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Postmortem on the Pontiff’s Cuban Tour: On Balance, Freedom Benefitted More Than Fidel

(Washington, D.C.): On the eve of Pope John Paul II’s historic visit to Communist Cuba, the
William J. Casey Institute issued a Perspective entitled Our Man in
Havana? Will John Paul II
Help Liberate Another Communist Country or Secure Life Support for Castro’s Regime? href=”#N_1_”>(1) The
early returns on this question are now in: It appears, happily, that the Pontiff remained
true
to his historic commitment to personal freedom and economic opportunity — a commitment
born of personal experience with Communist totalitarianism, a commitment that played an
indispensable part in the destruction of the Soviet empire.

Solidarity With Those Who Yearn for Liberty

Now, with his courageous words to the Cuban people — Catholic and non-Catholic alike —
the
Pope rekindled their hope that they will not be denied such fundamental liberties much longer.
Among the most inspiring of his statements were the following:

  • While speaking at the University of Havana on 23 January, the Pontiff lauded the legacy of
    Cuba’s famed Father Felix Varela y Morales — a Nineteenth Century cleric the Holy Father
    described as an “exemplary priest…and undeniable patriot”:

“He was the first to speak of independence in these lands. He also spoke of
democracy,
judging it to be the political project best in keeping with human nature, while at the
same
time underscoring its demands. Among these demands, he stressed two in particular:

“First, that people must be educated for freedom and responsibility, with a personally
assimilated
ethical code which includes the best of the heritage of civilization and enduring transcendental
values, so that they may be able to undertake decisive tasks in service of the community. And
second, that human relationships, like the form of society as a whole, must give people suitable
opportunities to perform, with proper respect and solidarity, their historic role giving substance to
the Rule of Law, which is the essential guarantee of every form of
human concourse
claiming to be democratic.

“I am confident that in the future Cubans will achieve a civilization of justice and
solidarity, of freedom and truth, a civilization of love and peace which, as Father Varela
said,
‘may be the foundation of the great edifice of our happiness.'”

  • On 24 January, the Pope discussed the individual’s vital role in bringing about freedom for
    his
    society:

“The Church calls everyone to make faith a reality in their lives, as the best path
to the
integral development of the human being, created in the image and likeness of God, and for
attaining true freedom, which includes the recognition of human rights and social
justice.

“In this regard, lay Catholics…have the duty and the right to participate in public
debate on
the basis of equality and in an attitude of dialogue and reconciliation. Likewise, the
good of
a nation must be promoted and achieved by its citizens themselves through peaceful and gradual
means. In this way each person, enjoying freedom of expression, being free to undertake
initiatives and make proposals within civil society, and enjoying appropriate freedom of
association, will be able to cooperate effectively in the pursuit of the common good.“

As to the Embargo

To be sure, the Pope also expressed on numerous occasions his strong opposition to the U.S.
embargo on Cuba and his concerns about the inhumane excesses of capitalism as practiced in
some countries. Fidel Castro obviously calculated that such statements would be worth the risks
associated with the Pope’s public calls for freedom in Cuba if they provided moral authority —
or
political top cover — to the Communists’ desperate, last-gasp bid for financial life support.

Ironically, if Castro’s ploy worked and the embargo were lifted, it seems quite
likely that the
effect would be precisely the kinds of capitalism that John Paul II most legitimately criticizes —
the crony capitalism or klepto-capitalism practiced by authoritarian regimes of the Left and the
Right. This mutation of the principle of free markets and economic opportunity amounts to an
odious Faustian arrangement, involving governments that ruthlessly guarantee “political stability”
and businessmen willing to pay handsomely for the opportunity thus afforded to exploit the local
workforce.

As it happens, President Clinton’s moral difficulties and the Pope’s courageous departures
from
Castro’s party line clearly upstaged those in the Administration and their motley allies — including,
in addition to Fidel’s usual apologists a number of captains of industry, past and present
politicians, libertarians, ex-diplomats, and retired general officers — who are championing the
early partial, if not complete, dismantling of the embargo.

Enter The New Republic

The case for ending the U.S. embargo has been further undercut by a devastating analysis
published in this week’s edition of The New Republic, reportedly Bill Clinton and Al
Gore’s
favorite public policy magazine. In an article entitled “Castro Inconvertible” (see the attached),
Charles Lane — the journal’s new editor — argued persuasively that the only thing worse than
perpetuating the embargo would be to dismantle it under present circumstances:

    “Even if the embargo is bloody-minded and atavistic, Castro’s position — ‘Socialism or
    Death’ — is many times crazier.

    “Embargo-lifters believe the myth that trade and ‘engagement’ with the West
    brought down the Soviet Union.

    “[For example,] the results of our dealings with Beijing hardly support the view
    that trade leads to the spontaneous generation of freedom.”

Lane dissects with devastating effect the several rationales being served up by the
embargo-busters. The first is especially noteworthy: “The one concession Fidel Castro most
fervently
demands from the United States is also the one policy change that would bring him down. If you
think this sounds too good to be true, I agree.”

The Bottom Line

The Center for Security Policy applauds the most important parts of Pope John Paul II’s
message
to the Cubans — a message of hope and opportunity through political freedom and other basic
human rights. It also concurs with Charles Lane’s bottom line:

    “The embargo may be a futile gesture, but it is not an empty gesture. It sends a
    message: the United States will have nothing to do with the tyranny 90 miles
    from its shores. A definitive verdict on the hard line must await Castro’s
    inevitable passing. My hunch, to paraphrase Castro himself, is that history will
    absolve it.    “

– 30 –

1. No. 98-C 11, 21 January 1998.

Castro Inconvertible

By Charles Lane
New Republic, 09 February 1998

Whatever its political impact on Cuba, John Paul II’s tour of the island may well bolster
opposition to the U.S. ban on trade with Fidel Castro’s Communist redoubt. The Pope was blunt
in his condemnation of the embargo, adding the Vatican’s voice to an already growing chorus of
opposition. Critics now include not only perennial liberal advocates of engagement with Castro,
but also the U.S. Chamber of Commerce and Lloyd Bentsen, whose old job as treasury secretary
included enforcing the ban.

The case against the embargo comes in various styles. Liberals (and the Pope) emphasize the
hardships it imposes on the Cuban people; free-marketeers, the senselessness of restraining trade.
Foreign-policy types love any opportunity to draw a dictator out of his shell. But the basic
contentions are that the embargo may actually have strengthened Castro by giving him a
scapegoat; that any justification for the embargo vanished with the Soviet Union; and that lifting it
now would liberate Cuba, because Castro would lose the last excuse for his failures, and because
democracy and Pepsi flow together. “No Sanctions, No Castro,” reasons columnist James K.
Glassman; end the embargo, he writes, and “the result, before very long, will be a thriving,
Castro-less Cuba, a diamond crescent glistening in the blue Caribbean Sea….”

Wow! The one concession Fidel Castro most fervently demands from the United States is also
the
one policy change that would bring him down. If you think this sounds too good to be true, I
agree. The U.S. embargo is indeed an unsatisfactory policy, one which imposes costs on both the
Cuban people and the United States. But it is easy to overstate those costs, and the policy is not
without benefits–even 37 years after President Eisenhower adopted it in response to Castro’s
confiscation of U.S. businesses on the island.

For every anti-embargo argument, there is a pro-embargo rejoinder. Does the embargo hurt
the
Cuban people? A bit, though far less than communism itself. And since the end of Cuba’s Soviet
subsidy, the U.S. has licensed donations of more than $227 million in medical supplies, plus $1
billion in humanitarian aid–mainly in the form of cash remittances from Cuban exiles to family
back home. Is it hypocritical of Miami Cubans to back the embargo while sending dollars that
prop up Cuba’s economy? Yes, but at least their cash goes to those who really need it. (Actually,
Castro’s government benefits, too. U.S. phone companies pay Cuba tens of millions of dollars
annually for connecting long-distance calls between the U.S. and the island.)

Does the embargo provide Castro with a political self-justification? Yes, but most of the
people
I’ve met in Cuba treated Castro’s embargo-bashing as just another official lie. Lifting the embargo
would also legitimize him by allowing him to claim victory over the Yanquis.

Does the Helms-Burton Act create diplomatic hassles with our Canadian and European
friends?
Yes, but basically the allies’ complaints are phony. Ostensibly, they objected to the
“extraterritoriality” of the law’s provision permitting Americans to sue foreign firms that use
nationalized U.S. property in Cuba. Their real motives, though, were anti-American posturing and
a fear of similar laws aimed at trade with Iran. Anyway, the provision has never been enforced;
Clinton suspended it in exchange for European condemnations of Castro’s human rights abuses.
Not a bad result.

Isn’t it hypocritical to trade with China while stiffing Cuba? Yes, but the results of our
dealings
with Beijing hardly support the view that trade leads to the spontaneous generation of freedom.
True, Cuba is much smaller and closer to the United States and thus more susceptible to
American penetration. But it also has a far less open economy than China’s, one in which Fidel
Castro controls the minutest of decisions. Repeating a common misconception, Glassman says the
U.S. embargo prohibits Americans from “buying things from [Cubans].” But “Cubans” aren’t
allowed to sell; by law, foreign trade is a state monopoly in Cuba. Trading with Cuba means
trading with Castro. Canadian businesses in Cuba may hire only state-selected workers; most of
their wages are remitted to Castro. Would American companies agree to work under those terms?
Should they?

Forecasts of a glittering post-embargo Cuba reflect wishful thinking, not a tough-minded
assessment of the economic realities of the island. Cuba long ago defaulted on billions of dollars in
loans from European and Canadian banks–money it borrowed despite the embargo, then frittered
away. Its reserves depleted, Cuba has recently been forced to finance critical imports through
short-term loans at double-digit interest rates. Restarting trade between Cuba and the U.S. would
require a huge bailout from multilateral financial institutions. Cuba is not yet a member of those
instruments of American imperialism, but even if it joined, would Castro agree to restructure his
island according to the dictates of the World Bank? He didn’t listen to his last patron, Mikhail
Gorbachev. Indeed, Castro has jailed (or shot) people rather than take their sensible economic
advice. The modest market reforms Castro has grudgingly allowed of late are the exception that
proves the rule.

The cleverest variant of the anti-embargo argument holds that the U.S. should offer a partial
lifting of the sanctions in return for the step-by-step granting of political and economic freedoms
to Cuba. The Clinton administration flirted with this notion, but the Cuban-American lobby
snuffed it. In theory, it’s a good idea; in practice, it has the fatal flaw of depending on Castro’s
acquiescence in his own gradual ouster.

Embargo-lifters believe the myth that trade and “engagement” with the West brought down
the
Soviet Union. Actually, the Soviets were undone by a good cop, bad cop routine. Europe and
Canada plied them with economic goodies, while Ronald Reagan’s stern anti-communism forced
them into ruinous defense spending and deprived them of international legitimacy. Castro faces a
version of this now. In any case, the notion that democratic reform in Cuba should depend on a
gesture from the United States seems odd. Even if the embargo is bloody-minded and atavistic,
Castro’s position–“Socialism or Death”–is many times crazier. Given that the end of the cold war
discredited Castro and his worldview, why should America make the first move? What would help
the Cuban people more: Additional hand-wringing by American pundits about U.S. policy, or an
unequivocal demand from those same elites for free elections now?

The embargo may be a futile gesture, but it is not an empty gesture. It sends a message: the
United States will have nothing to do with the tyranny 90 miles from its shores. A definitive
verdict on the hard line must await Castro’s inevitable passing. My hunch, to paraphrase Castro
himself, is that history will absolve it.

The Dog That Didn’t Bark: Moody’s, Et.Al. Fail Investors In Asian Markets, Miss Warning Signs In China And Russia

(Washington, D.C.): Yesterday, Moody’s and other rating agencies announced what every
knowledgeable investor on the planet had long since figured out: South Korea, Thailand and
Indonesia’s sovereign debt instruments (not to mention that of a number of their major banks and
financial services companies) are now “below investor grade” — read, junk bond status. Malaysia
was downgraded as well, to a less serious degree.

As the New York Times put it today: “Moody’s Investor Services began to catch up with the
market by downgrading four nations, three of them to ratings below investor grade.…This is
the first time Moody’s jointly downgraded a handful of countries in the [Asia-Pacific] region.”
(Emphasis added.) It appears to have occurred to Moody’s only recently that Japan’s banking
crisis and market downturn — which the Financial Times today described as a “death spiral” —
would preclude Japanese consumers from purchasing large volumes of exports from its neighbors
in Asia and prevent troubled Japanese banks from providing large scale new lending throughout
this troubled region.

Missing the Boat on China…

The Western rating agencies are apparently trying to top this dismal performance by following the
lead of the U.S. and its allies — who are determined to prevent China and Russia from
undergoing financial meltdowns of their own. For example, today’s New York Times reports that,
while Moody’s was downgrading South Korean, Thai, Indonesian and Malaysian sovereign debt,
it “affirm[ed its previous] ratings for Hong Kong and China.” As it happens, these ratings are
extraordinarily high. In the case of China for instance, its long-term foreign currency bonds are
rated by Moody’s to be “A3” — the agency’s seventh highest rating. China’s long-term foreign
bank deposits are somewhat lower, at “BAA2.” Neither of these have changed in at least the
past year.

This comes in contrast to analyses cited by the highly regarded DRI/McGraw-Hill Global Risk
Service during the second quarter of 1997. DRI/McGraw-Hill warned that as much as “20-40%
of China’s outstanding stock of loans, valued at $600 billion can be classified as non-performing.
So far, the problem has been contained. However, should things go wrong in China’s banking
sector, the ramifications in developing Asia could be huge.”

The scale of the decline of so-called “Red Chip” stocks (i.e., China-based, government-controlled
or -affiliated entities) on the Hong Kong market have, in many cases, fallen faster and further than
have counterparts among pre-takeover Hong Kong Blue Chips. It is also the view of some
respected analysts in Asia that China’s much-touted hard currency reserves are, in fact, seriously
encumbered by virtue of the need to prop up large — and, in many cases, doomed — Chinese
state-owned industries and enterprises.

…And Russia, Too

Today’s Washington Times features a front-page report by Martin Sieff entitled “Russia Next in
Line for Economic Collapse: Experts Warn of Political Consequences.” According to the Times,
Moscow’s plan partially to float the ruble next week could compound a financial crisis already
gripping Russia, as well.(1) The International Monetary Fund has, nonetheless, just released yet
another $700 million of the Kremlin’s $10 billion credit line on what has become an increasingly
politicized basis. In the absence of vastly increased collection of unpaid taxes, however, this
payment may amount to little more than a “Chinese clean-up” — permitting the Yeltsin
government to meet its immediate obligations to pay off politically-important domestic
constituencies and foreign creditors and investors who can, in turn, help to perpetuate the myth of
Russian solvency and fiscal responsibility. As Mr. Sieff puts it: “The country has been able to
avoid a collapse in part because of fresh infusions of money from the International Monetary
Fund, which lends to Moscow at highly favorable interest rates.”

The larger problem remains, though:

    “One Moscow-based financial analyst said the government was building a shaky
    financial pyramid ‘like a drunken poker player who can’t read the cards.’ In all, Russia
    has issued around $58 billion in three- and six-month GKOs [short-term government
    bonds], of which $15 billion is held by foreigners. That is more than double Russia’s
    $28 billion debt when Mr. Yeltsin was re-elected 18 months ago.    ” (Emphasis
    added.)

The Washington Times reports that “The proposed changes couldn’t come at a worse time,
said Marshall Goldman, director of the Davis Center for Russian Studies at Harvard University.
‘There is concern over the uncertain state of President Yeltsin’s health, at the continuing
extremely high level of criminal penetration of the financial system and over the impact on Russia
of the Asian financial crisis,’ Mr. Goldman said.

Mr. Sieff also quotes Keith Bush, Director of Eurasian Studies at the Center for Strategic and
International Studies as saying, “the new flexibility, combined with declining confidence in the
Russian currency, could lead investors to switch into dollars ‘in a massive way. We might then
see a massive dollarization in Moscow and a huge run on the ruble,’ he said.”

Martin Sieff concludes that, “If that happens, Russia will be ill-equipped to stem the flood.
Russian banks would need capital of at least $67 billion to cover a concerted run on the
GKOs, experts say.” What is more, Russia has nowhere near the hard currency reserves it needs
to protect against this eventuality. Specifically, Moscow acknowledges having just $18 billion in
foreign currency reserves — a claim that is almost certainly exaggerated. Even if true, this sum is
clearly inadequate given that, according to Interfax news agency, Russia’s central bank spent
almost $3 billion to prop up GKOs and other federal government bonds in November alone.

Despite all this, Moody’s has yet to change its ratings over the past twelve months on
Russia’s long-term foreign currency bonds and long-term foreign bank deposits, “BA2”
and “BA3,” respectively. It is ironic, not to say irresponsible and absurd, that Western
governments and commercial banks agreed just a few weeks ago to the debilitating debt write-down implied by a twenty-five-year “rescheduling” of some $100 billion of Soviet debt owed
these Western public and private sector institutions.

The Bottom Line

In the wake of the burgeoning international financial meltdown, the conventional wisdom has it
that the appropriate response is to throw American taxpayer funds — either directly or indirectly
through multilateral institutions like the IMF and World Bank — at those whose non-disclosure,
misconduct, corruption and failed industrial, banking and other misguided policies brought about
this avoidable global debacle. The William J. Casey Institute of the Center for Security Policy
believes, however, that three precepts should govern any assistance that might be forthcoming
from the U.S. treasury:

  • First, the Treasury Department’s Exchange Stabilization Fund (ESF) was designed for
    largely overnight currency stabilization needs and foreign exchange swaps — not to be an
    Executive Branch slush-fund for medium-term loans to foreign governments. The use of the
    ESF should be restricted by legislation and all U.S. financial commitments and
    disbursements to these, in effect, defaulted sovereign borrowers should require advance
    approval by the Congress.

  • Second, the American taxpayer should no longer be subjected to the sort of “moral
    hazard” involved in the recent Mexican bail-out     — where private sector investors and
    bankers were repaid in full, with profit, by the American people. The Washington Post
    yesterday quoted Lawrence Lindsey, a former Federal Reserve governor who is now a Fellow
    at the American Enterprise Institute, as saying: “In fact, one of the reasons we have Asia 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.     Now if we bail this one out, we’ll have established a second precedent, and the
    next time, it will be bigger and arguably something we can contain less easily.”

    • These private investors and bankers understood the risks involved in these higher-risk
    emerging market economies and should absorb the totality of their losses.

  • Third, the U.S. should not engage in even a limited bail-out — including the IMF/World
    Bank variety — for foreign governments engaged in activities harmful to vital U.S.
    national security interests (e.g., Russia and China)    . Foes of freedom need to know they
    cannot — and will not — have it both ways.

The Casey Institute believes that an important ingredient in such a principled approach to
international financial crises — one made all the more necessary by the appalling inadequacies of
Moody’s and other rating services to provide early warning of looming downturns — are the
enhanced reporting requirements and taxpayer protection mechanisms contemplated in S. 1315,
the U.S. Markets Security Act of 1997. This legislation — which would establish an Office of
National Security at the Securities and Exchange Commission — was introduced recently in the
Senate by Sen. Lauch Faircloth, Chairman of the Financial Institutions and Regulatory Relief
Subcommittee of the Senate Banking Committee, and Rep. Gerald Solomon, Chairman of the
House Rules Committee.

Finally, the Casey Institute considers the attached op.ed. article by syndicated columnist A.M.
Rosenthal from today’s New York Times to be required reading for those who wish to have
American international investment actually serve U.S. national interests — as well as those of the
individuals and entities involved. The secret to doing so, as Mr. Rosenthal brilliantly observes, is
by insisting that such investment actually advance democratic capitalism — a prescription that we
would be wise to follow assiduously in East Asia, China and Russia.

– 30 –

1. This crisis was forecast by the Casey Institute in its Perspective entitled Russian Bonds
Rocked By Second Senate Hearing in a Week Focusing on Undesirable Foreign Penetration
of U.S. Markets (No. 97-C 169, 10 November 1997).

The Senate Must Insist On An Early Vote On The Kyoto Treaty

(Washington, D.C.): These days, it is a commonplace that the Clinton-Gore Administration has
made an art form of the political practice of trying to have it both ways. Even so, the
Administration’s present, cynical contortions on the new Global Climate Change Treaty (GCCT)
are in a class all their own.

Flim-Flam

On the one hand, Messrs. Clinton and Gore would have us believe that the completion of the
Global Warming treaty was a signal accomplishment, a major step toward sparing the world
environmental catastrophe. In particular, Vice President Gore takes credit for having provided
the critical momentum during the negotiations’ endgame that produced this “historic” accord.(1)

On the other hand, Messrs. Clinton and Gore tell the Senate that this treaty is not really a treaty
yet. They say that it will not be ready for that institution’s constitutionally- mandated advice and
consent for at least another year. In the meantime, Senators are being told to chill out.

The administration tries to square this circle by arguing that the GCCT is really good as far as it
goes. It just doesn’t go as far as the President and Vice President want — and as far as the Senate
demanded in a 95-0 vote last summer — in imposing economic and other hardships on developing
countries, as well as the developed ones. The party line is that all that will be sorted out at
another conference in Brazil next November (N.B. after the mid-term congressional elections),
trust us. In the meantime, there is no reason, the Clinton team contends, for action by the Senate;
the treaty will not bind the United States until the Senate acts and it is formally ratified.

The truth of the matter is that the administration has no choice but to try to postpone Senate
consideration of the Kyoto treaty: If Senators get their hands on this treaty in its present form, it
will be overwhelmingly rejected.

Why the Senate Must Act Promptly

There are, however, compelling reasons why that must occur — and why Clinton-Gore cannot be
allowed to stonewall the Senate so as to preclude early consideration of the GCCT. These
include the following:

  • The Theory of Global Warming Must Not Be Legitimated: By definition, Al Gore’s
    treaty endorses the proposition that the planet is warming. And yet, there is no scientific
    consensus for such a conclusion. If anything, the evidence from the most accurate measuring
    devices — earth-monitoring satellites and weather balloons — indicate that the earth has not
    warmed appreciably over the past forty years, despite increases in greenhouse gas emissions.

    • The public is being fed a steady diet of assertions to the effect that the planet is
    warming catastrophically and that the scientific community agrees nearly unanimously
    that the cause is human consumption of fossil fuels. Even though these contentions are
    unproven, they are endlessly repeated in the well-honed technique of the “Big Lie.”
    Were the treaty to go unchallenged, there is little chance that an informed debate will
    occur in the future about whether the hardship and dislocation this treaty will require of
    the United States is justified.

  • The U.S. Must Not Abet the Spawning of a New Layer of International Bureaucracies:
    Everything else being equal, the Clinton administration will be working over the next year with
    the other signatories to put into place new international bureaucracies intended to implement
    various controversial aspects of the Kyoto treaty. One of these will be responsible for
    dictating, monitoring and presumably enforcing the new energy control regime entailed in the
    GCCT. Another will be needed to perform a global SEC-type function with respect to the
    emissions trading scheme, which is expected to create out of whole cloth a multi-billion dollar
    commodity market.

    • The treaty also apparently calls for a new multilateral agency that will be responsible
    for defining and orchestrating investment strategies concerning new greenhouse gas-reducing technologies. According to a Washington Times report, the Kyoto accord
    would also afford “UN bureaucrats some control over U.S. agriculture and forestry
    policies.”

    Decisions about who will be entrusted with all these powers — authority that
    could, in the wrong hands, prove highly injurious to national wealth and standards
    of living — will be made in the months before the Brazil conference.

  • The U.S. Must Not Embrace a New ‘Industrial Policy’: The Clinton Administration has
    indicated its determination to apply classic big-government “industrial policy” techniques
    domestically in the name of reducing greenhouse gas emissions through technological
    advances. The billions of dollars earmarked for this purpose constitute a statist approach to
    picking “winners and losers” — one that is rarely (if ever) as efficient or effective as market
    forces.(2) It also is rife with potential for abuse. Chances are that there will be even more
    politicization of the “science” of global warming as such funds wind up going primarily to
    those who subscribe to the party-line that the planet is heating up to a dangerous degree and
    man is the cause.

    • While Congress will have some say over the expenditure of these funds, it will be far
    easier to contest wasteful and politically motivated initiatives if the pretext for them,
    namely the Global Warming treaty, has been rejected.

  • The U.S. Must Reject a Dangerous Precedent for U.S. Sovereignty and Security: Last
    but hardly least, the GCCT sets a totally unacceptable precedent that must be repudiated at
    once. According to the Washington Times, in order to get agreement on Al Gore’s treaty, the
    U.S. delegation was obliged to abandon “its plan to exempt U.S. military training and overseas
    operations from fuel cutbacks that would be needed for the United States to reach its target.”
    The Times goes on to report that, “In the draft treaty, only overseas military actions approved
    by the United Nations     would remain exempt as would training and combat in international
    waters.”

The Bottom Line

It is not enough that formal U.S. accession be deferred on a treaty that would so egregiously
subordinate America’s sovereignty and security. The Kyoto treaty must be categorically rejected
— on national security grounds alone, if not on the basis of all the foregoing considerations.

The Senate must do its job. And the Clinton-Gore administration must be compelled to let it do
so, should that prove necessary.

– 30 –

1. See the Casey Institute’s Perspective entitled Watch Your Wallet: Al Gore’s ‘Flexibility’
Bodes Ill For U.S. Interests At Kyoto — And Beyond (No. 97-C 189, 8 December 1997).

2. The ongoing financial meltdowns of economies throughout Asia that have pursued such
industrial policies are vivid reminders of the folly of this approach.

Watch Your Wallet: Al Gore’s ‘Flexibility’ Bodes Ill For U.S. Interests at Kyoto — And Beyond

(Washington, D.C.): In his much-awaited appearance today at the Kyoto conference on the
Global Climate Control Treaty (GCCT), Vice President Al Gore announced “Open Season” on
the U.S. negotiating position. He told the delegates that “I have instructed our delegation to
show increased negotiating flexibility as long as basic principles of the U.S. position are
preserved.” By so doing, the Veep effectively invited intensified pressure on the American team
from environmentalists unhappy with the relatively modest greenhouse gas emissions-reduction
proposal announced by President Clinton last month.

Whether the Clinton-Gore Administration will, in fact, agree to make cuts in energy consumption
beyond those involved in bringing carbon-dioxide emissions down to 1990 levels by 2008-2012,
either at Kyoto or in a further round of negotiations that now seem all but inevitable, remains to
be seen. What is certain, however, is that — having telegraphed its willingness in principle to do
so — the United States will be hard pressed to resist demands that will make the treaty even
more unacceptable to the Senate than it is at present.

This prospect reinforces concerns expressed in a Symposium sponsored by the Center’s William J.
Casey Institute on 19 November and described in a summary released last week:

    “Several participants expressed concern…that the President might try to finesse the
    Senate, denying it the role of check-and-balance on executive action
    contemplated by the Framers.     As one put it: ‘…The proposals [President Clinton]
    made last month can largely be implemented by executive actions without submitting a
    treaty for ratification. For instance, the President can raise fuel efficiency standards by
    executive order. Other parts of his package will require only piecemeal congressional
    approval.'”(1)

The Casey Institute believes that under all circumstances the Senate must demand that any
treaty coming out of the Kyoto meeting be promptly submitted for its advice and consent. The
stakes in terms of such a treaty’s negative consequences for the interests and liberties of ordinary
Americans and for their country’s economy, sovereignty and security(2) are simply too high to
permit the Clinton Administration to foist such costs in either of two ways: 1) through unilateral
executive action or 2) by deferring a ratification debate on the treaty while obliging the United
States under international law to observe its limitations and other requirements.

The Bottom Line

Imposing such burdens through either of these techniques is all the more unacceptable, not to say
absurd, in light of the dubious scientific basis for claims about “Global Warming.” The
attached syndicated column by Charles Krauthammer, one of the Nation’s most brilliant minds,
eloquently dissects the latest manifestation of the phenomenon Adolf Hitler understood as well as
today’s apocalyptic environmentalists: “The great masses of the people…will more easily fall
victim to a big lie than a small one.”

– 30 –

1. For more on this important Symposium, see the Casey Institute’s Press Releases entitled Casey
Institute Symposium Offers ‘Global Warning’ About Global Climate Change Treaty (No. 97-R 174, 20 November 1997) and Casey Institute Symposium on Global Warming Suggests Case
For — And Costs Of — Kyoto Treaty Are Unsustainable (No. 97-R 188, 5 December 1997) and
its attached Symposium Summary.

2. See the Casey Institute’s Perspective entitled Effects of Clinton’s Global Warming Treaty on
U.S. Security Gives New Meaning to the Term ‘Environmental Impact’ (No. 97-C 149, 6
October 1997).

Testimony of Roger Robinson on market security

Before the Senate Banking Committee’s
Subcommittee on Financial Institutions
on Senate Bill S. 1315, The U.S. Markets Security Act of 1997

5 November 1997

Mr. Chairman, it is a privilege to appear before the committee today on an issue area that will, in my view, represent one of our principal U.S. national security concerns for the balance of this decade and the 21st century. The high-velocity, arcane world of global finance, specifically with regard to the private equity and debt markets, has never before, in peacetime, come into serious focus from a national security perspective. The ever-more sophisticated venues in which foreign governments — particularly those considered emerging markets like China and Russia — and related enterprises fund themselves and their global activities have resulted in a growth industry for potentially debilitating new challenges to our nation’s vital security interests. Mr. Chairman, passage of your bill, S.1315, — now sponsored in the House by Rules Committee Chairman Gerry Solomon — would prove of historic significance in helping the Congress and the U.S. security community curtail the both ironic and dangerous phenomenon of the American people unwittingly helping to finance the activities of foreign governments and government-controlled entities which contravene their fundamental security interests and values.

Mr. Chairman, I come to this opportunity to testify before the committee with more than twenty years of experience examining the national security dimensions of East-West financial flows. Over the past dozen years, I have been President and CEO of RWR, Inc., a small Washington-based consulting firm specializing in what I term, “national interest” projects and transactions internationally. Prior to forming the firm in September 1985, I served as Senior Director of International Economic Affairs at the Reagan National Security Council (3/82-9/85). During nearly two years of this period, I also served as Executive Secretary of the Senior Interdepartmental Group-International Economic Policy, the Cabinet-level body which reported through the National Security Advisor to the President. Before coming to government, I was a Vice President in the International Department of the Chase Manhattan Bank with responsibilities for the bank’s loan portfolio in the Soviet Union, Eastern Europe and Yugoslavia. During a portion of this period, I had the privilege of serving as a staff assistant to former Chase Chairman, David Rockefeller.

Consistent with your invitation letter to appear today, I intend to review briefly: 1) the evolving borrowing activities of the former Soviet Union on Western markets; 2) the important financial and political benefits gained by foreign governments through participation in our debt and equity markets; 3) the major reasons why the American people’s concern over certain foreign government entities will increase significantly; 4) the growing presence of Russia and China in these markets; and 5) coordinated actions which could be taken by the Congress, the Executive Branch and private U.S. market participants to help address the formidable national security risks attendant to global bad actors entering our markets — while avoiding capital controls and other potential disruptions to the free flow of capital into and out of the United States.

The Past as a Guide

Before going into why, in my judgement, these relatively new security-related problems in our debt and equity markets will be a matter of concern to a great many Americans across the political spectrum, it is instructive to look briefly at how the former Soviet Union funded itself and the bulk of its nefarious oversees activities. The same pattern is relevant to understanding the path of China’s funding efforts and that of several other sovereign borrowers over the past two decades.

The Soviets made substantial use of so-called “balance-of-payments” or general purpose loans beginning in about the mid-1970’s, most often arranged by syndicates of Western banks. Each syndicated loan made hundreds of millions of dollars in untied, undisciplined cash available to Moscow with no questions asked concerning where the money was going or how it was being used. General purpose borrowing was a bit expensive, but the proceeds could be easily diverted by the Kremlin, in multi-billion dollar sums annually, to help fund activities often inimical to vital U.S. and Western security interests.(1) As there were no hard currency-generating projects, self-liquidating energy deals or hard currency savings from import substitution underpinning these loans, it was all but inevitable that the USSR would eventually overextend itself, given only about $30-40 billion in total annual hard currency income. To put this income level in perspective, it was about one-third of the annual revenues of one American company like General Motors or Exxon.

To help whittle down its interest rates, in the late 1970’s Moscow had the idea of double-financing one of its largest natural gas pipeline projects, the 1,700-mile Orenburg gas deal constructed to deliver gas from the Orenburg deposits in the Caucasus to the West European gas grid. Although the Soviet-controlled International Investment Bank went to the Eurodollar market for some $2.2 billion in Western bank credits (in four separate syndicates) ostensibly to fund the purchase of wide-diameter pipe, compressors, turbines and other Western equipment needed for the project, in fact, these required imports were actually paid for in natural gas barter arrangements with the supplier countries. This double-financing gambit saved Moscow as much as one-quarter point off its normal market interest rate, as lenders in the West properly perceived project financing as a better risk than balance-of-payment loans.

It was also during this twenty-year window that Moscow broke the code on how to transform so-called interbank deposits — that is, the short-term deposits banks routinely make with each other to earn money on excess cash and help facilitate money transfers — into non-transparent medium-term loans. Similar to the practices of the Bank of Commerce and Credit International (BCCI) in later years, the Soviet Union possessed a network of subsidiary banks in Western capitals (which still exists today) purposely incorporated as legal entities of those countries (e.g. Moscow Narodny Bank in London is legally a British bank). The primary mission or business of these subsidiary banks was to deal in the interbank and foreign exchange markets, with the former ultimately serving as a kind of off-the-books roughly $10 billion reserve checking account. In short, billions of dollars in Western bank deposits in Soviet-owned banks — repeatedly rolled over at maturity dates — were used to finance activities harmful to Western security interests.(2)

The U.S. Bond Market “Prize”

The ultimate prize for Moscow, however, was the American bond market. Fortunately, the Soviet Union never attained this prize, although it did float some $1.8 billion in bonds in various other G-7 capitals. What the Soviet Union was after — and Russia has now secured — in gaining access to our bond market are the following financial and national security-relevant benefits:


  • Access to large sums of relatively inexpensive, general purpose cash that can be used for any purpose the borrower has in mind (e.g. the $1 billion Russian government bond offering issued in New York in November of last year).



  • The recruiting of a potentially large new group of Western lenders — including securities firms, pension funds, insurance companies, corporations and even individuals — thus diversifying away from sole reliance on Western governments and commercial banks.



  • Avoidance of conditionality, discipline and collateral in the process of attracting borrowed funds (e.g. a new avenue to circumvent compliance with IMF stand-by agreements as evidenced by the Russian bond last November issued at a time when the IMF had suspended loan disbursements).



  • The construction of politically-powerful new constituencies in the U.S. with vested financial interests in ensuring that the borrowing nation is not subject to future economic sanctions or other forms of international isolation and penalties.



  • Access to the U.S. bond market, over time, tends to create an incentive for early U.S. government bail-outs in the case of a foreign liquidity, or even structural, crisis which could damage scores of prominent American firms and possibly millions of individual U.S. investors — witness Mexico (e.g. bonds cannot be rescheduled, in part, because of the large secondary market for such paper).



  • Interest rates that can be considerably lower than these sovereign borrowers and government-related enterprises are accustomed to paying, again as evidenced by the first Russian bond offering since 1917, floated last November at some 345 basis points over the five year U.S. Treasury note — a rate as competitive as that of Venezuela, India and other better-known international borrowers.(3)


The fact that our government and major commercial banks recently participated in the multilateral twenty-five year rescheduling of some $100 billion in defaulted Soviet debt owed to Western governments and banks should remind the Committee of those in Western governments and markets who dismissed years of warnings that Moscow’s creditworthiness was in serious doubt and, indeed, unsustainable.

Why Americans Will Care

In answer to the question “Why should average Americans care?” it is worth recalling that American taxpayers lost to “reschedulings” billions of dollars in government-guaranteed credits to both the U.S.S.R. and Iraq. In addition, there is some lingering irritation among the American people over the misuse of the Treasury Department’s very short-term Exchange Stabilization Fund to help structure a medium-term bail-out of Mexico during its peso crises. Concerns over the U.S. taxpayer dimension of the multilateral bail-outs underway in South East Asia and South Korea — which could easily exceed $100 billion (via direct U.S. official credits and contributions to IMF emergency loans) — are in the news today. For these and other reasons, average American investors are paying more attention to where their dollars are going and how they are being used by often non-transparent foreign government borrowers. The internet, and the information revolution more generally, have given expression to this intensified interest.

In fact, the combination of economic, social and political consciousness in the shaping of U.S. investor portfolios — by both fund managers and individuals — is nothing new in the markets. In the former case, large institutional investors like the California Public Employee Retirement System (CALPERS) not only eschewed holding South African paper in their portfolio during the period of Nelson Mandela’s incarceration, but also at least in some cases, even holding the bonds and stocks of countries and companies who did business with South Africa. This kind of discipline is also expected by investors in various “green” funds which presumably invest in only environmentally-sound enterprises and activities.

Accordingly, we can increasingly expect Americans to choose their foreign investments based, in part, on their belief systems and to scrutinize the “small print” concerning which foreign government-related enterprises are appropriate contributions to their portfolios. To help illustrate this trend, the following scenarios could unfold, affecting interest groups in this country outside the financial and national security communities:(4)


  • Organized Labor — Over the past several months, the AFL-CIO has done ground-breaking work on seeking to identify government-controlled enterprises connected with — or operated by — China’s People’s Liberation Army (PLA). A principal concern of this organization is to bar from the U.S. market Chinese products manufactured with forced labor. Imagine the AFL-CIO’s membership discovering that their pension funds, or individual emerging market growth funds, contain stocks and bonds issues of some of those Chinese government entities either suspected of, or proven to be, involved in Beijing’s large gulag labor network.



  • Human Rights Organizations — Human Rights advocates made a valiant effort to be heard during the recent visit of Chinese President Jiang Zemin. Actor Richard Gere and other actors and celebrities, for example, have helped bring attention to the plight of the repressed Tibetan people. These and other advocates would presumably not be amused were they to learn that their investment portfolios (or those of U.S. companies with whom they are affiliated) include the paper of, for example, a Hong-Kong based company which, in reality, reports to the large General Staff Department of China’s Military Commission, which is ultimately responsible for the occupation of Tibet.



  • Religious Activists — It would probably not be difficult to find religious activists in this country becoming unknowingly involved as investors with Russian, Chinese and other foreign government entities which have, directly or indirectly, supported the subordination or crackdown of religions that are not on the short list of state-approved and -controlled religious institutions. Similarly, the senior management of a seemingly benign Hong Kong firm could be implicated in China’s religious persecution or forced abortion policies.



  • Pro-Democracy Advocates — Those who properly refuse to forget Tiananmen Square and/or other instances internationally of democratic ferment being crushed by authoritarian regimes, could well discover to their chagrin, if not outrage, that foreign government-related foes of freedom are benefitting from their unwitting portfolio decisions or those of their fund managers.



  • Anti-Proliferation Community — Proliferation is acknowledged by President Clinton to be one of the greatest threats to our security for the balance of this decade and beyond, yet it is increasingly likely that the investment portfolios of state and municipal governments of our country have been penetrated by some on the growing list of foreign government-controlled firms who have been named by U.S. and allied intelligence agencies (then leaked to the media) as contributing to the covert weapons procurement networks of rogue nations bent on acquiring chemical, biological or nuclear weapons and the means to deliver them.



  • Taxpayer Protectors — A growing number of American organizations have dedicated their talents and resources to stopping the flow of what they consider to be an excess of U.S. taxpayer funds to undeserving foreign governments which have encountered liquidity crises (or worse) due largely to non-transparent and corrupt banking systems, the squandering of revenues and reserves to prop up inefficient state-run enterprises and grandiose infrastructure development. As mentioned earlier, the undisciplined issuing of non-reschedulable bonds by these foreign government-controlled firms will now require a series of U.S. and Western taxpayer bail-outs (led by the IMF and other multilateral financial organizations), because, in part, of initially inadequate scrutiny by U.S. and Western regulatory agencies (e.g. Indonesia, Malaysia, Thailand, South Korea, etc.).


The Gazprom Bond Precedent

Consider the stakes in the current Gazprom bond/Eximbank drama that were subjects of powerful Senate Banking Committee hearings last week (October 30, 1997).(5) Committee Chairman Alfonse D’Amato made the key point at the outset of the hearings that it was the Clinton Administration — in the person of former Under Secretary of State for Policy, Peter Tarnoff — which supplied the following analysis to the same Committee in November 1995, “A straight line links Iran’s oil income and its ability to sponsor terrorism, build weapons of mass destruction and acquire sophisticated armaments. Any government or private company that helps Iran to expand its oil must accept that it is contributing to this menace.” (Emphasis added.) Clearly, financing, among other forms of “help,” is alluded to in this statement.

The most immediate national security challenge posed by the Total/Gazprom/Petronas consortium proceeding with its $2 billion contract with Tehran to develop the off-shore South Pars natural gas deposits is, in the bipartisan view of the Committee, that the revenues flowing to Iran from this deal will help facilitate, and even accelerate, Iran’s long-range ballistic missile and nuclear weapons programs. With the Iranian Shahad-3 and Shahad-4 missiles as little as eighteen months away from coming on line — the latter with a range of some 1,250 miles, enabling it to strike Tel Aviv and Western Europe — the roughly $1.75 billion in combined U.S. taxpayer and private investor funds scheduled to be made available to Gazprom in the coming months is seen by several Senators as a bridge too far. Indeed, it is unprecedented to have such a dramatic effort by members of Congress and, among others, the Jewish community of this country to highlight the national security dimensions of a large bond offering in our market.

To make matters worse, the backdrop of this violation of the Iran-Libyan Sanctions Act by France, Russia and Malaysia (as these firms are intimately tied to their respective governments) is particularly ominous in the following ways:


  • Iran and Russia have substantially bolstered their “strategic partnership” over the past year or so. That partnership has included the Russian supply and construction of weapons-relevant nuclear reactors over U.S. objection, advanced Russian missile technology sales and the intensification of coordinated pressure on pro-Western Azerbaijan in the Caspian Sea Basin.



  • Russia, France and China are also cooperating to undermine further the U.N. sanctions regime against Iraq — which many observers cite as the principal catalyst for Saddam’s latest, dangerous confrontation with the West.



  • Russia’s support for former Bosnian Serb President Radovan Karadzic, its disruptive actions in Macedonia — where Moscow is seeking to terminate the U.N. peacekeeping mission there — and its determination to complete the irretrievably-flawed VVER 440 nuclear reactor complex in Juragua, Cuba, bode ill for a constructive U.S.-Russia relationship or a smooth enlargement of NATO.



  • For his part, French Prime Minister Lionel Jospin did not do his country a service with his ebullient reaction to the announcement of the Total contract with Tehran. The fact that he “rejoiced” over the contract award was cited during the October 30th hearings with disappointment and disgust by Senator D’Amato, as well as Senator Christopher Dodd, former General Chair of the Democratic National Committee.


Although it remains unclear at this writing if the extraordinary statements made by Senators on both sides of the aisle during the October 30th Senate Banking Committee hearings(6) will translate into significant diminution of U.S. commercial bank disbursements to Gazprom suppliers under the $750 million Eximbank loan guarantee program or the company’s three billion dollar bond offering, one thing is clear: The Congress increasingly recognizes the serious national security dimensions attendant to certain Russian, Chinese and other foreign bond offerings and equity issues on U.S. capital markets.

China Bonds

Naturally, the dramatic market events of the past ten days — and the catalytic role of Asian governments — have focused the attention of the American people on our debt and equity markets perhaps as never before. An important reason for this is the sharp increase in the participation of small investors in the U.S. stock market in particular, where reportedly some 40% of our population is now engaged.

With the Asian “miracle” at least temporarily in disrepair, the public would be well-served by a close examination the scope of involvement of Chinese government-related enterprises in our markets. Chinese government-controlled enterprises have issued more than eighty bonds on global markets since 1988, nearly forty of which were denominated in U.S. dollars. The bulk of these dollar-denominated bonds were floated on the U.S. bond market. (Japan is the other G-7 nation with substantial Chinese paper in its markets.)(7)

According to year-end 1996 statistics, China has issued about $6.75 billion in dollar-denominated bonds. Although there are over a dozen different Chinese state borrowers involved in our bond market, it is interesting to note that just three borrowers — the government of the People’s Republic of China (borrowing under its own name), China International Trust and Investment Corporation (CITIC) and the Bank of China — make up roughly 65-70% of this total (some $4.4 billion). Specifically, the PRC has an estimated $2.7 billion in dollar-denominated bonds outstanding, while CITIC has about $800 million and Bank of China an estimated $850 million.

CITIC

At least one or two of these Chinese government-controlled borrowers on the American bond market have backgrounds which raise legitimate national security questions. Take, for example, the large Chinese “red chip,” CITIC, with some $23 billion in total assets. This important financial and industrial conglomerate is chaired by Wang Jun, the controversial arms dealer who met with President Clinton at a coffee klatche on February 6, 1996. Wang Jun is also chairman of Poly Technologies, a large company reportedly dealing in arms sales (among other activities). Poly Technologies was allegedly involved in the scheme to smuggle some 2,000 AK-47 assault rifles to West Coast street gangs and planned future lethal arms sales (including shoulder-launched surface to air missiles). Fortunately, the FBI interdicted this first shipment.

When U.S. media attention focused on Wang Jun’s session with the President, Mr. Clinton termed the meeting “clearly inappropriate.” Indeed, today Wang Jun reportedly cannot obtain a visa to visit this country. Given these circumstances it seems fair to ask some questions:


  • If it is “clearly inappropriate” for the President to have met with Wang Jun and he is denied entry into the United States, is it appropriate that the company he heads has issued some $800 million in bonds in our market?



  • What do the CITIC prospectuses cite with regard to the company’s association with Poly Technologies (a reportedly 50% subsidiary of CITIC until 1985)? Is the fact mentioned that CITIC’s chairman is also chairman of this military-related firm? Does not CITIC reportedly still own a piece of Poly Technologies through an intermediary company, Continental Mariner?



  • It has likewise been reported that U.S. intelligence sources believe that CITIC actually reports to the General Staff Department of China’s Military Commission, not the State Council as advertised. Is this suspicion reflected in publicly available materials for prospective U.S. investors?


Bank of China

Consider the Bank of China and its role as the banking intermediary for payments to Arkansas restauranteur Charlie Trie, accused of illegal campaign donations in the 1996 elections and under investigation for possible other felonies, including espionage. (The bank also made money transfers to Johnny Chun.) It could be that the Bank of China was only performing a normal banking function and not part of any illegal activity. Nevertheless, it is interesting to note that the Federal Reserve has not acted for some two years on the Bank of China’s request to open a branch in San Francisco, reportedly because of concern over abuses allegedly involving the bank. The question is: Is it not prudent to take a closer look at the Bank of China when it comes to New York for its next dollar-denominated bond offering?

The PRC Government

Finally, when the borrower is the People’s Republic of China, where did the estimated $2.7 billion in bond proceeds ultimately end up? Hopefully, a portion of these funds did not find their way to help fund components for the new DF-31 mobile ICBM, the new JL-2 submarine launched ICBM or other sophisticated, world-class military systems, which will be targeted at the United States and our assets overseas. Many Americans with human rights and other concerns may also seek to ensure that PRC bonds offerings are not funding, for example, enterprises involved in suppressing individual freedoms.

The purpose here is not to cast aspersions on all Chinese borrowers or fund raisers in our markets, or to propose the suspension of any borrowers or equity issuers on the basis of what we know today. It is rather to affirm, Mr. Chairman, that greater security-related disclosure and screening is urgently required if we are to build a more cooperative and sustainable bilateral relationship with China.

The Easy Way or the Hard Way

Most U.S. market players, frankly, view the notion of achieving enhanced national security-related surveillance of these markets as an anti-free market activity doomed to fail. Some understand, however, that it is not a matter of if but when a major geopolitical incident occurs which will focus the wrong kind of public attention on the U.S. corporate suppliers and funders involved with such a foreign client. For example, when a weapon of mass destruction is fired on a ballistic missile in anger, it is easy to imagine the intensity of the recriminations that would be directed at those who may be seen to have helped make that heinous act possible.(8)

In the case of such a tragedy, with possibly tens of thousands of casualties, will U.S. investment banks and others want to face the onslaught of potential Congressional and media attention alone? Alternatively, would such U.S. firms prefer pointing to a good faith partnership with appropriate Executive Branch agencies and congressional committees? Perhaps these U.S. government agencies and committees could validate the internal efforts made by these firms originally to “snakecheck” the foreign borrower or equity issuer who later committed, or was implicated, in a global crime. With some twenty countries, according to the CIA, currently expected to acquire weapons of mass destruction and ballistic missile delivery systems by the turn of the century, this scenario is not farfetched.

Even if this chilly prospect seems remote to some on Wall Street, consider some of the new, unsavory cadre of potential U.S. investment bank “customers” which could end up being legitimatized through access to our capital markets and most prestigious firms — not to mention the immense financial and political benefits of same: proliferators, terrorist-sponsoring nations and groups, national military establishments, intelligence and technology-theft front companies, organized crime syndicates, drug cartels, arms smugglers and money launderers.

Should investment banks and other capital market participants wish to tackle this admittedly complex problem indigenously — acknowledging that no perfect system can be constructed — it would certainly go a long way toward advancing this country’s security interests. After all, what would be wrong with explaining to prospective customers and the marketplace that the firm is now persuaded that subtle penetration of our markets by undesirable foreign government-related fund-raisers (who are not what they purport to be in prospectuses) is already underway? This kind of additional, security-related due diligence is now warranted.

Instituting new types of disclosure to create appropriate investor transparency at the front-end of these prospective offerings by foreign fund-raisers could make an incalculable difference in curtailing opportunities for those covertly dedicated to undermining U.S. and other democratic interests. The alternative would be to stand by and watch the American people innocently funding — through their pension funds, mutual funds, and other means — those who would directly or indirectly harm this country and their deeply-held values.

Conclusion

Mr. Chairman, I believe we all want to see China, Russia and other emerging market participants make steady gains in the direction of free markets, democratic-institution building, human rights, religious freedom and a civilized, benign foreign policy. There are certainly genuine merits to most of the openings created by the U.S. and global business communities in these countries, particularly the devolving of authority away from the state and toward the entrepreneurial individual. Nevertheless, we are not going to achieve these common goals and successfully bring China, Russia and others into Western political institutions and financial and trading systems in the absence of adequate discipline, transparency and conditionality with regard to U.S. financing of prospective adversaries or those who would aid and abet them. Such discipline and transparency are clearly inadequate today.

At the end of the day, I believe it all comes down to sustainability. When respected U.S. foreign policy figures characterize those in Congress and elsewhere who would seek to impose some modicum of security-minded disclosure, transparency and discipline on foreign entrants to our markets as reckless and counterproductive, they are, in my view, promoting an unsustainable and potentially dangerous U.S. policy.

Mr. Chairman, an appropriate balance must be struck between the normal functions of U.S. capital markets and our national security. Practically none of the public or private sector professionals I have spoken to over the past decade with respect to this major, emerging national security challenge had any interest in unnecessarily disadvantaging U.S. firms and driving business offshore, often to foreign competitors. Equally strong, however, was the sentiment that continuing to ignore this burgeoning, foreign government-sponsored use of our capital markets by wrong-doers in the guise of normal market participants was simply intolerable.

I am confident that you and most of your Senate colleagues on the Banking Committee have already chosen — in hopefully rare circumstances — which set of considerations must ultimately prevail. The “U.S. Markets Security Act” is an indispensable first step in putting into place a sensible monitoring or screening process which seeks to protect, in a non-disruptive, prudent fashion, the national security interests of the United States against an increasingly sophisticated array of global bad actors. As called for in this historic legislation, our allies, catalyzed by G-7 action under U.S. leadership, should also proceed with formulating similar market surveillance mechanisms as the affected security concerns are, more often than not, common ones. The creation of an Office of National Security at the SEC would send an important signal to would-be or actual bad actors seeking funding from the American people. Without any proposed capital controls or explicit enforcement measures, the U.S. Markets Security Act of 1997 contains a clear message: The relevant Committees of the Congress — including Banking, Foreign Relations and Intelligence — are now watching, even if most in the Executive Branch and the markets remain perilously dismissive of this complicated 21st century security challenge for this country and our allies.

Regrettably, the prospect of potentially devastating consequences stemming from largely unchecked foreign access to our markets will only expand from here, barring the passage of S.1315 or a similar bill which institutes security-minded disclosure and transparency to inform and benefit U.S. investors, particularly those not on Wall Street. Fortunately, leadership is coming from the Congress on this family of financial issues, including your own and that of Senators D’Amato, Brownback, McConnell, Mack (who introduced S.1083 on July 29, 1997), Kyl, Bennett and Dodd. In the House, Representative Solomon is taking the lead in support of these new reporting requirements.

Should we fail to step up to this new national security monitoring effort at the federal level on a balanced, carefully-crafted basis, there is little doubt that it will be taken on at the state and municipal levels in a blunter manner which would likely prove more chilling to our highly successful capital markets. Make no mistake, Mr. Chairman, this public policy concern has potentially powerful grass roots elements.(9) Once informed, the American people will not sign on to foreign government-related debt and equity issues of just any stripe or be successfully wooed by those who view sensitive introduction of some of this nation’s foremost security concerns into the already existing disclosure requirements of our capital markets as extraneous and unwanted intervention.

Thank you for this opportunity.

— End of Written Testimony —

1. Interestingly, the Russian government has long argued that the country’s powerful mafia consolidated its grip due, in part, to easy access to unconditioned Western credits during the Gorbachev era.

2. For more on this subject see my op-ed prepared for the Washington Post entitled “Moscow’s Shell Game,” June 22, 1986.

3. I would like to submit for the record a paper I prepared for an Executive Branch interagency gathering on February 21, 1997 entitled “Financial Sanctions: How Might They Be Used Against Proliferators?” sponsored by the Non-Proliferation Policy Education Center.

4. Although proliferation should be properly considered a “national security” concern, I none-the-less included a brief sub-section on this pressing issue which cuts across potentially all of these interest groups.

5. In fact, Gazprom’s $3 billion convertible bond offering scheduled for next month will likely be followed by some $10-18 billion or more in additional bond offerings on world markets in the next three years — including the American bond market — to help finance the estimated $45 billion price-tag for the long-delayed second strand of the 3,600-mile Siberian gas pipeline from the Yamal Peninsula to the West European gas grid. This is the same second strand that was killed in 1982-83 by President Reagan’s resolve not to permit this vast, two-strand project to go forward while Moscow was massing troops on the Polish border and sponsoring martial law in that country. The hard currency cost to the Kremlin of the resulting two year delay in completion of the first strand of the pipeline project and the now fifteen-year delay in the completion of the second strand was as much as $8-12 billion annually (depending on demand) during a period when total Soviet hard currency income was only about $32 billion a year.

Unfortunately for Gazprom, the U.S. capital markets represent, according to some reports, some 60-70% or more of its global borrowing capacity. This could mean that any substantial reduction in access to the U.S. bond and commercial bank markets during the Total deal could leave the company with a multi-billion dollar short-fall in its hard currency funding requirements for the second strand. Clearly, the Russian government, and its surrogate Gazprom, did not make the connection between participating in the Total consortium with Tehran and possible damage to its bond offering in the U.S. in basically the same time-frame. Similarly, the Chinese government may not, as yet, have connected the dots between the precedential Congressional challenge to the Gazprom bond and its own robust expansion plans for Chinese government-controlled enterprises to enter U.S. capital markets.

6. Mr. Chairman, I would like to submit for the record of these hearings a paper produced by the William J. Casey Institute of the Center for Security Policy entitled Sen. D’Amato’s Committee Serves Notice On Those Who Aid and Abet U.S. Adversaries: No Fund-Raising On American Markets (No. 97-C 161, 30 October 1997).

7. China has also issued bonds in Hong Kong dollars, Swiss Francs and, more recently, German Deutschmarks.

8. In this connection, it is useful to remember the appropriate criticism of the Bush Administration’s pre-war support for Saddam Hussein, better known as the Iraqgate scandal. To this day, there has not been adequate disclosure of Saddam’s Western suppliers and funders.

9. Achieving some understanding of the way these new financial security issues resonate at the grassroots level was greatly advanced by many “kitchen table” discussions with Dan Davis, M.P.A. He will be missed.

Russian Bonds Rocked By Second Senate Hearing In A Week Focusing On Undesirable Foreign Penetration Of U.S. Markets

(Washington, D.C.): The attention the U.S. Senate started in recent days to give to the danger
posed by potential adversaries — or those who aid and abet them — raising funds in American
bond and equities markets has arguably yielded its first returns: According to the 7 November
editions of the Wall Street Journal, the costs of Russian borrowing have increased by as much
as three fold, leading to the postponement of as many as fifteen bond offerings scheduled
for issuance this month.

‘Red Alert’

The following highlights of the Journal article are especially noteworthy:

  • “The benchmark $2.4 billion, 10-year global Russian government Eurobond, which had
    been yielding 2.8 percentage points above the comparable U.S. Treasuries three weeks ago,
    briefly yielded 9.3 percentage points over Treasuries, then quickly contracted to about
    4.5 percentage points.”

  • “Corporate debt was even harder hit. A three year bond for Uneximbank, one of Russia’s top-rated banks, had been yielding one-half spread is now 1.5 percentage points. Few companies
    are willing or able to handle the extra millions of dollars that entering the market today
    would cost them, according to Vladimir Kuznetsov of Solomon Brothers in Moscow.”

‘No Accident, Comrade’

Although the Journal attributed these developments to the market turmoil stemming from the
“Asian contagion” volatility of the past few weeks, another influential factor doubtless was the
impact of two, groundbreaking congressional hearings: the first convened on 30 October by the
full Senate Banking Committee(1) and the second on 5 November by its Subcommittee on
Financial Institutions. The common denominator of these sessions, which likely sent powerful
shock waves through the Russian apparatus responsible for tapping foreign private sector capital
markets, was the expressed determination of both leading Republicans and Democrats that
on-going national security-minded surveillance of such offerings was in order.

This was especially true of the second hearing which directly dealt with the perils associated with
the penetration of U.S. markets by both China and Russia. Under the leadership of its chairman,
Senator Lauch Faircloth (R-NC), the Subcommittee took testimony concerning his recently
introduced legislation, S. 1315, entitled “The Markets Security Act of 1997.” As the Financial
Times of London reported the day after the hearing in an article headlined, “Move to Curb China
Access to Capital”:

  • “Republican legislators yesterday mounted a broad political offensive aimed at forcing
    the Administration to take a tougher line with Russia and China, and make it harder for
    those countries to tap U.S. capital markets.”

  • “Partly for tactical reasons, the campaign by some Republicans to restrict Chinese access
    to the securities market has broadened its focus in recent days to include Russian
    borrowing.     Concern about Russia is high on Capitol Hill because of the belief that Iran is
    using Russian technology to develop medium-range ballistic missiles.”

  • William J. Casey Chair Roger W. Robinson, Jr. who the Financial Times recognized as “one
    of the architects of the Reagan Administration’s external economic policy” was also cited with
    respect to the “growing recognition [by the Congress] of the ‘serious national security
    dimensions’ of the Russian and Chinese bond offerings and equity issues.”

What’s At Stake

In his opening remarks, Sen. Faircloth set the tone for the entire hearing. Citing the increased
presence in the U.S. bond and equities markets of certain government-controlled entities intent on
using American funds to finance activities potentially inimical to U.S. security interests — or
corruption and capital flight in the case of equity issues — Chairman Faircloth said: “My chief
concern is that U.S. investors could unknowingly be financing [for example] the Chinese
Army. I have to ask do we really want our mutual funds and pension funds investing in
building the military capabilities of the Chinese Army?“

The lead witness in the 5 November hearing was the sponsor of S. 1315 in the House — the
influential chairman of its Rules Committee, Rep. Gerald Solomon (R-NY). A New York
investment banker prior to his election to Congress two decades ago, Rep. Solomon’s testimony
was informed by both personal experience in the market and a principled commitment to the
national security. The following were among its highlights:

“I’m most concerned about protecting the access of the investor to the most accurate, fair,
and sound information pertaining to stock listings so they can make educated, informed
choices.

“The Communist Government in China is in the midst of offering a whole string of their
controlled business on the Hong Kong markets with the intent of listing them on the New
York Stock Exchange. What’s most disconcerting about that is the Communist Chinese ongoing
commitment to Marxist/Leninism and a command economy. We all know that their economy is
policy-driven and despite overtures from the PRC, including from President Jiang, the fact
remains they are committed to an economic policy of Communist government control.

“A Bloomberg wire story…describes [PRC Minister of Post and Communications] Wu Jichuan’s
statement that the PRC would ease accounting rules to boost company profits. That’s just
cynical, manipulative and direct evidence of fraud. The highest priority of American
securities laws is to provide accurate information to the American investor, and the PRC’s
actions flout that objective.

“[These activities] effectively demonstrate the sort of concerns that should raise an alarm with
all of us in Congress and drive home the need for an overseeing authority to examine the
prospects of having the fate of American capital and investors tied to Communist
government controlled stock. And that, in a nutshell, is the motivation for this bill….It is
about safeguarding the hopes and dreams of Americans whose pension funds and financial
security depend on the sanctity of our free market system.”

Further Expert Opinion

The other witnesses at the Faircloth hearing were Casey Chair Roger Robinson, who formerly
served as the Senior Director of International Economic Affairs at the Reagan National Security
Council and as a vice president at Chase Manhattan Bank; Randolf Quon, an investment banker
and consultant who formerly worked with Hong Kong-based Chinese banks and mainland
government entities (including the Bank of China) and who now is a Fellow at the Potomac
Foundation and consultant with the Free Congress Foundation; and Rick Fisher, Senior Policy
Analyst on Asia at the Heritage Foundation, who specializes in monitoring the Chinese military
build-up.

The witnesses discussed myriad examples of actual or suspected abuses — ranging from the
proliferation activities of Russia and China to the modernization plans of China’s People’s
Liberation Army. They agreed that the development of a non-disruptive, security-minded
surveillance mechanism within the SEC (as outlined in the bill) could be, in Mr. Robinson’s
words, “The most significant global financial security(2) issue area of the balance of this decade
and well into the 21st century.” Mr. Robinson added, “Regrettably, the prospect of potentially
devastating consequences stemming from largely unchecked foreign government access to our
markets will only expand from here — barring the passage of S.1315 or a similar bill which
institutes security-minded disclosure and transparency to inform and benefit U.S. investors,
particularly those not on Wall Street.“

The witnesses emphasized that S. 1315 contemplated simply additional reporting requirements, so
as to avoid creating unwarranted impediments to the free flow of capital into and out of the
United States. Rep. Solomon nonetheless concluded that “This Office of National Security
within the SEC is an absolute must! We need a special watchdog agency specifically
committed to making sure no entity can engineer fluctuations that could bring the market
down.”

The Bottom Line

The Center for Security Policy commends Senator Faircloth and Rep. Solomon and those like
Senators Alfonse D’Amato (R-NY), Sam Brownback (R-KS), Jon Kyl (R-AZ), Mitch
McConnell (R-KY), Connie Mack (R-FL), Robert Bennett (R-UT) and Christopher Dodd
(D-CT) who have expressed similar concerns in other venues. With such leadership, there is
reason to hope that the salutary impact on prospective Russian bond offerings witnessed over the
last few days will prove to be neither unique nor ephemeral. Instead, it should become the
beginning of the end for the dangerous practice of certain foreign government-related fund-raisers
seeking to underwrite activities harmful to U.S. security interests with the unwitting assistance of
the American people.

Two pages of excerpts of Mr. Robinson’s testimony before the Faircloth subcommittee are
attached. His complete testimony may be obtained by contacting the Center.

– 30 –

1. For a detailed discussion of this hearing, see the Casey Institute’s Perspective entitled Sen.
D’Amato’s Committee Serves Notice On Those Who Aid And Abet U.S. Adversaries: No
Fund-Raising On American Markets (No. 97-C 161, 30 October 1997).

2. “Financial security” in this context is defined as the nexus between traditional national security
concerns and global financial flows.

Sen. D’Amato’s Committee Serves Notice On Those Who Aid And Abet U.S. Adversaries: No Fund-Raising On American Markets

(Washington, D.C.): The Senate Banking
Committee made history today. Under the
leadership of its Chairman Alfonse
D’Amato (R-NY), the Clinton
Administration, U.S. investment bankers
and other financial institutions — both
public and private sector — and foreign
governments were warned by Senator after
Senator: Those in violation of
U.S. sanctions law or who engage in other
activities inimical to American national
security interests will be denied, in
Sen. D’Amato’s words, the
“privilege” of raising capital
in this country’s markets.
Similar notice was pointedly served on
American governmental mechanisms — e.g.,
the U.S. Export-Import (ExIm)
Bank and the Overseas Private Investment
Corporation — engaged in
underwriting or guaranteeing loans to
U.S. suppliers doing business with
foreign offenders.

Chairman D’Amato described the purpose
of the Banking Committee’s hearing on the
violation of the Iran-Libya Sanctions Act
(ILSA) by France’s Total, Russia’s
Gazprom and Malaysia’s Petronas in the
following terms:

“This morning the committee
will examine whether foreign
companies engaged in activities
that are in violation of U.S. law
and policy against terrorism and
nuclear proliferation should
receive financial support from
U.S. government entities like the
Export-Import Bank or enjoy the
privilege of raising private
capital in our financial
markets.”

Sen. D’Amato hoisted the Clinton
Administration on its own petard when he
quoted former Under Secretary of
State for Policy Peter Tarnoff
as saying in November 1995 — when the
Banking Committee was first considering
legislation that became the Iran-Libya
Sanctions Act: “A straight
line links Iran’s oil income and its
ability to sponsor terrorism, build
weapons of mass destruction, and acquire
sophisticated armaments. Any government
or private company that helps Iran to
expand its oil must accept that it is
contributing to this menace.”

‘Let’s Not Kid Ourselves’

With characteristic directness, Sen.
D’Amato described the decision before the
United States with respect to the
prospective $2 billion
Gazprom-Total-Petronas deal to develop
Iran’s offshore South Pars gas field:

“Let’s not kid ourselves. We
understand that there are
those commercial interests who
put on the back shelf the
national interest and security of
this country…and turn
a blind eye towards aggression,
towards the terrorist activities
which Iran has sponsored and
continues to sponsor.

“The Iranian-Libyan
Sanctions Act was enacted
specifically to prevent this from
happening. It was
enacted with the administration’s
full support. Now with this
blatant violation, I believe the
administration has a moral and
legal responsibility to enforce
the provisions.”

D’Amato’s Recommendations

Sen. D’Amato declared, “as a
first step, all Export-Import
financing for Gazprom should be stopped
immediately.” Then, he
identified the next area for attention —
and action: “Gazprom’s
proposed billion dollar bond
offering” scheduled to come to
market next month:

“Should foreign companies
engaged in activities which
violate U.S. laws and undermine
our policies be allowed
unrestricted access to our
capital markets? Should Russian
companies that are providing
missile aid to Iran or financing
gas deals with them be able to
seek financing in our markets or
activities which threaten our
national security? Should the
United States just sit back and
allow Gazprom to do business as
usual?

“I don’t believe so.
Gazprom should not be entitled to
do business on the basis that all
is well and that we have an
unrestricted free capital market,
because the fact of the
matter is that their conduct is
in blatant violation of our
law….

“The U.S. has a strong and
solid tradition of free and open
markets, which I support. But our
markets must not be misused by
rogue terrorists. And that’s what
the legislation has provided for.
I don’t believe that we should
help finance their immoral
activities against us and other
civilized nations. The
Iran-Libyan Sanctions Act
provides that the United States
may impose, and indeed restrict
U.S. financial institutions from
making loans above $10 million to
any of the sanctioned countries.”

Enter Mitch McConnell

The hearing’s lead witness was Senator
Mitch McConnell (R-KY), chairman
of the powerful Senate Appropriations
Subcommittee on Foreign Operations. Among
the many highlights of Chairman
McConnell’s testimony were the following:

“There’s no question this
deal strikes to the heart of your
bill [the Iran-Libya
Sanctions Act], Senator D’Amato.
The proof is Tehran’s reaction.
According to the Iranian news
agency, the agreement calls our
bluff and represents a ‘moral
victory because world public
opinion, especially in Europe,
has taken a firm line against the
U.S., particularly with the
extraterritorial business of the
Act. This is the most valuable
aspect of the deal for us.’
That’s Tehran’s reaction.

“Mr. Chairman, let me
emphasize that last point. Two
billion dollars isn’t enough for
Iran, it’s a victory over U.S.
law, the direct attack of
American interests that
Tehran values.

“Let me turn to Gazprom’s
deal in Iran. Critics argue that
it is short-sighted to cut off
ExIm’s line of credit. There is
no question Gazprom could
eventually find alternatives to
U.S. suppliers. However, there is
also no question they would
compromise on American quality,
experience, and the ready
financing available under the
1994 MOU [with ExIm Bank]. Let’s
not forget, foreign investment in
Russia has been a flat line.
Official corruption, crime, and
weak legal and banking
institutions have been huge
deterrents. Gazprom’s 30 percent
share of an estimated $2 billion
investment clearly surpasses the
threshold established by law.

“In a related area, I’ve
pressed the administration for
three years to use our AID
program and to take decisive
action against a growing
Russian-Iranian relationship in
the area of nuclear and ballistic
missile technology. I am deeply
disappointed in the
Administration’s reluctance to
aggressively tackle this issue.
However, it’s only fair to
acknowledge the problem
is in Moscow, where there is a
clear national security policy to
strengthen ties to Tehran.

“With little evidence of
Russian interest in terminating
nuclear cooperation, I have a
hard time believing the Kremlin
will take any action which could
compromise the money-making
potential of this gas deal.
Russia’s irresponsible, if not
dangerous, alliance with Iran
should not compromise our policy
or the principal interests we
have at stake. U.S. Export-Import
Bank must serve those interests.
Let me be very clear here: the
Bank’s good standing is at stake.

“Senator D’Amato, the
message of the day is simple: We
know Iran is aggressively
pursuing a nuclear weapons
program. U.S. agencies
and institutions should not
underwrite companies willing to
generate profits for Tehran to
buy or build that bomb.“

Senator McConnell noted in the
hearing that he had sent the Chairman of
the U.S. Export-Import Bank, James
Harmon, a letter on 22 October 1997. In
it, he forcefully told Mr. Harmon (who
also testified before the Banking
Committee today):

“I believe the Bank should
immediately suspend all pending
transactions involving Gazprom
and should not agree to any
further financing unless the
contract with Iran is terminated.
I will offer language in the
Foreign Operations conference to
be included in the Statement of
Managers reflecting this
position. There is no question
that Gazprom’s operational
capabilities are enhanced by U.S.
exports which could directly
improve the efficiency and
productivity of Iran’s fields.
This is absolutely unacceptable.
Moreover, I want you to
understand that I will take
whatever steps are necessary
consistent with the procedures
outlined in your September letter
to oppose the provision of
financing, given my view that oil
production falls into the
category of supporting a surplus
commodity….

“I do not wish to
see congressional support for
your activities compromised
because you have financed
transactions which many believe
not only violate the intent of
ILSA, but also represent a threat
to U.S. national security
interests.”
(Emphasis added.)

Enter Sam Brownback

Sen. D’Amato credited Senators
Sam Brownback (R-KS) and Jon
Kyl (R-AZ) with catalyzing this
morning’s session on an expedited basis.
The former, who chairs the Foreign
Relations Committee’s Near Eastern and
South Asian Affairs Subcommittee,
continued his strong leadership in this
area by contributing to the
history-making character of the Banking
Committee’s hearing. Particularly
noteworthy were the following among his
remarks:

“I think this deal is
something we have to stand up and
speak out about. The
[Gazprom] bond offering would
essentially result in U.S.
investors funding activities
which pose serious threats to
U.S. national security interests.
And I can’t put it any blunter
than that. You’ve put it
as well that way, as has Senator
McConnell. This is something
which I believe we must examine
closely.

“Now, I’d like to say right
at the outset that this is not a
case of being out to get Russia
or to prevent U.S. companies from
doing business with Russia. That
is not the intent at all. Gazprom’s
investments in Iran and Libya,
however, and its attempts to fund
these activities on the U.S.
market are a matter of national
security and one which, if
nothing else, needs to be brought
to the attention of the American
people who might invest in these
companies. We’re talking
about U.S. investors in Iran and
Libya via Gazprom.

“Gazprom is a
centerpiece of Russian hard
currency earning structure and is
very closely linked to the Old
Guard Russian leadership.
It continues to be a major
instrument in the Russian
economic monopoly — as the
embargo on Turkmen gas
illustrates so well. And I had
the ambassador from Turkmenistan
in my office just this week
stating that again to me. It’s
also a bone of contention between
the Old Guard and the young
reformers in Russia, who are
trying to privatize the monolith.
However, Gazprom is short
on the cash it needs to get the
South Pars project up and
running. And in an act of sheer
gall, the company is planning to
get U.S. investors to pay for
this by selling convertible bonds
on Wall Street.

“Though Gazprom claims the
funds will be raised and go
towards other projects, the fact
is that the income will free
up cash for South Pars. This
convertible bond — as well as
others planned in the amount of
some $6 billion [over the next
two years] — will ensure that
Gazprom is able to continue with
impunity its activities, some of
which pose serious threats to
U.S. national security interests.
 Such bonds will also
provide the company with new
investors who will have a vested
financial interest in opposing
sanctions or international
penalties in the future.

“Essentially, the matter
boils down to this: Should
American investors fund Iranian
ballistic and nuclear missile
development? And of course the
answer is ‘No.’ And yet
that is essentially the deal that
Gazprom will be offering to
unsuspecting American investors
when it launches its bond next
month.

“Shouldn’t American
investors be aware that they
might be investing in a company
which is contravening U.S. laws? Should
the U.S. government be financing
the violation of our own laws?
Again, the answer is clearly ‘No’
— yet taxpayers
dollars are going to underwrite
guarantees of commercial loans
for Gazprom.

“Finally, if investment in
Iran were not enough, it was
announced at the end of last week
that the Russian-Libyan
Inter-governmental Commission had
agreed … in principle to
‘participation by Russian
organizations in carrying out a
number of projects in Libya
in the sphere of power industry,
communications, transportation,
oil and gas extraction and the
construction of gas pipelines and
other infrastructure facilities.’
Gazprom strikes
again.

“The time
has come to provide full
disclosure about the companies in
which Americans will be investing
their hard-earned money. We
should not stand by and watch
U.S. security firms, pension
funds, insurance companies,
corporations, personal investors
and others provide unconditional
cash to an enterprise that is
engaging in activities that could
compromise U.S. national
security. U.S. investors
should get the full story on
Gazprom’s activities before
helping to finance Iran’s nuclear
arsenal. And companies like
Gazprom, which engage in
activities harmful to the United
States, cannot and should not
expect the privilege of raising
funds in our markets.”

Enter Lauch Faircloth

Sen. Brownback’s testimony prompted Sen.
Lauch Faircloth (R-NC), Chairman
of the Banking Committee’s Subcommittee
on Financial Institutions and Regulatory
Relief, to broaden the lense further
still:

“…A Russian
state-owned firm is insulting the
U.S. by openly defying our
sanctions laws against Iran.
Then they come to Wall Street
saying, ‘Can we use your deep
pockets to help us finance this
deal?’ Well, Wall Street’s deep
pockets are simply the mutual
funds and pension funds of this
country. Why should America’s
small investors and retirees
finance the development of Iran’s
natural gas reserves? And when it
boils back down to it, that’s
exactly who’s doing it.

“When I see these kind of
absurd things going on, it
reminds me of the old phrase the
Communists put in themselves: ‘Give
them enough rope and they’ll hang
themselves.’ And we’re trying.

“Why should we finance
projects for our enemies? I
cannot understand anybody with
any common sense wanting to be
part of this deal. I
think Wall Street should say ‘No’
to the deal, and if they do not, then
I think we should block it by
legislation.

“Mr. Chairman, let me also
add that this is also
part of a bigger problem, that is
the foreign influence in our
securities markets by governments
and companies connected to
governments. They’re
issuing bonds left and right. Last
week, I introduced a bill [S.
1315] to create an Office of
National Security at the SEC
[Securities and Exchange
Commission] to monitor this kind
of bond offering. I am
particularly concerned about
China and companies that are
directly connected to the Chinese
government and the Chinese army.
Billions of dollars worth of
those bonds are flooding into our
market. I plan to look at the
Chinese aspect of this bond issue
next week.”

Enter Chris Dodd

Even one of the Banking Committee’s ranking
Democrats, Sen. Chris Dodd
of Connecticut was moved to associate
himself with his Republican colleagues —
specifically, Chairman D’Amato and Senator
Bob Bennett (R-UT), the latter
of whom had cited approvingly Sen.
McConnell’s words and a recent newspaper
headline that said “The Evil Empire
is Alive and Well and Its Headquarters
Are in Tehran.” Sen. Dodd went on to
add:

“I’m not opposed to my
country standing alone. We did
for a long time on South Africa.
It was virtually — for many
months it was the United States
that was moving. And many said,
‘Look, you’re going to stand
alone on this.’ Ultimately, we
were on the right side of
history. Others joined us. And
I think we’re on the right side
of history on this issue.”

Watch This Space

It is predictable that the Clinton
Administration will attempt to respond to
this historic and withering expression of
bipartisan opposition with a gambit of
proven effectiveness: the
slow-roll. href=”97-C161.html#N_1_”>(1)
Convinced that its assiduously promoted
“strategic partnership” with
Russia hangs in the balance and that
relations with Europe are already
stressed out with Helms-Burton and
charges of U.S. extraterritoriality, the
Administration no doubt sees the
necessity of forestalling — and
ultimately eliminating — this
“threat to key alliances.”

Specifically, the Clinton team plans
to take full advantage of the provisions
of the Iran-Libya Sanctions Act that
allow the executive branch, at the
President’s direction, to take as
much as 180 days to react to
violations. By delaying the start of that
180 day period for as long as possible,
the clock leading to sanctions will not
be started. The Administration cynically
calculates that, with Congress in recess
over the next few months, critical
attention will wane and pressure for
action like that discussed by Senators
today will dissipate.

In the end, the Clinton
Administration will try to package
“assurances” from the
governments of the companies involved in
the Total consortium with Iran that they
will redouble their efforts to halt
missile technology sales to Iran and
other transfers of weapons of mass
destruction. Just as China has
gotten Presidential approval for its bid
to purchase U.S. nuclear reactors on the
basis of such fatuous and empty
“assurances,” this newest
package will be presented as an effective
substitute for direct U.S. sanctions
against these foreign enterprises. In
fact, it will amount to nothing less than
a waiver of any serious ILSA sanctions.

The Bottom Line

To understand where this will end, one
need look no further than Saddam
Hussein’s latest spittle in America’s
eye. Following the latest, intensive
effort by Russia and France (and China)
to undermine the U.N. sanctions regime
against Iraq, Baghdad perceived a
fractured coalition that would not resist
his long-awaited breakout, starting with
the expulsion of all U.S. inspectors from
Iraqi territory.

The message should be clear: The
Senate must not leave town without
establishing the following:

  • The Administration’s
    “slow roll” strategy
    will not be tolerated
    and that a Presidential
    determination that ILSA is being
    violated by the Total consortium
    should be made forthwith.

  • No package of
    “assurances” will be
    allowed to substitute for the
    clearly required, tough and
    direct sanctions against Total,
    Gazprom and Petronas — in
    the case of Gazprom, including
    access to U.S. capital markets.

  • There must be no
    further disbursements under ExIm
    Bank loan guarantees to Gazprom
    — including those already
    approved by ExIm’s Board but not
    released by commercial banks.

  • The President should be
    called upon to use any measures
    necessary, including his
    authority under the International
    Economic Emergency Powers Act
    (IEEPA), to prevent Gazprom from
    going forward with the $1 billion
    bond offering it is expected to
    issue in the U.S. market in the
    near future.

– 30 –

1. Evidence of
this strategy was on display in the
course of this morning’s hearing: The
State Department’s representative —
Deputy Assistant Secretary of State for
Energy Resources and Economic Sanctions
— took the astonishing, if not
unprecedented, step — presumably under
instructions from his superiors — of
leaving the witness table after he
finished reading his prepared statement
and initially declined to respond to
questions. Only after Chairman D’Amato
insisted that he return and answer
questions that would obviously not
require answers involving classified
information did Secretary Ramsey address
Senatorial concerns.

The Big Lie: Long-term U.S. Interests Will Not Be Served By Presidential Misrepresentation Of Chinese Proliferation Acts

(Washington, D.C.): The fix is clearly
in with respect to U.S.-Chinese nuclear
cooperation. To be sure, Clinton
Administration officials continue to
insist to publications like the Washington
Times that “We’re still working
on the issues…We have not reached
agreement on a resolution of all the
outstanding issues” and
“Obviously both sides would like to
be in a position to announce that we’re
proceeding with the Nuclear Cooperation
Agreement at the Summit, but we’re
not yet finished.” (Emphasis
added.) The truth, however, is that the
decision was taken long ago to make the
centerpiece of the Sino-American summit
later this month an announcement that
U.S. nuclear power technology could begin
to flow to China.(1)

Before that can happen though,
President Clinton is obliged by statute
to certify that China is abiding by
previous commitments not to assist other
nations with nuclear facilities not
covered by International Atomic Energy
Agency safeguards. He must also formally
express satisfaction with Chinese
commitments not to transfer nuclear
weapons-related technology to non-nuclear
weapons states and to create and
implement effective export control
arrangements needed to ensure that such
transfers do not occur outside
non-governmental channels.

‘Engage’ Away

The Clinton Administration’s party
line — and that of others with an
interest in having the U.S. nuclear power
industry make sales to Communist China —
is that Beijing has made “real
progress” on all these scores. For
example, a recent report by a study group
sponsored by the Center for Strategic and
International Studies and chaired by
former National Security Advisor Brent
Scowcroft (who infamously endeared
himself to the Chinese by clandestinely
visiting and toasting Li Peng immediately
after his brutal crackdown in Tiananmen
Square) concluded:

“Since 1990, China has
continued, at times unsteadily,
to improve its non-proliferation
record. In 1992, China acceded to
the Nuclear Non-Proliferation
Treaty, whose extension China
later supported in 1995. In 1994,
China strengthened its commitment
to observe the Missile Technology
Control Regime guidelines, and
worked closely with the United
States in halting North Korea’s
dangerous nuclear program under
international monitoring. In
1996, China pledged to refrain
from further assistance to
Pakistan’s unsafeguarded nuclear
facilities, adopted a nuclear
testing moratorium, signed the
comprehensive nuclear test ban
and ratified the Chemical Weapons
Convention.

“At about the same time,
concerns about certain continuing
Chinese exports persisted, and
there have been setbacks. The
provision of nuclear technology
to Pakistan is perhaps the most
worrisome, but Chinese
cooperation with Iran also
presents a serious problem. The
best way to handle these concerns,
however, is to address them in
the context of a broader
relationship in which China sees
some advantage to responding to
American concerns, rather than
defying these concerns as a
matter of national pride.”(2)
(Emphasis added.)

On 24 September 1997, the Administration
garnered an additional bit of political
cover for its dissembling about China’s
proliferation behavior from a letter to
President Clinton signed by Senators Frank
H. Murkowski (R-AK) and Max
S. Baucus (D-MT). It declared,
in part:

“We…understand that
significant progress has been
made in [the area of
non-proliferation]. China has
agreed to terminate certain
international activities which
the U.S. found objectionable.
China has also agreed to
promulgate a clear and
comprehensive export control
regime for nuclear equipment,
services and technology….We
encourage you to build upon the
progress which your
administration has made in the
civilian nuclear area by sending
to Congress the necessary
certifications which will enable
you to implement the 1985
U.S.-China Agreement for Nuclear
Cooperation.”

Nettlesome Facts

Unfortunately,
to claim that real progress is being made
by China on proliferation — and that
further progress can be assured if it is
rewarded — is to ignore the totality of
the facts available. As the Center for
Security Policy’s director, Frank
J. Gaffney, Jr., noted in an
article entitled “China Arms the
Rogues,” in the September 1997
edition of the Middle East Quarterly:
“The picture that emerges [from
a review of the available evidence] is
one of an outside state systematically
seeding the Middle East with weapons of
mass destruction, along with the systems
needed to deliver them over increasingly
long ranges.”

Sensible Members of Congress and other
leading figures have come to recognize
the worthlessness of Chinese
“assurances.” For example, last
June, House International Relations
Committee Chairman Benjamin
Gilman (R-NY) observed: “Fighting
proliferation isn’t about getting
meaningless pledges from governments that
don’t have a good track record of
adhering to earlier pledges(3)….Fighting
proliferation isn’t about ignoring
overwhelming evidence of illegal
transfers.”

Such sentiments were recently echoed
at a Senate Foreign Relations hearing by Paul
Wolfowitz, who formerly served
successive administrations in senior
State and Defense Department posts and
currently is the Dean of John Hopkins
School for Advanced International
Studies. On 8 October 1997, Amb.
Wolfowitz testified:

“Whatever the motivations,
it seems clear that [Chinese]
behavior will not change simply
through friendly persuasion.
If they think they can continue
such behavior at no cost in their
dealings with us, it will go on.
It must be made clear that doing
business with our enemies will
cost them if they want to do
business with us…. [We]
should not be afraid of invoking
specific sanctions, or
withholding specific cooperation
that is sought from us, on the
grounds that any step will
endanger the overall relationship
with either Russia or China if
they believe that we need such
relations more than they do. But
that is the message that is sent
if we lean over backwards to
interpret away disturbing
intelligence information or to
ignore the clear intent of U.S.
laws.”

Fig Leaves

Such is the determination of the Clinton
Administration to “engage” with
China — and to seek short-term profits
for U.S. companies irrespective of
the strategic consequences of doing so
— that it is ignoring the foregoing,
prudent counsel. Despite China’s
appalling record of persistent
proliferation and repeated broken
promises, the Clinton Administration is
evidently seeking still more
“assurances” from Beijing
including, according to press reports,
the following “conditions”:

  • Pledges that the PRC will adhere
    to the tenets of the Nuclear
    Suppliers Group, if not join it
    (something China has repeatedly
    refused to do in the past);

  • Promises to restrict sales of
    nuclear equipment to facilities
    not subject to international
    inspection;

  • Assurances that China will end
    exports of missile technology and
    assistance in the development of
    and training on such missiles;

  • Commitments to establish an
    export control regime to curb
    non-governmental and governmental
    exports alike.

It is absolutely predictable that
such pledges — if, they are, in fact,
made by the Chinese — will be broken
before long. No U.S. foreign policy
worthy of the name can be predicated upon
such weak reeds.

The Bottom Line

A more realistic view of China’s
proliferation practices — and more
strategic prescription for a U.S. policy
to address such practices — is offered
by Mr. Gaffney in the conclusion of his Middle
East Quarterly article:

“For the People’s Republic
of China, these transactions may
be more than simply a valuable
means of generating hard
currency, paying for oil imports,
and gaining influence. Beijing
also appears to be encouraging
weapons proliferation in the
Middle East as part of its
campaign to diminish America’s
presence and influence in Asia.
For violent conflict in the
Middle East would preoccupy the
United States, sapping its
resources and tying it down far
from Chinese borders.

“That the PRC’s
proliferation activities appear
to be part of a larger and more
ominous pattern of hostile
behavior adds to the urgency of
effective countermeasures. The
United States must take the lead
in forging efforts —
multilateral where possible,
unilateral where necessary — to
resist and curb these
perils.”

The United States should not
implement a nuclear cooperation agreement
under present circumstances —
particularly if the price of doing so is
not only to sell Beijing technology that
may come back to haunt us, but to lie
about present and prospective Chinese
proliferation activities that certainly
will do so.

– 30 –

1. See the Casey
Institute’s Perspective
entitled Lying For Dollars:
Expected Clinton Certification on P.R.C.
Proliferation Would Demean U.S., Disserve
Its Interests ( href=”index.jsp?section=papers&code=97-C_140″>No. 97-C 140, 18
September 1997).

2. U.S.-China
Commercial Nuclear Cooperation,
Center for Strategic and International
Studies, Sept. 1997.

3. See the
Center’s Decision Brief
entitled ‘There You Go
Again’: More Chinese Proliferation, More
Clinton Politicization of Intelligence
(No. 96-D
56, 12 June 1996).

Effects of Clinton’s Global Warming Treaty on U.S. Security Gives New Meaning to the Term ‘Environmental Impact’

(Washington, D.C.): Lest there be any
doubt that the U.S. military has a stake
in the outcome of President Clinton’s
decision concerning the size, nature and
timing of mandatory reductions in
greenhouse gas emissions,(1)
consider the 23 September 1997 edition of
the trade publication Defense
Environment Alert. On that date, the
newsletter reprinted in its entirety a
memorandum circulated on 5 September by
Deputy Under Secretary of Defense for
Environmental Security Sherri Goodman.

‘Smoking’ Gun

The Goodman memo underscored the
immense quantity of fossil fuels consumed
by the Nation’s armed forces:

“The United States is the
world’s largest source of carbon
dioxide emissions, approximately
20% of the world total, resulting
primarily from burning fossil
fuels. Within the U.S.,
the Federal government is the
single largest user of energy,
with the Department of Defense
accounting for 73% of the Federal
government’s total.
Overall, DoD uses 1.4% of the
energy used within the United
States.”

Goodman estimates that the Pentagon’s
gross energy consumption totals
“about 24 million metric tons of
carbon equivalent of greenhouse gas
emissions.” Of this,
“about 58% was used for operations
and training in military tactical and
strategic systems (i.e., equipment,
vehicles, aircraft and vessels designed
or procured for use in military
operations). The remaining 42%
was used at DoD installations by
facilities and non-tactical
vehicles.”

A Bill of
Particulars

The memorandum declares that “Any
restriction on allowable carbon dioxide
emissions for these [tactical and
strategic] systems will affect DoD
military operations and readiness.”
It goes on to offer illustrative
examples, by service, of what those
repercussions might be, assuming a 10%
reduction in fuel usage. For example:

  • “For the Army,
    a 10% reduction in operations and
    training fuel use would cut
    328,000 miles per year from tank
    training, impacting its ability
    to fully execute the National
    Military Strategy    ….[It]
    would reduce the operational
    tempo mile-average training
    strategy to a level that would
    downgrade unit readiness and
    require up to six additional
    weeks to prepare to deploy.
    Strategic deployment schedules
    would be missed, placing
    operations at risk. Furthermore a
    10% reduction in training hours
    for flight crews could reduce
    their readiness status, requiring
    four-to-six weeks of additional
    training to deploy and will
    jeopardize crew safety.”

  • “For the Navy,
    a 10% reduction in fuel use would
    cut 2,000 steaming days
    per year     from training
    and operations for deployed
    ships. This would impact
    the National Security Strategy    …result[ing]
    in some ships being deployed at a
    less acceptable readiness rate.
    Naval aviation (Navy and Marines)
    would also be adversely
    impacted….The readiness of
    Marine Corps air-ground task
    forces would also be
    significantly affected. These
    integrated combined areas [form
    the] fundamental component of
    forward deployed United States
    forces and are vital to fostering
    regional stability and
    maintaining the overall readiness
    of the Navy-Marine Corps
    team.”

  • “For the Air Force,
    a 10% cut in fuel usage would
    result in the loss of
    over 210,000 flying hours
    per year. This would reduce Air
    Force readiness to the point it
    would be incapable of
    meeting all of the requirements
    of the National Military Strategy    .
    Fighter and bomber crews would be
    unable to maintain full combat
    readiness. This means that many
    advanced capabilities would be
    lost….”

  • “In addition, airlift
    capacity would be reduced 10%,
    impacting all supported agencies.
    Reduced aerial tanker capacity
    would further impact operations
    and training. Finally, training
    not only keeps existing units and
    crews ready to fight, it also
    prepares new crews to replace
    those lost through normal
    attrition. For example, the Air
    Force’s critical pilot shortage
    would be further exacerbated by
    reducing the production of new
    pilots through Undergraduate
    Pilot Training.”

The background memorandum concludes:
“In summary, DoD found
unacceptable impacts to national security….While
the results of this analysis provide
useful insight into some of the potential
short-term impacts of limiting fuel
usage, there are serious shortfalls in
this type of ‘static’ analysis. First,
the analysis does not address possible
threats to national security that will
emerge in the future. The impacts
described above assume that the force
structure in place today will be adequate
throughout the greenhouse gas reduction
period. Second, the analysis assumes
DoD’s fuel needs are relatively stable
and predictable. This means assuming that
a major crisis requiring the use of
military forces that will increase fuel
use will not occur.”

A
National Security Waiver?

For all these reasons, Secretary
Goodman attached to her background
memorandum a proposed “national
security waiver” to the treaty
expected to be adopted at Kyoto, Japan in
December. This waiver, the
memorandum says, “should address
military tactical and strategic systems
used in training to support readiness or
in support of national security,
humanitarian activities, peace keeping,
peace enforcement and United Nation’s
actions.” Seems reasonable.

Defense Environment Alert
reported, however, that “some
DoD sources say the September 5th
memos on the climate change treaty do not
represent the Pentagon’s current position
and are now outdated.“
Unfortunately, Goodman declined to return
phone calls seeking clarification as to
whether the Defense Department no longer
believes that a national security waiver
is required, or whether it no longer
believes that the impending presidential
decision would have “unacceptable
impacts to national security.”

What is clear, however, is
that this issue seems not to be
getting the sort of high-level attention
one would expect from the Pentagon
leadership, given the stakes. At
a Washington conference last week, the Chief
of Staff of the Army, senior
civilian and military strategic planners
(including, an Assistant
Secretary of Defense, a Navy
admiral assigned to the Joint
Chiefs of Staff, and generals
representing the Army and Air
Force) and the Chairman
of the National Defense Panel —
a congressionally mandated panel tasked
with preparing an independent review of
the Pentagon’s future requirements — all
confessed that they were unaware
of what was being done to protect defense
equities in the Clinton Administration’s
decision-making on global warming.

The Bottom Line

We can be sure of one thing: If
the Pentagon is not going to look after
those equities, no one else in the
Clinton Administration will do so.
Press reports say that behind the
tag-team hard-sell being mounted by
Messrs. Clinton and Gore for the Kyoto
treaty, a battle royal is raging between
environmental officials, on the one hand,
and those responsible for the U.S.
economy, on the other. The U.S. military
seems to be AWOL at a moment when its
support for the latter could help spare
the Nation as a whole the severe, and
unwarranted, impact of the President’s
emissions-reduction scheme upon our
future economic growth and standard of
living — to say nothing of its effect on
the readiness, power projection and
war-fighting capabilities of America’s
armed forces.

– 30 –

1. See the
following Casey Institute and Center for
Security Policy products: As
Clinton Pushes For Radical Approach To
Global Warming, Will Impacts On U.S.
National Security Be Frozen Out?
(No. 97-C 147,
2 October 1997) and Center
Asks: Are White House Climate Change
Extravaganzas Meant To Facilitate
Informed Debate — Or Just The Party
Line? ( href=”index.jsp?section=papers&code=97-D_146″>No. 97-D 146, 30
September 1997).