of Honor Award: Jeane Kirkpatrick

September 24, 1998Center for Security Policy

(Washington, D.C.): At a moment of profound national angst over the domestic implications of President Clinton’s personal and public misconduct, one of the most respected figures in America — Ambassador Jeane J. Kirkpatrick — yesterday issued a moving tribute to leaders of character from the past, and warned of the danger to this country’s worldwide interests if such qualities remain absent in the White House into the future.

The occasion for Dr. Kirkpatrick’s remarks was a luncheon held in her honor by the Center for Security Policy’s William J. Casey Institute. The former U.S. Permanent Representative to the United Nation’ received the “Casey Medal of Honor” [later renamed the Center’s Freedom Flame award] in the ballroom of the elegant Park Hyatt Hotel in Washington filled with nearly two hundred of her friends and admirers (including, among other distinguished guests the Chairman of the House International Relations Committee, Rep. Benjamin A. Gilman (R-NY)). This award was conferred in recognition of her extraordinary contributions to the Nation, both during her tenure at the UN and throughout a long and distinguished career in academe, as an author, as a syndicated columnist and as a valued participant in myriad presidential, departmental and private sector commissions and advisory boards — including that of the Center for Security Policy.

The following offer a sample of the deeply touching and inspiring thoughts shared by Dr. Kirkpatrick in the course of her informal address:

There were many aspects that account for the strength of the Reagan Administration and the success of it. But the most important of all, I think, was a love of our country, in fact, and an appreciation of our freedom, above all. A sense that our freedom was our most important heritage, our most important possession. It was the secret of our success.

It was a great privilege to work with those men…all of whom were good men, they were men of good character. As President Reagan himself was a man of good character and Ed Meese and, God knows, Bill Casey was a man of good character — as well as great intelligence and dedication, and skill and ability. I think that was an important factor in our success, a more important factor, perhaps, then we thought at the time.

The importance of preserving our traditional national character is the prerequisite, if you will, even to providing for our defense. On our character we must rest our defense. On which then rest our freedom and security….I know, frankly, no one — just no one — who more clearly, fully, completely reflected that character then our good friend, our warm friend, my best friend practically, Bill Casey.

Dr. Kirkpatrick also used the Casey Institute forum to address a matter of substance — one which she, correctly, considers to be of the utmost importance: the need to protect the United States against ballistic missile attack. Contrasting our present posture of utter vulnerability to such a threat with the America homeland’s historic invulnerability to foreign aggression, she observed:

The loss of that invulnerability is the real strategic revolution that has occurred in our times and with which we must cope. Meeting that challenge, which is the loss of our invulnerability, is the most important task that we confront and will continue to confront until we have, in fact, met the challenge and dealt with it. One of the many common causes which has brought the Center…and its [Board of Advisors] together many times, in common cause, is our commitment to provision of an effective, really effective, national missile defense which can end our vulnerability and return us to the security that has been ours all our national life.

The award luncheon began with a welcome by Bernadette Casey Smith, William J. Casey’s daughter, that called to mind the deep mutual respect and personal affection shared by her father and the honoree. A similar portrait of abiding respect and sense of purpose shared by Ambassador Kirkpatrick and the man in whose Cabinet she served so ably — President Ronald Reagan — was painted by former Attorney General Edwin Meese III in his formal introduction of Dr. Kirkpatrick. Mr. Meese, who also worked closely with the Ambassador in his capacity as Counselor and close advisor to President Reagan, was the first recipient of the Casey “Medal of Honor.”

The luncheon concluded with the presentation of the “Casey Medal of Honor” by Mrs. Sophia Casey, CIA Director Casey’s beloved widow.

Casey Institute Symposium on Russia

Many of those who participated in the luncheon then joined in an afternoon-long symposium entitled “Russia: Transformation or More Financial Bailouts?” The stage was set for this exceptionally timely symposium by Hon. Roger W. Robinson, Jr., former Senior Director of International Economic Affairs at the National Security Council under President Reagan and currently President of RWR, Inc.

Mr. Robinson, who holds the Institute’s Casey Chair, provided a review of the important elements of the financial and political drama unfolding in the former Communist state. Mr. Robinson also offered several notable prescriptions for Russian reform (e.g., conditioning further governmental aid flows on a curtailing of Russian military and foreign policy activities threatening to U.S. and Western interests; institutionalizing protections for private property; adopting Western legal and commercial codes; and focusing on the creation of a environment conducive to the growth of small- and medium-sized businesses).

Participants then heard a fascinating address by Dr. Judy Shelton, a widely published and respected economist whose work focuses on international monetary, finance and trade. Dr. Shelton reviewed the impact of the ruble’s devaluation on global currencies and financial flows. She also underscored the failings of government-to-government transfers to encourage real economic reform in Russia and warned that the lack of a viable currency in Russia meant any reforms were essentially building on quick sand.

Next the symposium heard from Dr. Marshall I. Goldman, the Kathryn Wasserman Davis Professor of Russian Economics at Wellesley College and Associate Director to the Davis Center for Russian Studies at Harvard University. Long regarded as one of the United States’ foremost experts on the Russian economy, Dr. Goldman presented a rather bleak assessment of the prospects for economic and political reform. Among Prof. Goldman’s many notable insights were his estimation of the possibility — and potential beneficial effect — of a decentralization of the Russian Federation to the extent that the regions engage in real curbs on the mafia and the building of institutions necessary for genuine democratic pluralism and free market economies.

Mr. Thomas Moore, Director of the Kathryn and Shelby Cullom Davis International Studies Center at The Heritage Foundation, concluded the symposium with an informative address concerning the strategic nexus between finance and national security, in particular focusing on the actual — if unintended — effects of past and future western aid flows to the former Soviet state. Mr. Moore expressed concern about the United States’ apparently continuing unwillingness to recognize the danger inherent in providing U.S. tax dollars to the Russian government as it proceeds, among other things, threatening strategic modernization programs.

– 30 –

Wall Street Journal Joins Casey Institute on Right R_x For Russian Financial Crisis: ‘It’s the Private Sector, Stupid’

July 14, 1998Center for Security Policy

(Washington, D.C.): The lead editorial in today’s Wall Street Journal is required
reading for
those concerned about the latest Clinton Administration-brokered bail-out of a foreign financial
basket case: Russia. This brilliant essay — entitled, “Financing Capital Flight” (see href=”index.jsp?section=papers&code=98-R_130at”>the attached) — enunciates themes the Casey Institute strongly
endorses,⁽¹⁾ notably the fact that this bail-out will
squander immense Western resources without addressing the underlying causes of
Russia’s
persistent financial woes. Worse yet, such taxpayer largesse is likely actually
to compound
those problems.

As the Journal eloquently put it:

href=”#N_2_”>⁽²⁾ effective control of
the national gas company, Gazprom, a big hard-currency earner that claims about
one-third of the world’s known natural gas reserves. In a world that increasingly
demands and rewards market transparency, Russia remains global finance’s house of
mirrors.

“The notion that the IMF is going to fix the Russian fun house by funneling
billions into its Central Bank reserves and then by sending teams of technocrats to
dictate reforms is ludicrous. We know this because it has been tried….

“The better way to defend Russia’s ruble would be to turn to the private
markets for help …. While Russian politicians have learned they can get away
with stiffing the IMF, or the World Bank, or even the U.S. government, their turn
toward capitalism has also been driving home the lesson that it’s a lot costlier to
play fast and loose with the private marketplace — where investors react to
dumb policies by doing things like selling off stocks, not offering bigger
bailout packages.”

It is to be hoped that an additional point will be addressed in future Journal
editorials on the
subject — and by others worried that U.S. and other Western taxpayers are being victimized by
bailouts which amount to little more than international wealth redistribution schemes benefitting
primarily opportunistic Western investors and lenders and their in-country crony capitalist allies.
National security will not be served by perpetuating a politico-economic system in
Russia
that is bent on building new offensive missile threats, encouraging the proliferation of these
and other weapons and engaging in policies from Serbia to Iraq to India to North Korea
pursuant to a “Primakov Doctrine” that is highly inimical to Western interests. href=”#N_3_”>⁽³⁾

– 30 –

1. See ‘Russian Clean-Up’: Expectations of Western
Bail-Out Artificially Buoy Markets, But
Serve to Compound the Problem (No. 98-C 99, 4
June 1998) and As Expected, Russia Gets a
Bail-Out — But It Won’t Get Moscow Through Next Year, or Protect U.S. Security
Interests
(No. 98-C 128, 13 July 1998).

2. The biggest of these “cronies” by far was Vice President Gore’s
erstwhile interlocutor, ex-Prime Minister Chernomyrdin.

3. See Primakov Watch: Destroying NATO From
Within (No. 98-D 14, 22 January 1998),
Clinton Legacy Watch # 10: Administration Ineptitude, Appeasement Put Saddam,
Primakov
Back in Driver’s Seat (No. 97-D 173, 20
November 1997) and ‘Founding Act’ or ‘Final Act’
for NATO? (No. 97-D 69, 19 May 1997).

As Expected, Russia Gets a Bail-Out — But It Won’t Get Moscow Through Next Year, or Protect U.S. Security Interests

July 13, 1998Center for Security Policy

(Washington, D.C.): As the Casey Institute predicted on 4 June 1998, href=”#N_1_”>⁽¹⁾ the price-tag for U.S.
and Western taxpayers to help float Russia’s tragically mismanaged economy and financial
structure was moved to “sticker shock” proportions over the past weekend. The International
Monetary Fund — knowing that its institutional integrity was being scrutinized after multiple
debacles in Asia — initially tried to hang tough on Russia and demand genuine, systemic
reform
before disbursing the remaining tranches of Russia’s existing $9.2 billion IMF facility. This
new-found discipline, however, was shattered by President Yeltsin’s
politicization of the bail-out
package on Friday, 10 July when he personally telephoned President Clinton, French
President
Chirac, British Prime Minister Blair and, of course, German Chancellor Helmut Kohl
with
the stark message: “Show me the money!”

What followed were bankable commitments to Moscow to advance multi-billion dollar sums
of
IMF, World Bank, commercial banks, investor and Japanese funds — perhaps as much as $22.6
billion — in exchange for the same tired, and repeatedly broken, Russian promises on tax
collection, budget deficit reduction and breaking up huge monopolies (like the state-owned
energy company, Gazprom) emblematic of past failed IMF packages.

Moral Hazard Celebration

To be sure, Western investors and lenders which continued to contribute to the compounding
of
Russia’s financial morass in anticipation of just this kind of hastily configured taxpayer bailout
were ebullient this morning. For example, Geoffrey Dennis, a global market
equity strategist for
Deutsche Morgan Grenfell in London is quoted as stating, “This [bailout package] supports our
fundamental view that Russia will not be allowed to fail. All round, it’s very, very
good news but
Russia must keep its reforms going.” (Emphasis added.) Particularly pleased are Western holders
of so-called GKO ruble-denominated Russian bonds who were staring into the abyss of default
going into the weekend.

According to Russia’s chief negotiator, Anatoly Chubais, of the $22.6 billion in new financing
cobbled together for Moscow, some $14.8 billion will be disbursed in 1998 and the balance next
year. The IMF will shred much of its remaining credibility by disbursing as much as $6 billion
up
front within days and the World Bank will step up for some $6 billion before the end of
1999.
Japanese co-financing with the World Bank, and large commercial bank credits and sovereign
bond offerings will comprise the bulk of this year’s remaining amount.

What Is Wrong With This Picture?

As troubling as it is to see this predictable, politicized script on Moscow’s financial bailout
unfold
in the fog of a mid-summer weekend, even more appalling is the dearth of any security-related
conditionality or Russian concessions of the type which could contribute to the defense of the
United States. J. Michael Waller of the American Foreign Policy Council has consistently done
yeoman work in itemizing those elements of Russia’s strategic and conventional military
modernization program — not to mention global adventurism — which Western taxpayers
routinely help fund by way of successive bailout packages. (See, for example, Mr. Waller’s
href=”http://www.afpc.org/faa/faa25.htm”>attached break-out. Please note that
if you “click” on this site, you will leave the Center for Security Policy’s site.)

It is no less troubling that — with a few notable exceptions like Rep. Benjamin
Gilman (R-NY),
Chairman of the House International Relations Committee — the Congress has failed to
insist
that it get hard information as to where U.S. taxpayer dollars (most disbursed to Russia
as
part of our 18% of all IMF outlays) are going and how precisely they are being
used. No
good can come from Moscow’s confidence that it will continue to enjoy the “best of both worlds”
in this latest massive bailout — namely, the ability to secure funds from the West with essentially
no-strings-attached even as it pursues costly military modernization and the “Primakov
Doctrine”⁽²⁾ at the West’s expense.

The Bottom Line

The time has come for Congress to assert itself. It must insist that U.S. tax-dollars
not be made
available — either directly or indirectly through international lending organizations — to
Russia as long as such funds are likely to be diverted or otherwise make possible (e.g.,
through the fungibility of money) threatening strategic force modernization programs
and/or
Russia’s contribution to the proliferation of weapons of mass destruction and ballistic
missile delivery systems.

At the very least, Congress must insist as the price for further largesse that the
United States
is free to take steps to reduce the vulnerability of the American people to the effects of these
malevolent Russian activities. Specifically, the United States must declare that the
Anti-Ballistic Missile Treaty — which has, according to a legal memorandum prepared for the
Heritage
Foundation,⁽³⁾ ceased to be binding on the United States as
a matter of law — will no longer be
permitted to prevent this country from deploying effective protection against ballistic missile
attack for the American people and their forces and allies overseas at the earliest possible
moment.⁽⁴⁾

– 30 –

1. See the Casey Institute’s Perspective entitled
‘Russian Clean-Up’: Expectations of Western
Bail-Out Artificially Buoy Markets, But Serve to Compound the Problem ( href=”index.jsp?section=papers&code=98-C_99″>No. 98-C 99, 4 June
1998).

2. See the Center’s Decision Brief entitled
Primakov Watch: Destroying NATO From Within
(No. 98-D 14, 22 January 1998) and the Casey
Institute’s Perspective entitled ‘Jakarta with
10,000 Nuclear Warheads’? Fear-Mongering Begins on Behalf of I.M.F.’s Next Bailout — of
Russia ( No. 98-C 95, 29 May 1998).

3. This study can be accessed on the Heritage Internet site at:
href=”http://www.heritage.org”>www.heritage.org. (Please note that
if you “click” on this site, you will leave the Center for Security Policy’s site.)

4. The Center for Security Policy agrees with the Heritage
Foundation’s Missile Defense Study
Team (Team B) conclusion that the easiest, fastest and most cost-effective way to accomplish this
deployment is by modifying the Navy’s AEGIS fleet air defense system. This important study can be accessed on the Heritage Foundation’s
World Wide Web site www. heritage.org. (Please note that
if you “click” on this site, you will leave the Center for Security Policy’s site.)

Another Gift to China?

July 8, 1998Center for Security Policy

Wall Street Journal, 07 July 1998

Bill Clinton certainly proved to be a grateful guest. First the President dangerously altered the
U.S. position on the relationship between mainland China and Taiwan by moving closer to China’s
position on unification. Then in another act of troublesome expediency, he moved toward
acceptance of China’s position on entry to the World Trade Organization. Maybe the Chinese will
invite him back for Christmas.

On the WTO, there is little disagreement in principle. Certainly, this huge country should
become
part of the world trading order. Partly through joint ventures with Western companies, Chinese
enterprises have become important exporters. As a nation China has racked up current-account
surpluses that have put nearly $150 billion in hard currency reserves in the government’s hands.
Also, China’s entry presumably would clear the way for Taiwan, which qualified for membership
years ago.

But the key question about China’s entry is: On whose terms?

China wants to enter the trade organization as an emerging economy, a status that would
allow a
longer grace period for lowering barriers to free trade and investment. Developing economies, for
example, have a whole decade to cut the value of their export subsidies by 24% and the volume of
subsidized exports by 14%. For developed economies the figures are 36% and 21%, and the time
frame is six years. The WTO, backed by the U.S., has so far refused to grant China such a
provision.

And for good reason. Emerging-economy status, itself of doubtful validity, is nonetheless
reserved
for countries of negligible economic impact. China’s economy is the world’s seventh largest,
bigger than Canada’s and Russia’s, with a GDP climbing toward the trillion-dollar level. Making
allowances for a country of this size discredits a trading system that has to be seen as fair and
impartial in applying international rules.

Bill Clinton is far too casual toward important legal principles. He seemed to accept China’s
position when, during his Shanghai radio call-in he conceded that “China is still an emerging
economy” that deserved a longer period of adjustment than richer countries. Then, to Chinese
claims that to lower barriers would threaten their economy at a critical juncture, the President
responded: “They have big chunks of unemployment for which they have to create big chunks of
employment …. They want to have a timing for WTO membership that will permit them to
continue to absorb into the work force people who are displaced from the state industries.”

Mr. Clinton wouldn’t say something like that if he actually believed in or understood how
markets
work. The truth is that if China entered the WTO under the stricter terms, its people would
benefit, not suffer. If big international investors were genuinely free to develop markets in China,
they would provide the Chinese with a wider range of products and services, and make new and
better jobs for that huge, willing labor pool. Instead, an American President defends
protectionism.

Before leaving Hong Kong, Mr. Clinton told a press conference he was going home with
“ideas”
on how to settle the deadlock over China’s entry to the world trading body. Perhaps by the time
Congress and the rest of the world are made privy to those ideas, we’ll find that his politicking in
China didn’t represent a significant change after all in the U.S. position. But on the past week’s
evidence, Mr. Clinton appears more than willing to bend the rules in key matters of substance. It’s
a lot to give away in return for the smiles that greeted him in Beijing.

Allowing Premature China Entry Into W.T.O. Would Be A Nightmare for U.S. Security — As Well As Economic — Interests

July 8, 1998Center for Security Policy

(Washington, D.C.): As the Center for Security Policy reported Monday, href=”#N_1_”>⁽¹⁾ President Clinton’s
trip to China is likely to prove a long-term set-back for U.S. interests for a number of reasons,
including: its phony de-targeting agreement; its diminishing, if not de facto
abandonment, of the
U.S. long-term commitment to Taiwan; and its damaging effect on critical regional alliance
relations. Yesterday’s Wall Street Journal offered yet another area of Mr. Clinton’s
“engagement” policy that is cause for serious concern: The Administration apparently is
inclined to permit China’s entry into the World Trade Organization (WTO) on Beijing’s
terms and timetable.

The thoughtful Journal editorial, entitled “Another Gift to China?” (see href=”index.jsp?section=papers&code=98-C_124at”>the attached), explains
what is at stake:

emerging

a whole decade

The WTO,
backed by the U.S., has so far refused to grant China such a provision.

“And for good reason. Emerging-economy status, itself of doubtful
validity, is
nonetheless reserved for countries of negligible economic impact. China’s
economy is the world’s seventh largest, bigger than Canada’s and Russia’s, with a
GDP climbing toward the trillion-dollar level. Making allowances for a country
of this size discredits a trading system that has to be seen as fair and
impartial in applying international rules.” (Emphasis added.)

More ‘Engagement’ on China’s Terms?

Unfortunately, the prospect that the U.S. government will accede to Beijing’s demands that
the
WTO bend to its will — rather than insist that China play by the same rules established for the rest
of the world — is not only of a piece with the rest of the Clinton Administration’s policy of
appeasing the PRC. It is also likely to prove but a foretaste of the heavy-handed manipulation of
the trade organization that can be expected from the Chinese should they be admitted.

China’s accession to the WTO will likely have undesirable repercussions beyond the trade
arena,
however. Consider, for example, two implications that may bear adversely on U.S. national
security and/or foreign policy interests:

Permanent MFN status: China would be spared the scrutiny to which its
policies are
currently subjected as a result of the requirement annually to renew its Most Favored Nation
status. While this would please Beijing and its lobbyists in the United States business
community, it would deny the Congress an important vehicle for holding both the PRC and
the
executive branch accountable for China’s ongoing, systematic abuse of human rights and its
proliferation of weapons of mass destruction and other dangerous technologies, as well as its
predatory economic practices. Just as President Clinton’s decision to de-link approval of MFN
renewal and China’s human rights record has translated into a steady increase in repressive
behavior by the Communist regime in Beijing, it is predictable that eliminating the
reviews
currently required under U.S. law will translate into worse behavior by the PRC on all
fronts.

Undercutting unilateral economic sanctions: Entry by China into the
WTO membership
will give Beijing new mechanisms to resist U.S. efforts to penalize it for conduct deemed
inimical to American interests. The precedent for such use of the trade organization has been
established by the European Union which has, in recent months, used the threat of recourse to
the WTO’s dispute resolution mechanism to induce the United States effectively to neuter
provisions of its domestic law — notably, the LIBERTAD (a.k.a. Helms-Burton) Act and the
Iran-Libya Sanctions Act. To be sure, as the Casey Institute has previously noted, href=”#N_2_”>⁽²⁾ the
Clinton Administration has been a willing partner in such eviscerations. Still, should China
become a member of the WTO, even a more robust American government would find it
difficult to sanction the PRC in the event Washington believed such a step to be warranted
(e.g., in the wake of a future Tiananmen Square-style massacre).

The Bottom Line

The Casey Institute commends the editorial board of the Wall Street Journal for
illuminating the
extent to which the United States risks being taken to the proverbial cleaners on the
trade
front should it permit premature Chinese WTO membership on highly privileged terms,
terms that are not only undeserved, but that would be damaging to the international trading
system. (Matters will be made worse if — as President Clinton has implied with his notorious
embrace of Beijing’s “three noes”
— one of the world’s economic powerhouses, Taiwan, will be denied the opportunity to join the
trade organization.⁽³⁾)

The Casey Institute urges, however, that consideration also be given by Congress, the media
and
the American people to the harm that could be inflicted on U.S. national security and other
interests were China to receive, through WTO membership, what amounts to permanent MFN
status to Beijing and further protection against the imposition of economic sanctions by the
United States government.⁽⁴⁾

– 30 –

1. See the Center’s Decision Brief entitled
Clinton Legacy Watch # 28: ‘Peace For Our Time’
With China (No. 98-D 122, 6 July 1998).

2. For a discussion of how the EU and Clinton Administration have
connived to undermine these
U.S. laws, see the Casey Institute’s Perspective entitled By
Eviscerating Economic Sanctions,
Clinton Leaves No Policy Choice Between Inaction and Military Strikes ( href=”index.jsp?section=papers&code=98-C_87″>No. 98-C 87, 19 May
1998).

3. Today’s Washington Post features an op.ed. by Rep.
Sherrod Brown (D-OH), which points
out that the application of this “three noes” principle is also excluding Taiwan from participating
in the World Health Organization. As a result, the children of Taiwan are not receiving the
medical help the WHO could provide to reduce, if not completely to eradicate, the fatal effects of
a virus now killing them by the score.

4. For more on measures that threaten to deny the U.S. government
this important policy
instrument, see Terms of ‘Engagement’: Lugar Anti-Sanctions Measure Could
Preclude
Important U.S. Security Policy Options (No. 98-C
117, 22 June 1998).

Open Letter to the President

June 4, 1998Center for Security Policy

One Hundred Fifth Congress

Congress of the United States

Committee on International Relations

House of Representatives

Washington, DC 20515

May 28, 1998

The President

The White House

Washington, D.C.

Dear Mr. President:

Press reports this week indicate that the government of the Russian Federation has inquired
with
the International Monetary Fund regarding the possibility of a new, low-interest loan to
supplement large loans it has earlier received from the IMF, including a $9.2 billion loan that is
still in the process of disbursement to that government. I am writing to share with you my very
strong concern over this reported request by the Russian Government.

As you know, I and other Members of Congress have been increasingly disappointed by the
conduct of Russian foreign policy. That concern stems from many negative aspects of that
foreign policy, including: Russia’s relationship with Iran, which involve nuclear and ballistic
missile technology and investments in Iran’s energy sector; the Russian Parliament’s unwillingness
to ratify the START-II nuclear arms reduction treaty; the Russian Ministry of Atomic Energy’s
continuing efforts to finance the construction of a nuclear reactor in Cuba; Russia’s efforts to gain
concessions — such as major revisions in the Treaty on Conventional Forces in Europe — from the
process of expansion of the NATO Alliance; the reported sale of advanced Russian arms and
military technology to China; Russian financial support for the authoritarian regime of Alexander
Lukashenko in Belarus; Russian efforts to “re-integrate” the newly-independent states of the
former Soviet Union; reports of covert Russian arms sales and military involvement in regional,
ethnic conflicts, particularly in the Caucus region, that have promoted instability in such regions;
the Russian manipulation of gas and oil exports from the newly independent states of Central
Asia, a manipulation that has brought financial pressure to bear on the governments of those
states by cutting off badly-needed hard currency earnings.

The most troublesome aspect of Russian foreign policy, however, is the repeated refrain on
the
part of high Russian officials, including Foreign Minister Yevgenii Primakov and President Boris
Yeltsin himself, that there should be a “multipolar world.” Under the cover of seeking such a
“multipolar world,” Russian foreign policy apparently seeks to challenge American leadership
around the world and dissipate America’s ability to organize international cooperation to address
pressing problems. This unconstructive approach to our bilateral relationship comes at a time
when the United States must lead the charge on tremendously serious problems involving
proliferation of weapons of mass destruction and the stabilization and prevention of conflicts
around the world.

Mr. President, much of Russia’s current fiscal difficulty arises from the inability or
unwillingness
of President Yeltsin to vigorously pursue badly-needed economic reforms over the last few years
and from Mr. Yeltsin’s willingness to grant large-scale tax breaks during his 1996 presidential
election campaign. The IMF cannot be expected to finance the Russian government to make up
for a lack of action and fiscal responsibility on the part of its own officials and legislators. The
reports that the recent auction of the large Russian oil firm “Rosneft” met with no bids may be a
clear indication of how private investors view this situation in Russia. The United States
Government should be equally cautious at this time to ensure that it is not placed at greater risk of
a Russian default on its official debt.

Mr. President, I strongly urge the United States withhold its support for any additional IMF
loans
to the government of the Russian Federation until the concerns I have outlined are addressed in a
manner that responds to the interests of the United States and its ability to organize effective
international responses to the threats to peace and stability around the world.

With best wishes,

Sincerely,

BENJAMIN A. GILMAN

Chairman

BAG/mg

‘Russian Clean-Up’: Expectations of Western Bail-Out Artificially Buoy Markets, But Serve to Compound the Problem

June 4, 1998Center for Security Policy

(Washington, D.C.): In a rare Sunday public statement — calculated to be digested by
international financiers prior to market openings — President Clinton announced that the United
States was prepared to help ease Russia’s financial crisis. His statement was transparently
intended to buy time for the Kremlin by restoring private investor confidence through the prospect
of a multilateral rescue package. What this initiative is likely to produce, however, is a
cascading of Russian short-term debt obligations, fattening the wallets of Western investors
and bankers while staving off needed, systemic reform and off-loading new, multi-billion
dollar costs onto U.S. and allied taxpayers.

‘Dead Cat Bounce’

The next day’s verdict on the President’s effort by the market was a harsh one — another 10%
slide in the Russian stock market, down more than 40% in recent months. While some recovery
occurred over the next two days, there is reason to doubt that it amounts to evidence of new,
durable market stability. As yesterday’s London Financial Times put it:
“Traders…cautioned
that the rebound in Russia’s financial markets was on the back of low volumes and might
simply reflect a ‘dead cat bounce’ after weeks of heavy selling.”

This assessment seems to characterize accurately yesterday’s ruble-denominated Russian
treasury
bills (known as GKOs), as well. While $946 million was raised in a debt sale, it was all
in bonds
with short maturities, i.e., less than a year. Roughly $80 million of it was in
bonds with a
redemption date of just seven days! The rest was in maturities of 126 days
or 343 days, with
yields of between 50% to 60%, depending upon the repayment schedule.

In addition, the Russians also went to the international market via a $1.25
billion dollar-denominated Eurobond offering lead managed by Goldman Sachs. href=”#N_1_”>⁽¹⁾ And, according to Reuters,
Finance Minister Mikhail Zadornov announced today that “Russia will launch two
more dollar-denominated Eurobond offerings this year and will put the finishing touches on
a foreign
borrowing package in the next few days.”

Just How ‘Dead’ is the Cat?

What is going on here, anyway? In the words of today’s Washington Post:

Prime among
these is what economists call ‘moral hazard’ — the problem that bailouts may
encourage imprudent behavior by governments and investors.

knowing that the economic fundamentals aren’t very strong,
but taking comfort that when the chips are down, the IMF and the [Group
of Seven industrial countries] aren’t going to let that country fail,”

To be sure, Russia’s forays into the market have been heralded as successes, indicating a
restoration of investor confidence. The reality is quite different:

First, the Ministry of Finance fell as much as $250 million short in its effort to cover Russia’s
debt
scheduled to come due this week, thereby necessitating yet another raid on
its already
seriously depleted hard currency reserves.⁽²⁾

Second, the exceedingly short-term maturities the Kremlin was forced to
accept are
almost unheard of for sovereign borrowers. This is all the more astounding given the
high
rates of interest demanded by the marketplace. These are obvious bellwethers of a lack of
investor confidence.

Third, there is the matter of the overall size of the debt coming due, week-to-week.
According
to today’s New York Times, Russia is facing $900 million worth of GKOs
coming due next
week. Another $1.3 billion in debt will mature the following week. According to a
Bloomberg report of 3 June, “the [Russian] government still must make another $3.9 billion in
debt payments this month, and a total of $33 billion this year.” Wednesday’s New York
Times
cites Erik Nielsen, an economist at Goldman Sachs in London, as saying that “Russia will need
to finance the redemption of $50 billion in the next year” — an amount that translates into a
staggering average of more than $1 billion per week for the balance of this year. While
there
may be some overlap in these estimates, the point is clear: Russia’s high interest rates and debt
structure have become what Desmond Lachman has called a “debt trap.”

Finally, the Washington Post telegraphed on 3 June that Russia was
contemplating the financial
equivalent of a “Hail Mary” pass: an unparalleled effort to reschedule some $70 billion
in
government ruble-denominated debt, almost all of which is in the form of traditionally
non-reschedulable bonds held by foreign and domestic investors.

From ‘Debt Trap’ to ‘Moral Hazard’

One need not be a banker to realize that something is very wrong with this picture.
No one with
a modicum of fiduciary responsibility would be lending unsecured to Russia now — unless
they expect to garner large profits from usurious interest rates, essentially risk-free thanks
to expected, large-scale infusions of Western taxpayer money.

Such a mindset was exhibited in remarks attributed to Denis Smyslov, investment director at
the
Moscow office of Global Fund Management, in yesterday’s Financial Times: “He said
the
markets were playing a ‘waiting game’ with the government until there was further evidence of
financial support from the International Monetary Fund or Russia’s Western partners.
‘At
current yields, I do not think there will be a big outflow of foreign money from the GKO
[treasury bill market],’ he said. ‘But everyone is waiting for a financial package
between
the Russian government and the IMF which will explain how to lower interest rates and
defend the rouble at the same time.'”

When In Doubt, Fear-Monger

As the William J. Casey Institute recently predicted,⁽³⁾
the Clinton Administration has begun to
utilize fear-mongering techniques to rationalize U.S. taxpayer underwriting of a continuing
flow of new money to Russia, despite its untenable short-term debt structure. The
Times
reported on 1 June 1998 that an unidentified State Department official declared that “The
Indonesians, the Koreans and the Thais weren’t sitting on tens of thousands of nuclear
weapons.
The disaster here would be an economic meltdown that aided Yeltsin’s enemies on the right.”
(Emphasis added.) Then, Deputy Secretary of Treasury Larry Summers — the Administration’s
point man on global bail-outs — chimed in with the warning of a “contagion effect,” stating that
“Russia’s problem has the potential to become Central Europe’s and the world’s.”

An important component of what is really at work here was laid bare by the
Wall Street Journal‘s
George Melloan in an editorial published on 2 June. He wrote:

What it means is
that the crisis is taking place in a rather narrow and rarefied sector, one chiefly
inhabited by multi-millionaire Russian bankers who mostly ‘inherited’ their
properties from the state and by Western lenders and investors — hedge funds,
for example.”

The Bottom Line

If the Clinton Administration has its way, the U.S. taxpayer will be put in the position of
helping
Russia perform what is known in banking circles as a “Chinese clean-up,” the sort of financial
legerdemain familiar to consumers who use their Visa credit line to pay down their
MasterCard
overdrafts. What makes this “Russian clean-up” even more unsavory is the
fact that it
arises from the deliberate collaboration of the Russian government and primarily
Moscow-based tycoons with Western investment and commercial banks. The latter are
reaping near-term, windfall profits while seeking to protect themselves, week by week, against
Kremlin non-payment while awaiting a multilateral taxpayer bailout (read the International
Monetary Fund,
World Bank and others).

No one can say they have not been warned of this “moral hazard.” For example,
former Federal
Reserve Governor Lawrence Lindsey warned last December that: “One of the reasons
we have
the Asian crisis is that we bailed out Mexico. We signaled to creditors around the world that you
could feel free to lend in Asia and the U.S. Treasury and the IMF would bail you out if you got in
trouble.”⁽⁴⁾ The same can be said of expectations
concerning Russia.

The West could experience strategic, as well as financial, repercussions if the
Clinton
Administration’s “Russian clean-up” is unaccompanied by wholesale, systemic reform in Russia.
Fortunately, a powerful 28 May letter to the President from House International Relations
Committee Chairman Ben Gilman (R-NY) — see the attached — signals that the Congress
will not permit such a travesty.

– 30 –

1. The New York Times reported on Wednesday that
Goldman Sachs economist Erik Nielsen said
that “Russia was now hoping to raise up to $6 billion this year on the European markets, up from
$3.5 billion under a previous plan.”

2. By some estimates, these are now as little as $10-12 billion, of
which as much as $4.5 billion
may be in less-liquid gold in a depressed precious metals markets. This amount is sharply reduced
from what was believed to be a $14 billion reserve level as recently as last Friday.

3. See the Casey Institute Perspective entitled
Jakarta With 10,000 Nuclear Warheads? Fear-Mongering Begins On Behalf of
IMF’s Next Bailout — Of Russia (No. 98-C 95, 29
May
1998).

4. See the Casey Institute Perspective entitled
The Dog that Didn’t Bark: Moody’s Et. Al. Fail
Investors in Asian Markets, Miss Warning Signs in China Russia ( href=”index.jsp?section=papers&code=97-C_200″>No. 97-C 200, 23 December
1997).

‘Jakarta with 10,000 Nuclear Warheads’? Fear-Mongering Begins On Behalf of I.M.F.’s Next Bailout — of Russia

March 29, 1998Center for Security Policy

(Washington, D.C.): In the past week, a warning issued this past January by the Center for
Security Policy’s William J. Casey Institute came to fruition — with a vengeance. As the Institute
noted on 7 January 1998:

Waiting in the wings is Russia

“… the only reason Russia has not been a candidate for a new emergency
bail-out initiative by the IMF — and the Clinton Administration and other
Western governments assiduously politicizing it — is that there is already one
underway. That politicization, like the multilateral cronyism now so much in
evidence in Asia, is ensuring that Russia continues to receive disbursements from
the IMF under its existing $10 billion standby agreement, long after such outlays
should have been suspended due to the Kremlin’s non-compliance with the IMF’s
conditionality (particularly with regard to tax-collection).”

The Fat’s in the Fire, Now

The following are among the indicators that Moscow’s financial chickens — and those of the
Western governments, lenders and investors that have helped prop up the Russian economy for
years — are now coming home to roost:

Russian hard currency reserves are acknowledged by Moscow to have
fallen to some $14
billion (of which roughly $4.5 billion is comprised of less-liquid gold holdings) — a thoroughly
inadequate cushion to defend the ruble and stem the flight of Western and Russian capital now
underway.

Interest rates on Russian government-backed bonds (known as GKOs)
were tripled this week
to a staggering 150% in a desperate bid to induce investors to continue holding such paper —
and the ruble in which these financial instruments are denominated.

New indications of major labor unrest, as evidenced by the recent,
debilitating closure of two
major trans-Siberian rail lines at the hands of coal miners and their sympathizers striking for
payment of long-overdue back wages.

A substantial drop in world oil and gas prices, coupled with
weakness in the gold market
— commodities which together still represent some 70-75% of Moscow’s total annual hard
currency income. These realities translate into immense pressure for overseas sales of Russia’s
other main export, sophisticated armaments (including technologies and hardware relevant to,
among other things, weapons of mass destruction and ballistic missile technologies). Even
before Russia’s present financial crisis, it was ill-advised to give credence to the Kremlin’s
official promises to curb proliferation of such weaponry; under these circumstances it is utterly
fatuous to do so.

The recent cap imposed on foreign investment in a major Russian electric utility enterprise,
UES (Unified Energy Systems) — demonstrating that the much-anticipated liberalization
of
key industrial sectors, including the opportunity for such assets to be available for
foreign
ownership, will not proceed along the promised time-table. Not surprisingly, given this
economic and political backdrop, there were no takers for the much-heralded auction of a
sizeable percentage of the Rosneft oil company’s stock earlier this week.

The ‘Multilateralist’ Prescription: When in Doubt, Bail-Out

Last night, the PBS program “The NewsHour with Jim Lehrer” featured a discussion of the
Russian financial trauma involving the Harvard Russian Research Center’s Marshall
Goldman
and the Carnegie Endowment’s Arnold Horelick. In response to cogent
arguments made by the
former about the gravity of the situation and its systemic underpinnings, the latter
referenced what
can safely be predicted will be the mantra for the Clinton Administration and other “assertive
multilateralists”: An economic bail-out package must be assembled at once, justified on national
security grounds insofar as Russia is “a Jakarta with 10,000 nuclear
warheads.”⁽¹⁾

Such fear-tactics may already be bearing fruit for the Kremlin and others seeking protection
from
a collapsing Russian market. Yesterday’s 6% partial recovery in Moscow’s stock exchange is
being widely explained as resulting from the perception that the West is about to step in to save
Russia’s bacon. Expectations in this area were only heightened by the G-7 governments’
recent, highly politicized decision formally to admit a clearly unqualified Russia to become,
for all intents and purposes, a full-fledged member of the “G-8.”

Watch This Space

In furtherance of this agenda, the following are among the initiatives that can safely be
expected
to be advanced by the Clinton Administration, other Western governments and/or international
financial institutions:

In addition to the immediate disbursement of the next $670 million
tranche of what
remains of Russia’s existing $10 billion, three-year IMF facility — a step that is
unwarranted
given Moscow’s continued non-compliance with the Fund’s conditionality governing such
borrowing — there may well be what could be termed an “accelerated disbursement” of
the
balance of this stand-by arrangement, worth as much as $5 billion.

Yet another raid on President Clinton and Treasury Secretary Robert Rubin’s favorite
foreign
policy slush fund — the so-called Exchange Stabilization Fund — to support the
ruble and
help restructure Russia’s short-term domestic debt profile.

The arrangement of similar, bilateral bail-out schemes on the part of other
G-7
governments, as well as coordinated disbursements by other multilateral
institutions (e.g.,
the World Bank and the European Bank for Reconstruction and Development) for what will,
no doubt, be described as legitimate “project finance” requirements.

A new minimum $10 billion IMF or Bank for International
Settlements “bridging” facility
to see the Kremlin through what will be, in reality, an informal debt rescheduling of at least its
increasingly unsustainable domestic debt maturity schedule and high borrowing costs. As a
practical matter, the pressure will be intense to cover Moscow’s near-term hard currency
obligations, as well.

A simultaneously structured, multi-billion dollar “private sector” lending
package. This
will likely be depicted as a safeguard against the increasingly common by-product of IMF
emergency lending — i.e., the notorious “moral hazard” problem of making private Western
lenders and investors whole for their unwise, or even reckless, herd mentality in pursuit of
supposedly “high-yield” emerging markets. In fact, this private sector
“burden-sharing”
initiative will be, to some extent, a ruse because, as is so often the case, Western
taxpayers
are effectively underwriting it via the cash being concurrently provided by bilateral and
multilateral government lending mechanisms.

Where Is the Money Really Going?

Before more new U.S. taxpayer money goes into Russia, there is a requirement for
urgent House
and Senate hearings to examine rigorously Russia’s hard currency and ruble cash-flow.
Specifically, the American taxpayer must be informed of the sources and uses of Russian cash in
order to judge the appropriateness of any further assistance schemes for the Kremlin.

What would almost certainly be discovered in the course of any such review — whether by the
Congress, an apolitical intelligence analysis or independent review — is the fact that
Russia
maintains a robust and hugely expensive strategic modernization program. Among the
expenditures associated with this program are the development and production programs for new
ballistic missiles and land- and sea-based launchers, multi-billion dollar deeply buried
command-and-control facilities and advanced conventional weapon systems.

In addition, an empirical accounting is needed for such odious and costly Russian
activities as:
ongoing client-state support (including supplier-credits for proliferation-related
activities, the
construction of a dangerous nuclear power complex in Cuba, href=”#N_2_”>⁽²⁾ Gazprom’s efforts to help
develop the Iranian South Pars gas fields href=”#N_3_”>⁽³⁾, fomenting instability in the Caspian Basin
for
the purpose of isolating, if not toppling, leaders of littoral states — like Azerbaijan’s
Aliyev and
Georgia’s Shevardnadze — who want to do business with the West, rather than Moscow href=”#N_4_”>⁽⁴⁾; the
sluicing of funds out of Russia by official and unofficial organized crime figures
and syndicates;
and other items on the utterly unreformed foreign policy agenda of Foreign
Minister Yevgeny
Primakov.⁽⁵⁾ These activities — and the
ancien regime apparatchiks that pursue them — severely
limit the latitude of those like Prime Minister Kiriyenko said to be committed to a genuine
democratic and market transformation of Russia.

Other Required Steps

Such transparency can help to reduce the now-inordinate risk that any future U.S. or
multilateral aid to Russia that involves funds from the Treasury will simply wind up
advancing such undesirable Russian activities. In addition, the Congress should ensure
that
whatever further assistance to Moscow is considered be accompanied by the following near-term
steps:

The debate on IMF replenishment in the wake of the Asian financial melt-down should
factor
in the now-demonstrable pattern of what will happen if the Fund’s Managing Director Michel
Camdessus and the Clinton Administration are allowed to continue to violate the
organization’s institutional integrity and financial discipline. Congress must ensure that a
condition of granting the IMF any additional lending authority is that the Fund’s
deliberations be more transparent and based on sound financial, not political,
considerations — to say nothing of other reforms necessary to prevent a repetition of the
IMF’s past counter-productive policy prescriptions.

The management of the Russian financial crisis should be seen as a litmus test of IMF
operations and reform requirements. This takes on additional urgency as the prospect
of yet another stealthy multilateral bail-out — this time for China — may loom on the
horizon.

There should be congressional oversight of — if not actual pre-approval required
for —
disbursements from the Treasury Department’s Exchange Stabilization Fund so as to
assure that this important stand-by facility can no longer be used to make possible ill-advised
executive branch foreign policy initiatives that would not otherwise pass muster.

Russia should be removed forthwith from the “critical path” of the International
Space
Station (ISS). This project is too important to allow Russia’s illusory status as a “full
partner”
with the United States to jeopardize it. This is particularly true since Moscow is quickly
approaching — if it has not already surpassed — $1 billion worth of defaulted obligations for
construction of its portions of the ISS (i.e., the Service Module, etc.) Russia’s non-performance is
significantly delaying and greatly adding to the costs to the U.S. taxpayer of the
space station, unnecessarily imperiling already tenuous support for the program in Congress.

If any further reason were required for confining Russia to the role of a paid
subcontractor on the ISS, the conduct of the Russian Space Agency and its director,
Yuri Koptev, and other Russian research and design institutes serving as suppliers to
the ISS with respect to missile proliferation to Iran would warrant such a step. Just as
U.S. support to Chinese space-launch activities have reportedly accrued to the benefit
of Beijing’s ICBM programs, it stands to reason that American efforts to help subsidize
the Russia space program with cash and sophisticated technology transfers will
redound to the detriment of this country’s security interests — especially since much of
the Kremlin’s “civilian” space apparatus is, in reality, under the auspices of military
intelligence (i.e., the GRU).

Russia must become a responsible player on the world energy scene by:
renouncing its efforts
to complete the fatally flawed nuclear reactor complex in Juragua, Cuba href=”#N_6_”>⁽⁶⁾; suspending its
participation in the South Pars development project (via Gazprom) and in the emerging Iranian
nuclear program; cease and desist any further efforts to impede — or channel through Russia —
the westward flow of oil from the Caspian Sea region; and stop promising Saddam Hussein
large-scale credits to develop its oil fields while simultaneously undermining U.S./UN sanctions
on Baghdad.

Finally, there should be a demonstrated commitment to bring genuine, systemic reform to
Russia. This would be reflected, at a minimum, in: the replacement of Yevgeny
Primakov,
the shrewd thug whose proclivities developed during a career with the Communist KGB are
much in evidence in his effective domination of Russia’s so-called power ministries (i.e., the
intelligence, interior and security as well as foreign affairs portfolios). The presence of
Primakov and his associates is, arguably, one of the greatest obstacles to the sorts of
reformist policies advocated by younger political leaders like Kiriyenko — policies that
have a chance of attracting, retaining and making effective use of foreign assistance and
investment.

For its part, the United States must accompany a more disciplined approach to lending
(either
direct or indirect) to and investment in Russia with efforts to ensure greater disclosure
and
transparency with respect to Moscow’s efforts — and those of China — to enter the
American debt and equity markets (i.e., bonds and stock). The most important such
effort to
date has been mounted by Sen. Lauch Faircloth (R-NC), chairman of the
Senate Banking
Committee’s Financial Institutions and Regulatory Relief Subcommittee, and Rep. Gerald
Solomon (R-NY), chairman of the House Rules Committee, in the “U.S.
Markets Security Act
of 1997″ (S. 1315)⁽⁷⁾. This legislation would
require the creation of an Office of National
Security at the Securities and Exchange Commission, charged with assuring the preparation of
quarterly reports to relevant congressional committees of those foreign government-controlled
entities which have entered, or are seeking to enter, U.S. capital markets during the previous
90-day period.

The Bottom Line

Americans genuinely concerned about U.S. national security must not allow that
principle
to be further adulterated by those who have proven themselves consistently to be
indifferent to, if not actually contemptuous of, the Nation’s long-term defense and foreign
policy interests. The real grounds for fear is that the United States might
adopt a policy
approach that — in the name of “national security” — winds up bailing out Russia without
correcting the serious, systemic problems and malevolent behavior identified above.

Should the Congress and the American people allow that to happen, scenarios worse than any
imagined by the fear-mongers may eventuate. One thing is for sure, the same template will be
used in the future to justify a bail-out for China, and perhaps other authoritarian regimes prepared
to extort the United States and its allies into pulling their financial chestnuts out of the proverbial
fire, without mitigating the threat they pose to U.S. national security.

– 30 –

1. This “national security” argument for otherwise unjustifiable
bail-outs — first exploited when
Secretary of Defense Cohen was featured prominently in the Administration’s sales campaign on
behalf of expanding IMF lending authority in the wake of the Asian financial crisis — will
doubtless be accompanied in the future by other dire predictions. Such fear-mongering scenarios
might include: massive refugee flows into Central and Western Europe; a domino effect should
the financial contagion spread to the latter regions; further unraveling of Russia’s
command-and-control over its nuclear forces; the destruction of Russia’s budding middle class;
strikes which
deny essential services to the Russian public and economy; the prospect of intensifying
proliferation to make ends meet; and the demise of the last hopes for reform in the Kremlin.

2. See Makeover: Castro Is No ‘Moderate’; Cuba Is
Still a Threat (No. 98-C 75, 29 April
1998), Castro’s Cuba: A Classic ‘Asymmetric’ Threat ( href=”index.jsp?section=papers&code=98-C_59″>No. 98-C 59, 3 April 1998) and No
Apologies to Castro: Politicized Pentagon Study Misses Abiding Nature of Threat From Cuba,
Promotes Wrong Response (No. 98-C 54, 30 March
1998).

3. See The French and the Russians ‘Don’t Get It’ on
Iran — The Question Is: Does the
Clinton-Gore Team? (No. 97-C 148, 2 October
1997).

4. See, for example, Caspian Watch # 11: U.S.
Interests Jeopardized as Moscow’s Man in
Armenia and Armenia’s Man in the Kremlin Prevail (No.
98-D 56, 31 March 1998) and
Caspian Watch # 10: Russia Makes its Move in Yeltsin’s ‘Pipeline
War’ (No. 98-D 28, 12
February 1998).

5. See Primakov Watch: Destroying NATO From
Within (No. 98-D 14, 22 January 1998).

6. See Clinton Legacy Watch # 19: Will
Gore-Chernomyrdin at Last Put a Halt to Russia’s
Dangerous Nuclear Sales to Cuba, Iran? (No. 98-D
40, 6 March 1998).

7. See The Dog That Didn’t Bark: Moody’s, Et. Al.
Fail Investors in Asian Markets, Miss
Warning Signs in China and Russia (No. 97-C
200, 23 December 1997).

Casey Symposia Illuminate Abiding, Multifaceted Threat Posed By Castro’s Cuba — And Imperative of Retaining Sanctions On It

March 15, 1998Center for Security Policy

(Miami, Florida): On 12 and 13 March, the Center for Security Policy’s William J. Casey
Institute held two informative and exceedingly timely symposia in South Florida. The purpose: to
discuss vital U.S. security interests in Cuba and to explore policy prescriptions being advanced
with increasing insistence⁽¹⁾ in the wake of Pope John Paul
II’s visit to that island. Of particular
concern are recommendations that the American sanctions on Cuba be eased, if not eliminated
altogether. The Casey Institute symposia, however, offered powerful reasons why such
recommendations should be rejected, lest the Castro regime be given a new lease on
life in
political, economic and moral terms — and the abiding threats to the U.S. posed by that
regime be actualized.

The first of these two Casey Institute symposia was held on 12 March at the
historic Biltmore
Hotel in Coral Gables, Florida. The second took place the following day at the Governors Club
in West Palm Beach, Florida. Among the participants were a leading Member of Congress,
several former senior policy-makers, defectors and other refugees from Castro’s Cuba,
representatives of the Coast Guard in Miami and U.S. Southern Command, and a number of
leading national and local journalists. (Portions of the symposia will be rebroadcast into Cuba by
Radio/TV Marti — the vital surrogate broadcasting operation that is, as was made clear by its
Director in the course of the first day’s discussion, serving a unique purpose in providing the sort
of news and other programming in Spanish that is denied the Cuban people by their government.)

Taking Stock

On both the 12^th and 13^th, the discussions began with a review of
several serious national security
risks that continue to be posed by Castro’s Cuba. These discussions featured presentations by the
Institute’s William J. Casey Chair, Roger W. Robinson, Jr. Mr. Robinson,
former Senior
Director of International Economic Affairs at the National Security Council, illuminated
the
threat to millions of Americans posed by the Russian-sponsored nuclear power complex at
Juragua, 180 miles upwind from the Florida coast. He also addressed the menace posed
to
American government and military communications, commercial interests and the privacy of
individual citizens by the vast signals intelligence facilities the Russians and Cubans operate in
Lourdes, Cuba.

Of particular interest were Mr. Robinson’s remarks concerning the myriad design and
construction problems with the Juragua complex — problems sufficiently severe as to ensure that,
if allowed to come on-line, these reactors will experience catastrophic failures.
This
appalling prospect was confirmed by Pelayo Calante, a Cuban refugee who
worked on quality
control and assurance aspects of the Juragua complex for seven years prior to his defection.
Although a different reactor design from that which exploded in Ukraine (i.e., water-cooled
VVER-440s versus the graphite system used in Chernobyl), a catastrophic accident in Juragua
would have similarly devastating effects for those downwind. Mr. Robinson cited analyses by the
National Oceanographic and Atmospheric Administration which predict that
such an accident
could release a plume that would expose as many as 50 to 80 million Americans across
the
southern United States to potentially dangerous levels of radioactivity. href=”#N_2_”>⁽²⁾

Russia’s recently announced release to Havana of a $350 million line of credit for
unspecified
“priority installations” on the island — of which the Juragua and Lourdes complexes are
almost
certainly preeminent — is particularly alarming. It comes on the eve of congressional action on the
Clinton Administration’s latest request for as much as $1 billion in new U.S. taxpayer aid
flows
to Moscow (over and above the expanded assistance being given through
multilateral
institutions). Mr. Robinson recommended a three-part strategy: 1) A
dollar-for-dollar
withholding from any future American assistance to the Kremlin in response to such
malevolent
Russian financial underwriting; 2) U.S. import controls should be readied for
use against any
foreign suppliers or funders of the Juragua nuclear plant; and 3) Should these (and other diplomatic
and/or legislative) mechanisms fail to deter the fueling and completion of this irretrievably flawed
complex, a U.S. air strike must be executed to ensure the reactor infrastructure
is destroyed
prior to delivery of nuclear fuel to the site.

In the West Palm Beach symposium, Representative Lincoln Diaz-Balart (R-FL)
addressed the
additional threats posed to the U.S. by the Cuban regime’s extensive involvement in
drug-trafficking, its persistent connections to terrorist
organizations throughout Latin America and
its suspected biological weapons program. Congressman Diaz-Balart
concluded that, despite
leaks to the effect that the Clinton Administration has concluded Fidel Castro no longer poses any
danger to this country, these activities — especially when taken together with the risk of a Cuban
Chernobyl in Juragua and the hostile use electronic surveillance from Lourdes — constitute an
abiding and clear danger to the United States.

Insights into the weakness of Fidel’s hold on power were provided by several participants.
Both
meetings were, for example, addressed by Commander James A. McKenzie of
the U.S. Coast
Guard who discussed the Cuban military’s increasingly unimplementable doctrine of people’s war
and its low and declining day-to-day readiness. And Roberto A. Weill, founder
and President of
La Universidad Latinoamericana de la Libertad Friedrich Hayek, assessed Cuba’s dismal
economic record under Castro’s corrupt and ideological mismanagement — and its even
more
bleak future should the regime be permitted to retain power.

Further context for considering any possible changes to U.S. policy toward Cuba prior
to its
liberation from Castro’s tyranny was provided by:

The Director of Radio/TV Marti, Herminio San Roman, who, on 12
March, discussed the
systematic repression of independent sources of news and information by the regime and the
need for the United States to supply surrogate broadcasting as a means to offset Cuban
government propaganda and disinformation campaigns and as an indispensable building block
for any transition to democracy;

José Basulto, President of Brothers to the Rescue, who eloquently
discussed, on 12 March,
the as-yet-unrelieved repression of human rights in Cuba, notwithstanding the recent Papal
visit. Recalling the premeditated murder two years ago of four Brothers to the Rescue flying
in international airspace by Cuban warplanes acting on Castro’s orders, Mr. Basulto
spoke
authoritatively of the regime’s willingness to use force ruthlessly against those whose
commitment to democracy and freedom Fidel perceives to be a threat to his hold on power;
and

Ambassador José S. Sorzano, former Special Assistant to the
President for National Security
Affairs and U.S. representative to the United Nations, who on 13 March discussed the alienation the Cuban
people feel from their government as a result of a policy that amounts to apartheid. Fidel
denies the majority of Cuban citizens access to services, food, medicine or compensation
available to foreign nationals in Cuba. Dr. Sorzano emphasized that Fidel Castro’s
personal
charisma is the last vestige of his government’s legitimacy and warned against enhancing it by
abandoning or weakening the sanctions regime — to say nothing of providing it with billions of
dollars in life support via renewed Cuban access to the resources of the International Monetary
Fund, World Bank and other multilateral lending and grant-making institutions.

What Should Be Done Now

Luncheon remarks on 12 and 13 March by Frank Calzon, Director of the
Center for a Free
Cuba, and Rep. Diaz-Balart, respectively, concluded the symposia with a focus on the future of
American policy toward Cuba. Both men disputed disinformation being promoted by
Fidel
Castro and embraced by Americans and others interested in ending or weakening the U.S.
economic sanctions regime: Cuban policy, not access to U.S. medical supplies, is causing
health problems for the people of Cuba. Mr. Calzon noted, for example, how
tourists who seek
medical treatment in Cuba have no difficulty securing drugs or medical procedures whose
systematic denial to Cuban nationals is said to justify liberalizing restraints on trade with the
island.

Mr. Calzon also decried the complicity of many foreign companies with
Castro’s abusive
behavior (e.g., with respect to the regime’s pocketing of nearly all of the funds ostensibly paid
by Canadian and other entities for compensating their Cuban workers and its willingness to allow
the despoiling of the island’s environment). Such conduct — with its parallels in China, Vietnam,
the former Soviet Union and elsewhere — sharply challenges the assertion that capitalist
“engagement” will inexorably foster not only economic but also political liberalization on
the part of
totalitarian governments.

In Palm Beach, Rep. Diaz-Balart described his belief that Cuba would probably
enjoy a
transition to democratic capitalism unless the U.S. embargo were lifted. In
that case, he
warned, the chances that Castro would be succeeded by a government determined to pursue the
“Little China” model of fascist capitalism — under which foreign infusions of capital are welcome,
provided they are effectively controlled by the state (e.g., through joint ventures,
state-owned
entities, etc.) and political control remains firmly in the hands of the regime and its adherents.

Both of the luncheon speakers called for greater transparency and candor on the part of the
U.S.
government about the true state of affairs in Cuba, a redoubling of efforts (through the Catholic
Church, Radio/TV Marti and other mechanisms) to encourage the development of a civil society
and an end to Castro’s repression and the rejection of (presumably) well-meaning, but
counter-productive, attempts to suggest that that objective will be advanced by dismantling the
American
sanctions on Communist Cuba.

A more detailed summary (with accompanying
Press Release) of the Casey Institute symposia on Cuba will be released shortly. It
can be obtained by contacting the Center for Security Policy by phone (202-835-9077), fax
(202-835-9066) or here on its World Wide Web site.

– 30 –

1. Among the most recent of these calls has come in the past few days
from the recently retired
Supreme Allied Commander, Atlantic, General John Sheehan (USMC).

2. For more on the dangers posed by the Juragua nuclear complex,
see the Center’s Decision
Brief entitled Clinton Legacy Watch # 19: Will Gore-Chernomyrdin At
Last Put a Halt to
Russia’s Dangerous Nuclear Sales to Cuba, Iran? (No.
98-D 40, 6 March 1998) and the Casey
Institute’s Perspective entitled ‘Show Me’: The Allies Must
Demonstrate Their Commitment
to Changing Cuba By Halting the Cuban ‘Chernobyl-In-The-Making’ ( href=”index.jsp?section=papers&code=97-C_03″>No. 97-C 03, 6 January
1997).