Tag Archives: Mexico

How Bill Clinton Proposes To Spend The ‘Surplus’: Bailing Out Foreign Governments — And Their Western Underwriters

(Washington, D.C.): If the Clinton Administration has its way, the government-private sector
cronyism that contributed importantly to the present meltdown of currencies, banking systems and
economies throughout Asia by subverting the workings of free market mechanisms — a
phenomenon that will likely burst forth in China and Russia, as well — will be treated, ironically,
by a cronyist prescription: Led by Treasury Secretary Robert Rubin, the Administration
hopes (among other, higher profile objectives) to protect his former Wall Street colleagues
and their counterparts overseas by off-loading their cascading debt crises onto U.S. and
other Western taxpayers.

‘Moral Hazard’

The latest manifestation of such cronyism can be found in the recent announcement by the
South Korean government that it is prepared to guarantee short-term private sector bank
debt. We are told that Seoul must take such a step in order to persuade foreign creditors to
extend maturities on the approximately $92 billion in combined private sector and sovereign obligations due over the next year. In point of fact, it was
the predictable product of a Clinton Administration strategy that initially offered levels of
assistance (through the International Monetary Fund and via direct “standby” loans) that were
predictably inadequate to staunch the hemorrhage of foreign capital from South Korea’s and other
“emerging markets.”

Matters are made worse by the stealthy manner in which these initiatives are being promulgated.
The absence of transparency with regard to the true magnitude of the problem — let alone its
ultimate implications for U.S. taxpayers — actually invites more of this costly cronyism.

Let’s be clear: The U.S. Treasury Department knew, or certainly should have known, that
the initial $57 billion International Monetary Fund package for Seoul would not restore
market confidence in South Korea, particularly given the structural character of the
problem. Low-balling the bail-out amount that would be required for Korea served two
troubling purposes, however: 1) It reduced somewhat the “sticker shock” with which the
Congress and the American people would react to the bail-out; and 2) it put South Korea in
extremis. The latter enabled Rubin and Company, the Japanese banks and other Western
creditors to euchre Seoul into extending government guarantees for the obligations of private
Korean banks, thus minimizing the exposure of U.S. and other Western creditors.

The Sound of Other Shoes Dropping

Unless it is stopped forthwith, this sort of creeping multilateral socialization of largely private
sector debt and investment is certain to be replicated throughout the region and beyond.
Thailand has already sought to renegotiate its $17.2 billion IMF package and tried to secure a
rescheduling of its short-term debt, an entirely understandable reaction to Seoul’s success in
renegotiating the size and terms of its deal.

A front page article in today’s New York Times suggests that Indonesia may be about to follow
suit with regard to its own $40 billion rescue package. Jakarta seems intent, however, on going
beyond where the South Koreans and Thais have dared to go. In so doing, it is telegraphing the
manner in which bad-debt-ridden nations like China and Russia can be expected to conduct
themselves: Rather than simply seeking a relaxation of IMF conditionality, debt rescheduling
and/or larger infusions of Western taxpayer-guaranteed cash, the Indonesians are simply
ignoring the IMF’s required economic and financial milestones. For example, as the Times
noted, “President Suharto said his government would increase spending by 24% next year despite
pledges of austerity.”

Here Comes China

The next shoe to drop in Asia is likely to be China. Notwithstanding the stunning absence of
official warnings or media commentary on this prospect, there is evidence that China’s banking
industry is nearing financial meltdown at a time when its much-touted reserves are judged to be
heavily encumbered. As the Casey Institute noted on 23 December 1997(1):

“…The highly regarded DRI/McGraw-Hill Global Risk Service during the second
quarter of 1997…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.'” (Emphasis added.)

Even one of the principal proponents of Sino-U.S. economic entente — Robert Zoellick,
Under Secretary of State for Economic Affairs and Deputy White House Chief of Staff in the
Bush Administration — was obliged to observe in an appeal for greater American assistance to
Asian economies published in yesterday’s Washington Post: “…The United States should work
closely with China to defuse another economic time-bomb: the bad debts of China’s state-owned enterprises piling up year after year, and now totaling a shocking 25 percent of
China’s whole economy.” (Emphasis added.)

The only problem is that the cronyism that afflicts China is not simply a mutation of a free
market system, but the core structure of Beijing’s so-called “market socialist” system. This
reality may explain the deafening silence with respect to China’s impending addition to the rolls of
Asia’s “financially challenged”: If the cure is seen to require disentangling the government
from what passes for China’s “private sector,” there is no hope as long as the PRC remains,
in key respects, a centrally controlled economy with a communist political system. However
much the current Chinese leadership might try, like Mikhail Gorbachev before them, to abscond
with the lexicon of market capitalism, China will not be able to prosper over the long haul absent
wholesale political as well as economic structural change.(2)

Then There’s Russia

Also waiting in the wings is Russia — a nation whose smaller markets and financial requirements
may help it remain lower on the radar screen for a time. But the Kremlin’s hybrid
socialist/market/kleptocratic economy has already produced successive requests for IMF
interventions, to say nothing of a roughly $100 billion rescheduling of Western government and
bank debt to the former Soviet Union accomplished within the past few months. As Martin Sieff
reported in a front-page article in the Washington Times on 23 December:

“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….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. ” (Emphasis added.)

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

What the United States Must Do — and Not Do — Now

If the United States is to avoid making further mistakes that are not only costly for the American
taxpayer but that are strategically harmful, important changes must be made by both the executive
and legislative branches:

Organizing the Executive Branch for Security-minded Economic Policies: On 4 January, the
New York Times reported that President Clinton has only recently begun to huddle with his top
foreign policy and national security advisors in the White House Situation Room to develop a
more comprehensive and integrated view of American policy options and equities in the
management of the Asian financial debacle. If such a grievous oversight is appalling, it is
hardly surprising, given the Clinton Administration’s studied inattention to the nexus of
economic, financial, energy and technology issues and traditional national security
concerns.(3)

The Center for Security Policy has long argued that this nexus will be at the heart of the foreign
policy and defense challenges this Nation is likely to face in the 21st Century.(4) Indeed, its William
J. Casey Institute was established in March 1995 expressly for the purpose of advancing public
awareness and official understanding of these increasingly complex problems — the sorts of
problems to which the distinguished public servant and Wall Street financier for whom it is named
devoted most of his professional career.

It is gratifying that there is growing awareness in some quarters of these realities. As the Times
put it on 4 January: “The newfangled financial crises that destabilize huge economies in a single
day appear increasingly connected to old-time political and security crises. In fact, there is
growing fear that 1997’s market calamities could beget 1998’s security crises.” Unfortunately,
the resistence exhibited by the Clinton Administration to addressing the national security
implications of economic, financial and related decisions is now not simply embarrassing
evidence of strategic myopia; it is a practice that the Nation simply can no longer afford.

    The Reagan Model

A model for avoiding such costs to both U.S. national interests and to the Treasury can be
found in the Senior Interdepartmental Group — International Economic Policy (SIG-IEP)
operated by the Reagan Administration between July 1982 and April 1985.(5) This Cabinet-level
interagency mechanism had several characteristics that would stand the present U.S. government
in good stead:

  • The Department of Defense, CIA and National Security Council were charter members
    of the SIG-IEP    , bringing to bear their respective insights and resources in addressing policy
    matters brought before the Group. These agencies also participated regularly in the working-level interagency entities that supported the SIG-IEP.

  • Although the SIG-IEP was chaired by the Treasury Secretary, it reported to the President
    through the National Security Advisor    , assuring that the President was faithfully afforded
    both economic and security perspectives on pending issues. Decisions for which no consensus
    recommendation could be found were generally considered at full National Security Council
    meetings chaired by the President.

  • Pre-crisis planning was an explicit part of the SIG-IEP’s mission and featured
    prominently on its agendas.

In the present environment, a mechanism like the SIG-IEP would equip the U.S. government
with an alternative to reactive policy-making. It would also assist in devising policies that
differentiate between the help that can reasonably be provided by the United States to key allies
(e.g., South Korea) and that available for nations whose behavior requires that they continue to be
regarded as potential adversaries (e.g., China and Russia).

Establishing Principles that Should Guide Congressional Action: To the Congress falls the
responsibility to determine the full implications for American interests and taxpayers of the
Clinton Administration’s response to the present financial crisis. Urgent hearings are required in
both the Senate and House banking and foreign affairs committees. A priority item on the agenda
of such hearings should be the U.S. Markets Security Act (S.1315) introduced last October in
the Senate by Sen. Lauch Faircloth, Chairman of the Financial Institutions and Regulatory Relief
Subcommittee of the Senate Banking Committee, and in the House by Rep. Gerald Solomon,
Chairman of the House Rules Committee. This legislation would strengthen disclosure and
reporting requirements, specifically with regard to foreign governments and government-controlled entities seeking to enter the U.S. debt and equities markets.

Congress should also take steps to ensure that American policy is guided by three precepts so as
to minimize the strategic and financial costs of the present — and prospective — financial
meltdown in Eurasia:

  • 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 and now in prospect in this one —
    where private sector investors and bankers were repaid in full, in some cases with profit,
    by the American people.     As Lawrence Lindsey, a former Federal Reserve governor who is
    now a Fellow at the American Enterprise Institute, put it to the Washington Post on 22
    December: “…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.”(6)

    • These private investors and bankers understood the risks involved in the higher-risk
    emerging market economies. They, not the American taxpayer, should be obliged to
    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 Bottom Line

The fierce competition to increase Western exposure in the “emerging markets” has now evolved
into a contest by the sovereign managers of — and players in — those markets for ever-larger
taxpayer-underwritten bail-outs and less stringent repayment obligations. This profoundly
changed circumstance is giving rise to myriad recommendations that generally fall into two
camps:

On the one hand, some contend that the IMF has been monstrously transformed from its modest
beginnings as a valuable international monetary coordinating and supervisory body into a tool of
“corporate welfare.” According to this view, the IMF is now little more than a slush-fund for a
club of cronies — international bankers, politicians and capital market players. This perception is
feeding a growing demand to abolish the International Monetary Fund in order to return to
genuine free market capitalism.

On the other, there are those who see in the present crisis an opportunity to promote new and far
more insidious impediments to the workings of the international marketplace. Notably,
international financier George Soros wrote on 31 December 1997 in the Financial Times that
“International capital movements need to be supervised and the allocation of credit regulated by
an international authority.” His proposal: the creation of an International Credit Insurance
Corporation to police the world-wide flows of capital — a breathtaking new milestone in the
creeping multilateralism that is increasing impinging upon market forces and U.S. sovereignty.(7)

There is, of course, a sensible middle ground between disestablishing (as opposed to significantly
reforming and de-politicizing) the IMF and instituting global capital controls. Its ingredients are
to stay true to market forces — so long as doing so does not undermine U.S. national security
interests — and allow imprudent governments, bankers and investors to pay the price for ill-advised decision-making and crony capitalism.

There can be instances in which it is in the interest of the United States to offer indirect or
direct financial assistance to friendly governments struggling with legitimate liquidity
shortfalls (i.e., those catalyzed by forces other than crony capitalism and/or corruption). In
such instances, U.S. aid must be provided in a transparent manner, calculated to bridge the
recipient nation into renewed solvency and genuinely free market economic vitality. Disciplined
progress toward these objectives can only be assured, however, by matching disbursements
against clear performance milestones, so that all parties understand that the agreed “workout”
can — and will — be interrupted if such milestones are not met.

Finally, some fifty years after the Congress adopted legislation organizing the executive branch for
national security — involving, among other things, the creation of the National Security Council —
the legislative branch should take similar steps to ensure that the Nation is equipped with
the interagency mechanisms needed to deal with the dynamic economic and financial
security challenges evident today and likely to be even more threatening in the future.
President Reagan’s SIG-IEP offers a proven model for an effective Economic Security Council
(particularly in contrast to the feckless Clinton National Economic Council) that should be
promptly mandated by statute.

Should the United States fail to take these steps, it risks squandering not only whatever federal
“budget surplus” may now be in prospect but vastly more in terms of American economic
interests, national security equities and taxpayer resources.

– 30 –

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

2. See the Center’s Decision Brief entitled Kow-Towing to China: Clinton’s ‘Engagement’
Policy Means Joining Beijing in Stifling Human Rights in America (No. 97-D 198, 18
December 1997).

3. See the Center’s Transition Brief entitled Putting the Security into the New Economic
Security Council (No. 92-T 140, 9 November 1992).

4. See the following Center papers: An Ominous Strategic Development: “Perestroika
Bonds” and Soviet Entry into U.S. Securities Markets (No. 89-P 67, 28 October 1989), When
Deutsche Bank Talks Soviet Debt Default, The Bush Administration Should Listen (No. 91-D
113, 13 November 1991) and ‘Stop Payment’: The Case for Supporting Yeltsin by not
Disbursing Another $2.5 Billion Blank Check (No. 93-D 86, 4 October 1993); as well as the
following Casey Institute papers entitled: Dangerous Upshot of Clinton-Gore’s China
‘Bonding’: Strategic Penetration of U.S. Investment Portfolios (No. 97-C 47, 1 April 1997)
and 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).

5. The now-declassified National Security Decision Directive (NSDD) 48 that established the
SIG-IEP in July 1982 should be required reading for those in the Clinton White House, Congress,
the media and allied capitals who are serious about economic crisis resolution and pre-crisis
planning.

6. Mr. Lindsay authored a powerful elaboration of this thesis entitled “The Bad News About
Bailouts” which appeared in the New York Times on 6 January 1998.

7. See the Center’s Decision Brief entitled Will 1998 Be the ‘Year of Surrendered
Sovereignty’? (No. 98-D 1, 5 January 1998).

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).

Prepared Remarks by David L. Luke III before the Casey Institute of the Center for Security Policy’s Symposium

“The Implications of the Global Climate Change Treaty
for the U.S. Economy, Sovereignty and National Security”

November 19, 1997

My role today is to cover the probable impact on the United States economy of adopting what
appears will be the United States’ proposal at Kyoto. It is still not absolutely clear what will be
put on the table, but in my comments, I will assume that the United States as a developed country
will probably suggest controlling its emissions on a legally binding basis in or around the year
2010 at or below the level of its emissions of the year 1990.

I am also assuming that other developed countries will do about the same. However, a group of
about 130 developing countries, including China, India, Brazil, Chile, Mexico, South Korea,
Malaysia, and Indonesia, which have so far largely resisted any limits on emissions, will probably
have only rather vague and voluntary long-term emission targets.

To deal with my part of the agenda, I would like to discuss with you three subjects:

    A. What may be the impact on the United States economy?

    B. What will happen in the countries which will not be under legally binding
    limits?

    C. What is likely to happen to the world’s total greenhouse gas emissions?

What may be the impact in the United States Economy?

The United States economy is now vigorous, competitive, and growing nicely because of
generally excellent technology, creativity and leadership in the private sector, together with the
fact that there has been enough self-discipline and wisdom in our electorate to avoid some of the
regulatory excesses and governmental interventions that so clearly have caused a degree of
economic stagnation in some other very prominent nations in the developed world.

The United States is also clearly one of the leaders in the world in the efficiency with which it
converts energy into units of GDP and very gradually we will probably continue to make a little
more progress in efficiency. But the key point is that we are now at the forefront in world energy
efficiencies. There is no efficiency deficit in our country, and there is no obviously available
opportunity which will let us magically and suddenly do drastically better.

Because our GDP is growing at about 2.3 percent per year,(1) in 2010 it would be about 46
percent on a noncompounded basis larger than in 1990. Our emissions are growing in parallel
with our GDP and it obviously would be a very major and challenging task to have to return our
emissions to the 1990 levels or below them.

To try to accomplish this, the administration has proposed a market trading system for emission
permits. This has not yet been spelled out in detail and so an easier and possibly more likely
mechanism for governments to consider is a potential tax on carbon emissions. Actually the two
are in many ways synonymous.

WEFA (formally known as Wharton Economic Forecasting Associates) has calculated that such a
tax would need to be $200 per ton of carbon emitted in order to return our emissions to the 1990
levels.(2)(3) They estimate, however, that imposing such a tax would produce the following results
in our economy. In each case, the impact cited is the change from the base case assumed if the
plan were not instituted.

  • Gasoline prices would increase by 45 cents per gallon.(3)
  • Residual fuel oil prices for industrial facilities would increase by roughly 140 percent.(4)
  • Natural gas prices for industry would increase by 90 percent.(4)

  • USGDP would decline by about $228 billion per year (more than 2.5 percent) below the base
    case.(2)
  • A million good, high-paying jobs would be lost.(3)
  • The U.S. trade deficit would jump sharply.(3)

  • The growth in personal net income for an extended period of time would fall by 15 percent
    below the base case level.(3)

In addition to the WEFA study just summarized, DRI/McGraw-Hill has developed data
which supports many of the key conclusions of the WEFA analysis of the economic impact.(5)

There are several other projections of the potential impact from other sources, including one
issued by the U.S. Department of Commerce with the work done by the Argonne National
Laboratory in July 1997 and another by the Economics Strategy Institute in September 1997.

The first study deals with six major energy-intensive industries. The projected impacts of this
study are very disturbing and very serious. While some assumptions are different, the overall
impact on the economy is not dissimilar to the WEFA data.(6)

The ESI study deals with industries with varied characteristics and is interesting because one of
the industries it looks at is the semi-conductor industry. While we would not normally expect a
negative effect here because it is not thought of as an energy-intensive industry, there are special
circumstances here which would place a very heavy burden on semi-conductors. The United
States is currently a moderate net importer of semi-conductors.(7) With alternate sources such as
Korea, Malaysia, Taiwan, and Singapore not expected to be covered by binding carbon emission
regulations, even more of our semi-conductors are projected to be imported and fewer of those
made in the United States would be exported.(7) Jobs in this excellent and growing industry are
projected to be lost overseas.(7)

In short, several reputable and well-informed sources of opinion feel that under the Global
Climate Change protocol, United States economic growth would be reduced, excellent, well-paying jobs would be exported, our trade deficit would grow, and our much-envied standard of
living would be reduced.

Totally independently from the four studies I have mentioned, Senator Hagel has previously
reported that the AFL-CIO has estimated an overall loss of United States jobs totaling 1,250,000
to 1,500,000.(8) In total, the appraisals from widely different sources describe some very serious
negative impacts for the United States economy. It is not a very pretty picture!

Beyond this there is one other important factor about the United States economy which should
also be considered.

The program will put a sharp focus on the comparison of various types of fuel. Before we look
too carefully at this, we should consider briefly the advantages that fuel-type diversity and
indigenous fuels provide in a less-than-totally-stable and predictable world. Not all foreign fuel
sources are located in politically stable parts of the world. Some of the largest present and
prospective sources of energy are in the areas where there is considerable tension clearly visible.

The United States is fortunate enough to have large coal, oil, and gas deposits. These are not
large enough to make us self-sufficient, but this diversity of indigenous fuel types and their
aggregate strength minimizes very substantially what would otherwise be a much greater
dependency on foreign sources.

Let me illustrate a potential impact of the Global Climate Change Program which might occur.
Currently, 23 percent of the United States energy supply is derived from coal.(9) However, coal is
more carbon-intensive than other fuels. One unit of coal produces 20 percent more carbon
dioxide than petroleum and 80 percent more carbon dioxide than natural gas.(9) The proposed
energy emission penalties on coal are expected to be proportionate to the relative emission of
each fuel. This will place a harsh economic penalty on coal because of its emission number. As a
nation, we could reduce our emissions by moving away from coal, but it would move us away
from a secure, indigenous source of energy into greater dependency on potentially much less
secure, nonindigenous sources of energy.

The United States coal industry is now quite efficient and modern, and if we give it up in a period
of easy energy availability, it can’t be instantaneously called back into service in a period of great
future need. I remember vividly that our coal supply was invaluable to the nation during the
energy crisis of the 1970s.

Without a really compelling reason to change, supply diversity and reasonably high self-sufficiency
are great national assets. Clearly, such a position should not be abandoned without the most
careful thought.

Now let’s turn to what will happen in the developing countries which are not expected to be held
to mandatory limits on emissions?

Simply put, the factors from the Global Climate Change Program that produce significant
economic disadvantage in many of the developed countries will automatically produce significant
relative economic advantages in the developing countries which compete with the developed
countries.

With the increasingly global nature of the world economy, jobs and capital will be inclined to flow
to areas of the greatest relative economic advantage. The absence of the new energy emission
penalty to be imposed in the developed countries and the economic advantage in the developing
countries resulting from this will move jobs and industrial plants to Brazil, Chile, Mexico, Korea,
China, India, and so forth. Many of the major multinational companies are already established in
the developing world and so the transition would not be hard to accomplish, but it would be very
hard on some of the developed countries.

One might theorize that a reasonable expectation would be that the emission regulation status of
the developing countries would transition to Developed Country status over time. However,
most would say that this is a very optimistic point of view. For illustration, look at the trade
discussions with the two countries with which the United States has its largest trade deficits. Our
markets are open to them, but even our status as the world’s only remaining superpower does not
lead either of them to want to ignore their own national economic self-interest enough to
voluntarily open their markets to us. As a result, our trade deficits with them simply keep on
growing.

The same analogy applies to those countries who are driven by economic self-interest to make
capital investments in the so-called rogue states. The same economic self-interest also applies to
those who transfer sensitive military technology to less-than-peace-loving recipients. The
economic self-interest of nations is a very compelling force in most areas of the world, and it is
very, very hard to voluntarily persuade many nations to give up their own self-interest.

Unless we bring all nations in on the same basis at the beginning, it will be virtually impossible to
do it later. Once most of the developing nations taste the rewards of the relative economic
advantage they will gain under the Global Climate Change Program, they simply won’t give it up!

My next topic deals with what might be expected to happen to the world’s total greenhouse
emissions under the scenario which many foresee if only the developed countries are regulated
and the developing countries are not.

The simple fact is that, in spite of the great sacrifices called for in the United States and in some
other countries in the developed world, and in spite of curtailment of emissions in those countries
at least to the 1990 levels, economic growth will continue and probably accelerate in the
developing world, stimulated in part by job transfers. Also, it is true that energy efficiency per
unit of GDP is significantly less in many of the developing countries, such as China. For example,
greenhouse gas emissions in China are on average as much as eight times greater per unit of GDP
than in the United States.(10)

Therefore, making a product in China which was previously made in the United States might
produce eight times the energy emissions for that same product.

A recent report from the Center for Study of American Business concludes that even without the
Global Climate Change Program the percentage share of total emissions by the developing nations
will rise from 36 percent in 1990 to 52 percent in 2015 and 66 percent in 2100.(11) With the
Global Climate Change Program implemented as proposed, the percentage relationship will be
exacerbated in favor of a still greater share produced by the developing nations.

Failure to control the developing nations will mean that almost no matter what is done in the
developed nations, total world emissions will continue to grow and any hope to stabilize
atmospheric concentrations will not be fulfilled.

I hope that my comments may have opened the opportunity for further discussion of these issues.
Their importance justifies much discussion.

— End of prepared remarks —

(1) The Global Climate Change Debate, Economic Strategy Institute, September 1997, Page 23

(2) The Road to Kyoto, The Heritage Foundation, October 6, 1997, Page 13

(3) The Global Climate Change Debate, Economic Strategy Institute, September 1997, Page 33

(4) The Road to Kyoto, Page 14

(5) The Road to Kyoto, Page 16

(6) Impact of High Energy Price Scenario on Energy Intensive Sectors, July 1997, Argonne National Laboratory, U.S.
Department of Commerce, Pages ES-3,4

(7) The Global Climate Change Debate, Pages 76 ,77

(8) Environment News, August 1997, Page 16

(9) The Global Climate Change Debate, Pages 9, 10

(10) Human Events, 10/24/97, Page 13

(11) The Road to Kyoto, Page 18

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.

THE WILLIAM J. CASEY INSTITUTE’S SYMPOSIUM ON THE STRATEGIC AND ECONOMIC OUTLOOK FOR THE ASIA/PACIFIC REGION

9 June 1997

The ANA Hotel
Washington, D.C.

In anticipation of congressional
consideration of President Clinton’s
proposal to renew China’s Most Favored
Nation (MFN) status for another year and
in light of growing concerns about U.S.
national and economic security interests
in East Asia (notably, the 1 July Chinese
takeover of Hong Kong), the William J.
Casey Institute of the Center for
Security Policy convened its third
semi-annual Casey Symposium to discuss
these and related issues.

Over 120 former and present government
officials, businessmen, diplomats and
public policy analysts participated in
this half-day event. The following
summary describes highlights of the
conversation, including points made in
the course of five of the most important
interventions. Four of these were offered
by the Symposium’s Lead Discussants —
Richard Bernstein, a veteran
correspondent and co-author of the
critically acclaimed new book, The
Coming Conflict with China; Senator
Jon Kyl (R-AZ), a member of the
Senate Intelligence, Judiciary and Energy
and Natural Resources Committees; Ambassador
James R. Lilley, former
Assistant Secretary of Defense for
International Security Affairs and U.S.
Ambassador to the People’s Republic of
China and to South Korea; and Senator
Thad Cochran (R-MS), a member of
the Senate Appropriations Committee and
chairman of the Government Affairs
Subcommittee on International Security,
Proliferation and Federal Services. The
fifth major intervention, dealing with
financial aspects of China’s troubling
agenda, was made by Roger W.
Robinson, Jr., a former Vice
President at Chase Manhattan Bank and
Senior Director of International Economic
Affairs at the Reagan National Security
Council, who currently holds the
Institute’s William J. Casey Chair.

The following observations made in
the course of this Casey Symposium
appeared to reflect concerns shared by
many of the participants. No effort was
made, however, to define or adopt
consensus positions on the issues
discussed.

I. The Burgeoning Chinese
Threat

Richard Bernstein led off the
discussion of the first section of the
Symposium by citing recent Chinese
leadership statements and writings meant
for internal consumption that candidly
describe the authors’ perceptions of an
inevitable confrontation between the PRC
and the United States. Particularly
noteworthy are the views expressed in a
1994 compendium of
such writings entitled Can the
Chinese Army Win the Next War, which
depict a protracted struggle in which the
United States is China’s principal
adversary.

It follows from the conclusion that a
Sino-American relationship once
characterized by cooperation in
containing Soviet power has become a
zero-sum game that China will
increasingly pursue policies that are at
variance with U.S. interests. Those
already evident include: ambitious
modernization programs creating far more
powerful strategic nuclear, conventional
and unconventional forces; espionage and
technology-theft operations in the United
States and elsewhere; the penetration of
U.S. and international securities markets
by Beijing’s military and intelligence
services; influence operations aimed at
suborning American politicians; unfair
and inhumane trade practices (involving,
among other things, piracy of proprietary
information and exploitation of slave
labor); prolific and indiscriminate arms
proliferation; and China’s efforts to
dominate the Western Pacific out to the
“second island chain.” href=”97-R86at.html#N_1_”>(1)

Most participants appeared
unpersuaded, in light of the PRC’s
internal policy documents and evident
conduct, by the argument that Beijing
will only view the United States as an
adversary if Washington behaves in a
hostile manner toward China. In the face
of much evidence that the Chinese
government believes it has already
embarked upon a protracted confrontation
with the United States, it behooves the
Clinton Administration to develop a
long-term, strategically minded policy
for protecting U.S. interests.

II. U.S. Perceptions of the
Strategic Threat

Senator Jon Kyl observed that such
strategic thinking generally does not
come easily to democracies. By contrast,
totalitarian regimes like China’s that
are committed to acquiring and wielding
power tend to have both long- and
short-term strategic plans designed to
fulfill their aspirations. Since the
political elite of China continue to
exercise central control of all the
political and most of the economic
functions of the country, China’s
resources and diplomatic energy can be
cohesively used to achieve that nation’s
goals.

If anything, the surging nationalism
accompanying the imminent take-over of
Hong Kong is likely to reinforce the
Chinese government’s increasing
assertiveness. The United States must
reckon with the prospect that the
People’s Liberation Army will become even
more willing to flex its muscles in the
South China Sea and beyond as its
power-projection capabilities steadily
improve.

Roger Robinson noted that, in addition
to steadily improving the reach of its
military, Beijing is making strides
unprecedented among communist states in
diversifying its foreign sources of hard
currency and in recruiting politically
powerful new Western constituencies in so
doing. These objectives are being
achieved via the PRC’s
multibillion-dollar penetration of the
international and American securities
markets. Since 1988, China has issued
some eighty bonds. While the bulk of
these have been yen-denominated bonds,
the total amount of dollar-denominated
Chinese bonds (primarily issued in the
U.S. market) has now reached at least
$6.7 billion.

The United States has not, to date,
been sufficiently serious about:
determining through national intelligence
sources and methods the true identities
of these Chinese state-owned enterprises
and banks; tracking their activities on
behalf of the PLA and China’s security
services; monitoring the identity and
conduct of their affiliates, subsidiaries
and shell companies or unveiling the real
backgrounds of their chairmen, boards of
directors and other top management. As a
result, the full magnitude of this
strategic development has yet to be
popularly comprehended.

The short form is that this preferred
borrowing venue provides major Chinese
state-owned enterprises and banks
intimately connected with the PLA and
Beijing’s security services with access
to large sums of undisciplined,
unconditioned and inexpensive cash. This
money can be easily diverted to finance
activities inimical to U.S. security
interests — not to mention being at odds
with American principles and values.
Worse yet, in the process, Beijing is
ensuring that influential groups in the
United States and elsewhere in the West
have a financial vested interest
in ensuring that China is not subject to
future U.S. economic sanctions,
containment strategies or other forms of
isolation and/or penalties.

The Clinton Administration and the
Congress should take steps to deny
PLA-front companies and other
inappropriate Chinese borrowing entities
the opportunity to sell bonds in the U.S.
market. This step can be taken in a
non-disruptive fashion (e.g., by creating
a security-minded screening mechanism for
these would-be participants in the
American bond and equities markets)
without fear of jeopardizing U.S.
exports, jobs or
“people-to-people” contacts
unaffected by such transactions.

Among the other topics that demand
careful strategic thought by U.S.
policy-makers are:

  • Sino-Russian Strategic
    Cooperation:     The United
    States must be alert to the
    possibility that this cooperation
    will greatly enhance China’s
    military capabilities. (A case in
    point is Russia’s reported
    willingness to provide China with
    its formidable SS-N-22 supersonic
    anti-ship cruise missile — a
    weapon system designed to attack
    U.S. AEGIS air-defense vessels
    and aircraft carriers. Subsequent
    to the Casey Symposium, Rep. Dana
    Rohrabacher [R-CA] led the House
    of Representatives to vote to cut
    off all U.S. assistance to Russia
    if even one of these
    missiles were transferred to
    China.)

    • Another concern is that China and
    Russia may be collaborating in
    the exporting of ballistic
    missile and other advanced
    weaponry to dangerous Middle
    Eastern states, with a view to
    diverting American power from
    Asia — and, thereby, further
    diminishing the U.S. capacity to
    challenge either parties’
    interests in the region.

  • Global Ballistic Missile
    Defense System:     China’s
    efforts substantially to upgrade
    its own long-range missile forces
    and its willingness to engage in
    what one Chinese official called
    “nuclear blackmail” by
    suggesting a willingness to
    attack Los Angeles add urgency to
    the requirement for prompt
    development and deployment of an
    effective ballistic defense
    system to protect the United
    States, as well as its forces and
    allies overseas.

  • Concerns about Chinese
    Penetration of the Western
    Hemisphere:     The U.S. should
    oppose Chinese efforts to gain
    access to facilities in Panama
    that could allow it to interfere
    with, or block, passage through
    the Canal or destabilize the
    United States by using Mexico as
    a trans-shipment point for
    weapons smuggling or
    drug-trafficking.

Strategic thinking concerning China
suggests that the United States cannot
afford to allow China’s aggressive
behavior to go unchallenged. The United
States must take great care to avoid
allowing commercial/economic gains to
override national security concerns when
contemplating policy towards China.
Washington must avoid the pitfall of
allowing further aggression to occur
without repercussions simply because
feigned ignorance is easier than tough
responses.

Most importantly though, the United
States must begin addressing Chinese
aggression from a strategic framework
that has thoroughly considered the entire
scope of the problem. This framework has
to consider the issues on all fronts,
assume a world-wide perspective, and must
incorporate economic, military and
diplomatic concerns in framing a cohesive
and coherent U.S. policy. To enjoy the
American people’s support, the policies
that emerge must conform to and reflect
the values and principles for which this
country stands.

III. Regional and
Geostrategic Dimensions of the Threat

Ambassador James Lilley provided an
extraordinary tour de horizon
of the regional context in which
China’s bid to confront the United States
is playing out. Among the more important
subjects discussed in this section of the
Casey Symposium were the following:

North Korea: One of
the major “flash-points” in
Asia is North Korea. The despotic
Communist regime that currently controls
North Korea has become increasingly
unstable due in large part to failed
economic and social policies. The country
is desperately lacking in food, oil and a
viable economic base. Such factors are
jeopardizing the iron-grip of the
Communist regime, prompting it to clamp
down even harder on any expression of
freedom in order to retain control.

The North Korean regime may,
nonetheless, survive for years to come if
it continues to receive help from China
and the West. Currently, the Chinese are
providing Pyongyang with large quantities
of food and oil, apparently in the belief
that it remains in China’s interest to
prop up this regime, despite its infamous
corruptness and increasing
unpredictability.

North Korea’s political instability is
especially disturbing in light of its
formidable military capabilities. North
Korea likely possesses some degree of
nuclear capability and could easily hit
Japan with its ballistic missiles.
Despite the North’s acute economic
difficulties, the regime in Pyongyang
still dedicates 30% of its GNP to the
military and its standing army is a
formidable threat to South Korea. Given
North Korea’s history of violence and
instability, and considering the fact
that the North Korean forces could
inflict serious damage on U.S. forces
stationed in South Korea, the security
interests of the United States would be
well-served by a coherent, articulate
policy towards North Korea.

Suggestions for what this policy
should entail include an even more
insistent U.S. demand that the North and
South hold direct talks in Korea. The
Clinton Administration should, however,
end its policy of giving food to North
Korea unconditioned on serious reform. It
should, instead, insist that the North
Koreans reduce the amount they spend on
the military so they may obtain some
semblance of economic stability. Most
importantly though, the United States
should make it absolutely clear that any
military assault on South Korea would
result in the instant and total
annihilation of North Korea by American
forces.

Japan: Another
imperative for the United States in Asia
must be continuing and strengthening its
security arrangements with Japan. For
obvious reasons, this relationship is the
key to U.S. security in the region. But
recent questions of stability in Korea
and China’s military development require
that U.S.-Japanese security be renewed
and reinvigorated.

In particular, if Washington wishes to
perpetuate Japan’s status as a
non-nuclear power, it behooves the
Clinton Administration to work with Tokyo
to field effective ballistic missile
defenses at the earliest possible moment.
(The fact that Japan operates its own
AEGIS ships makes a sea-based
anti-missile system based on the U.S.
Navy’s Wide Area Defense program a
natural choice for such cooperation.)

Hong Kong is a key
litmus test for future dealings with
China. Profound concern was expressed
about the likelihood that the PRC will
deny Hong Kong political liberty and, in
due course, impinge upon its economic
autonomy, as well. The United States —
and other freedom-loving nations should
impress upon China that such repressive
policies in Hong Kong will have
immediate, tangible and severe
repercussions.

In this connection, it is particularly
disturbing that Washington and other
allied capitals already seem to have
shrugged off Beijing’s gutting of the
democratically elected Legislative
Council and the imposition of new
restrictions on the freedom of assembly,
the domestic media, the flow of
information from abroad, foreign support
for Hong Kong policy research institutes
and access to the marketplace by
perceived opponents of the mainland’s
policies, to name but a few.

How China behaves towards Hong Kong —
and how the West responds in the event
that Beijing either uses force or other
coercive techniques to work its will in
the erstwhile British colony — will
almost certainly signal what lies in
store for Taiwan. Some
participants in the Casey Symposium
contended that, by sending two carrier
battle groups to the region last year,
the United States demonstrated its
determination in the face of the PRC’s
ballistic missile launches and amphibious
exercises aimed at intimidating the
Republic of China. A related view holds
that this incident served to reinvigorate
U.S.-Japanese security ties.

Others felt a far more ambiguous
signal was sent as the Clinton
Administration declined to spell out what
actions it would take if the PRC actually
attacked Taiwan and as it ordered U.S.
naval forces to steer clear of the Taiwan
Strait. A similarly pessimistic
assessment holds that Japan has drawn the
conclusion that China is the rising power
in the region, the United States the
receding one, and that Tokyo has begun to
adjust its diplomatic and military
postures to reflect this new correlation
of forces.

It seemed generally agreed, however,
that at least the Chinese took away from
this crisis a new appreciation of the
strategic significance that attends
control of the waters of the South China
Sea. That lesson seems to be contributing
to the current emphasis China is placing
on upgrading its naval power so as to
compete with — and perhaps, ultimately,
to challenge — the U.S. Navy in the
Western Pacific.

In remarks following lunch, Senator
Thad Cochran added his own impressions of
the geostrategic situation in Asia that
provides the context for contemporary
Sino-American relations — and that may
shape those of the future. These
impressions were drawn from Sen.
Cochran’s recent visits to the region and
from an important series of hearings his
Subcommittee on International Security,
Proliferation and Federal Services has
been holding this year.

China’s proliferation of conventional
and unconventional weaponry was cited as
a matter of particular concern. Although
China claims to adhere to the Missile
Technology Control Regime (MTCR), and
signed the Nuclear Non-proliferation
Treaty (NPT), recent Chinese actions
prove that China is quite willing to
disregard its international obligations
in pursuit of its larger objectives. In
this regard, the PRC’s transactions with
Iran and Pakistan merit particular
attention:

  • Beijing has sold Iran, among
    other weapon systems and
    technology, advanced sea- and
    land-based anti-shipping cruise
    missiles. These capabilities pose
    a risk to naval as well as
    civilian vessels in the Strait of
    Hormuz and the Persian Gulf, a
    waterway which — if denied to
    the United States and its
    principal trading partners —
    would have profound and adverse
    economic as well as strategic
    implications. The PRC has also
    transferred to Iran guidance
    component systems that can be
    used to improve the accuracy and
    range of surface-to-air missiles
    and materials used in the
    creation of chemical weapons.

  • China has also provided Pakistan
    with M-11 missiles and components
    used in the enrichment of uranium
    required for nuclear weapons.
    Pakistan is useful to China in
    that the two nations share a
    common enemy, India. Pakistan’s
    interest in pan-Islamist ideology
    and lucrative trade
    opportunities, however, have also
    made it a valuable cut-out for
    Chinese weapons of mass
    destruction and other technology
    transfers to much of the Middle
    East.

Sen. Cochran remarked, however, that
it is important not to ignore the role
the United States has been playing in
facilitating the transfer of potentially
dangerous dual-use technologies to China,
some of which, at least, are contributing
both to Beijing’s own military build-up
and to its international weapons sales.
The United States clearly needs to
re-examine its technology export
restrictions — or, more precisely, its lack
thereof — which have allowed 47 (or
more) supercomputers to be sold to
Chinese “end-users” who are
believed to be using them to design and
test nuclear weapons and perform other
worrisome tasks.

IV. Conclusion

Recent developments strongly suggest
that China is emerging as a significant
threat to U.S. interests in the strategic
Asia/Pacific region. It is, therefore,
inevitable that American policy-makers
will be obliged to address an
increasingly vexing array of challenges
from China and its clients.

If the United States is to meet these
challenges successfully — i.e., conduct
its relations with the People’s Republic
so as to enhance U.S. national security
as well as its economic prosperity —
Washington must begin to think
strategically, not simply in a tactical,
reactive mode. In particular, the
American government and people will need
to understand the true nature of the
danger China poses; they will also have
to adopt appropriate countervailing
approaches. The William J. Casey
Institute of the Center for Security
Policy hopes that the latest Casey
Symposium has contributed to this process
and looks forward to its further progress
in the course of future Symposia.

1. For more on
these activities, see the Casey
Institute’s Perspective
entitled Non-Renewal of
M.F.N. For China: A Proportionate
Response to Beijing’s Emerging,
Trade-Subsidized Strategic Threat
(No. 97-C 76, 9
June 1997).

Dangerous Upshot of Clinton-Gore’s China ‘Bonding’: Strategic Penetration of U.S. Investment Portfolios

(Washington, D.C.): Press reports have
begun to focus on a Chinese entrepreneur,
Wang Jun, as one of the most intriguing
— and probably one of the most important
— figures in Communist China’s influence
operation in the United States. For
example, a detailed front-page article in
the Washington Post on 16 March
describes Wang as “head of China’s
most politically connected financial and
industrial conglomerate, as well as a
Chinese military-owned arms trading
company [Poly Technologies] under
investigation for illegally smuggling
assault rifles into the United
States.”

Wang is the object of both
journalistic attention and an FBI
investigation at least in part because of
his participation on 6 February 1996 in
one of the Clinton-Gore campaign’s
notorious fund-raising coffee-clatches at
the White House. Less attention has thus
far been paid to the self-declared reason
for Wang’s desire to gain access to the
highest circles of the U.S. government:
his flagship company, China International
Trust and Investment Corporation (CITIC)
was interested in issuing new “debt
offerings.” Like Johnny Chung,
Charlie Trie and others with access to
Asian “walking around money,”(1)
Wang evidently believed that sipping
coffee with the President could only be
good for business.

‘Follow the Money’

This motivation for Wang Jun’s effort
to have “out-reach” to the
Clinton-Gore team highlights what the
Casey Institute of the Center for
Security Policy believes is a potentially
serious new penetration of the U.S.
securities markets by China’s Military
Commission (the governing mechanism
overseeing the Chinese People’s
Liberation Army): the issuing by
CITIC since March 1993 of hundreds of
millions of dollars worth of
dollar-denominated bonds in the American
market.

The fact that the national
security implications of such
transactions have apparently received no
more attention than was evidently given
to the idea of leasing a preeminent U.S.
Navy base to the Chinese merchant marine(2)
only intensifies concerns about the
Clinton Administration’s management of
the China portfolio. After all,
it would appear that, through this
device, Beijing’s General Staff
Department — which reportedly controls
CITIC and which is, in turn, controlled
by the Military Commission(3)
— has been given a mechanism for
recruiting American mutual funds, pension
funds, insurance companies and other
market players to help underwrite
activities in some cases inimical to U.S.
interests.

What is more, the interconnection
between Poly Technologies and CITIC —
evidenced by Wang Jun’s chairmanship of
both entities, by CITIC’s former 50%
ownership share of Poly Technologies and
by the apparent, continued linkage of the
two entities through a corporate
intermediary, Continental Mariner
Investment Corporation — raises an
ominous prospect: A large number
of American investors may have
unwittingly actually helped fund,
directly or indirectly, Poly Technology’s
alleged scheme to smuggle automatic
rifles and other weaponry into the hands
of criminal elements in this country.
(Just how deadly the sorts of weapons can
be in such hands was brought home a few
weeks ago when bank-robbers wielding
AK-47’s manufactured by Poly’s
partner-in-crime, Norinco, used them
against Los Angeles police officers
having nowhere near the firepower.)

‘The Chinese Clean-Up’

Beijing broke the code over a decade
ago concerning the contribution bond
offerings by state-owned or operated
companies like CITIC could make to
expanding China’s sources of
international borrowing. As noted in a
paper entitled “Financial Sanctions:
How Might They Be Used Against
Proliferators” presented by Casey
Institute Chair Roger W. Robinson, Jr. in
a 26 February 1997 meeting attended by
U.S. government officials and sponsored
by the Nonproliferation Policy Education
Center, these benefits include the
following:

  • Access to large sums of
    relatively inexpensive,
    general-purpose cash that can be
    used for almost any purpose the
    borrower has in mind.

  • The recruiting of an entirely new
    group of lenders — including
    securities firms, pension funds,
    insurance companies, corporations
    and even individuals —
    diversifying away from sole
    reliance on Western governments
    and commercial banks as sources
    of funding.

  • Avoidance of conditionality,
    discipline and collateral in the
    process of attracting borrowed
    funds — offering a new avenue to
    circumvent the compliance
    milestones embodied in such
    mechanisms as International
    Monetary Fund stand-by
    arrangements.

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

  • The non-reschedulable character
    of bonds — thanks, in part, to
    the large secondary market for
    such instruments. This reality,
    which was much in evidence in the
    recent case of the Mexican tesobonos,
    tends to create an incentive on
    the part of Western governments
    to intervene in the event of a
    liquidity crisis that threaten to
    harm scores of prominent firms
    and possibly thousands of
    investors.

  • The interest rates offered can be
    considerably lower than those
    sovereign borrowers are
    accustomed to paying. A case in
    point is Russia’s
    dollar-denominated bond offering
    last November which attracted $1
    billion for five years at a rate
    that was just 3.45 percent higher
    than U.S. Treasury notes of
    comparable maturity — a rate
    competitive with that of
    Venezuela, Mexico, India and
    other better-known international
    borrowers.

The CITIC Play

CITIC is a prime example of China’s
application of this sophisticated
fund-raising technique. The Casey
Institute has learned that CITIC has
issued some 15 bonds in the securities
markets since the summer of 1988. Most of
those bond offerings were yen-denominated
(some 10 issues) and totaled roughly 183
billion yen. At least four CITIC
bond issues, however, were denominated in
U.S. dollars, raising a total of $800
million. Two of the U.S. dollar offerings
had American investment firms as lead
managers.

When one includes a 500 million Hong
Kong dollar bond-offering — worth
approximately $65 million U.S. (by CITIC
Hong Kong Finance in July 1993 lead
managed by JP Morgan Asia Ltd.), the
total U.S. dollar amount involving
American investment firms climbs to nearly
$1 billion. Some of the highlights
of these transactions are as follows:

































Launch Issuer Name Amount Maturity Lead Manager
3/93 CITIC $150M 4/98 Nomura Singapore
7/93 CITIC $250M 8/03 Goldman Sachs & Co
10/94 CITIC $200M 10/06 JP Morgan & Co.
10/94 CITIC Pacific $200M 11/97 HSBC Markets and Paribas Capital Markets

What Congress Should Want
to Know About CITIC

The fact that such a highly
questionable corporate entity like CITIC,
led by a figure emblematic of China’s
role in the campaign finance scandal,
could entrench itself in the fabric of
the American business and investment
communities undercuts the proposition
that the U.S. securities industry can be
relied upon to safeguard national
security interests in the course of
certain foreign borrowing transactions.
To gain a fuller picture of CITIC’s true
corporate identity and its connections
with China’s military establishment — as
well as how the hundreds of millions of
dollars raised by CITIC through bond
offerings in the U.S. were likely used —
a number of questions should be taken up
by relevant Congressional committees.
They include:

  • Who are the subscribers to CITIC
    bond offerings in the U.S.?

  • What do the prospectuses filed
    with the Securities and Exchange
    Commission say about CITIC, its
    senior management, and the
    proposed use of bond proceeds?

  • What are the disclosure
    obligations associated with
    CITIC’s bond offerings and what
    constituted the precise market
    entry process?

  • Can the U.S. intelligence
    community confirm that CITIC is
    controlled from behind the scenes
    by the General Staff Department,
    the right arm of China’s Military
    Commission?

  • What is the precise relationship
    between Poly Technologies and
    CITIC today — and to what extent
    are the senior managements and
    directors of this family of
    companies the same people?

  • Does China Ocean Shipping Company
    (COSCO) have any formal
    affiliation with CITIC or do
    business with any companies Wang
    Jun heads?

  • Who are Wang Jun’s and CITIC’s
    principal political sponsors and
    funders in China and elsewhere?

  • What is the history of Wang Jun’s
    reported friendship with Charlie
    Trie and John Huang?

The Bottom Line

The Center for Security Policy has
long believed that there exists an
important nexus between national security
and the Western securities market.(4)
It now appears that the corporate
flagship of China’s military-industrial
complex — with the wrong leadership,
corporate history and agenda — has been
attracting large sums of totally
undisciplined cash from a wide spectrum
of American investors. Accordingly, the
Casey Institute believes that the
troubling national security aspects of
CITIC’s established presence in the U.S.
bond market should be explored forthwith,
at a minimum, by the Senate Governmental
Affairs and House Government Reform and
Oversight Committees.

It is to be earnestly hoped that the
consideration of this subject in
congressional hearings will lead to an
awareness of the larger danger: Western
securities markets may well represent the
most attractive, and certainly one of
the most important, funding vehicles
available to potential adversaries of the
U.S. and their state-owned enterprises
for the balance of this decade and the
21st century. This
“financial bridge” to the next
century — well traveled by CITIC and
other Chinese government and
government-operated bond-offerers on
the Clinton Administration’s watch —
should serve notice that security-minded
market-entry procedures are urgently
needed for the U.S. bond market. The
United States would be wise to pursue as
well the institution of similar
mechanisms and procedures in its allies’
securities markets.

– 30 –

1. Today’s Wall
Street Journal reports on the
apparent source of at least some of
Charlie Trie’s slush fund: The
state-operated Bank of China. Charlie Yah
Lin Trie “a central figure in the
controversy over foreign contributions to
the Democratic Party, received a series
of substantial wire transfers in 1995 and
1996 from a bank operated by the Chinese
government.” The electronic money
transfers from the New York office of the
Bank of China were “usually in
increments of $50,000 or $100,000 [and]
came at a time when Mr. Trie was
directing large donations to the
Democratic National Committee.” The
Casey Institute has learned that between
October 1992 and March 1994, the Bank of
China issued some $850 million in
dollar-denominated bonds.

2. Incredibly,
despite a public outcry about the lease
of Long Beach naval base to the state-run
Chinese Ocean Shipping Company (COSCO),
the Clinton Administration has —
according to the Washington Post:

“quietly agreed to end the
requirement that Chinese ships
provide four-days notification
when entering one of a dozen
sensitive [U.S.] ports [i.e.,
those near sensitive military
installations]. In exchange,
China agreed to provide new
business opportunities it had
first promised American shippers
in 1993, but had not yet
delivered. Officials say
implementation of that offer is
progressing slowly.

“The primary Chinese
beneficiary of the deal struck in
the spring and summer of 1996
is the state-run shipping
company, COSCO.”

3. See “PLA
Espionage Means Business” by Tim
Maier in the 24 March 1997 edition of Insight
Magazine.

4. See the
following Casey Institute Perspectives:
Russian ‘Bondage’: Moscow’s
Financial Breakout Gets Underway With
Wildly Oversubscribed Eurobond Sale
(No. 96-C
119, 26 November 1996); The
Debate Begins Over Russia’s Financial
‘Break-Out’; Where Will It End For
U.S. Taxpayers, Interests?
(No. 96-C
110, 4 November 1996); and If
You Like the Rigging of the Lebed
Dismissal, You’ll Love the Rigging of the
Global Credit and Securities Markets
(No. 96-C
100, 17 October 1996).

Summary of The William J. Casey Institute Of The Center For Security Policy’s Symposium On: “The Growing Nexus Between Geopolitics And The Markets”

13 March 1997
The Harvard Club, New York City

As markets for energy, technology and
financial instruments become more global
in character, the implications for U.S.
national security must be thoughtfully
addressed. The American government’s
practice of recent years — which has
tended to consider these inextricably
intertwined fields in isolation from one
another — is a formula for disaster.
Neither the security nor the economy of
the United States will be well served
over the long-term if policies are
pursued that fail to give due weight to both
facets of the global equation.

The following are among the hard
questions requiring considered answers:
1) Where will the greatest geopolitical
threats most likely emanate from? 2) What
economic and financial policies would
best mitigate the risks to American
national security and what defense
practices would best serve U.S. interests
in the economic, financial, energy and
technology fields? And 3) Is U.S.
currently prepared to formulate and adopt
such policies?

In order to stimulate and inform
debate about these and related issues,
the William J. Casey Institute of the
Center for Security Policy on 13 March
1997 convened its first Semi-annual
Symposium in New York City. The topic to
be addressed was: “The Growing Nexus
Between Geopolitics and the
Markets.”

Three distinguished Americans with
expertise in these fields served as Lead
Discussants: Robert L. Bartley,
Editor-in-Chief of the Wall Street
Journal; John F. Lehman,
former Secretary of the Navy Chairman of
J.F. Lehman & Company; and Roger
W. Robinson, Jr., former Senior
Director for International Economic
Affairs at the National Security Council
and the current holder of the Institute
William J. Casey Chair. Other
participants included more than one
hundred leading members of the
international business community and
defense industry, respected journalists,
former government officials and others
involved in public policy. (A complete
list of participants is attached.)

This paper briefly summarizes the key
points that emerged in the course of the
symposium. No effort was made to define
or approve consensus positions on the
issues discussed, nor were specific
recommendations adopted by the group. wp=”br1″>

The Business-Government
Disconnect

The pace and scope of modern business
have grown to immense proportions. In
fact, the term “multinational
corporation” has, for all intents
and purposes, lost its significance
because fewer and fewer American
businesses are not involved in some way
with the international marketplace. Even
relatively small U.S. businesses are
increasingly operating on a global scale.
The U.S. economy is inexorably being
redefined as an integral part of a
rapidly evolving world economy.

One effect of these changes is to
create unprecedented exposure for U.S.
enterprises to changes in sources of
supply and market share, to say nothing
of the effects of war, local conflicts
and terrorism. This reality places a
premium on ensuring not only open
dialogue between the business and
policy-making communities but also an
increasing appreciation in the former
about the national security implications
of international developments.

Accomplishing these goals is,
unfortunately, complicated by the reality
that the modern business culture is, in
important respects, worlds apart from the
Beltway political culture. For example,
inside the Beltway, there are still many
influential figures who continue to hold
out Japan as the model for economic and
industrial policy. In fact, as any
competent entrepreneur understands,
Tokyo’s efforts at centralized planning
and industrial policy that has greatly
contributed to Japan’s recent economic
decline.

U.S. experimentation with a similar
approach has been scarcely more
satisfactory. A case in point would
appear to be the Pentagon’s Very
High-Speed Integrated Circuit (VHSIC)
program. Fearing that commercial industry
could not produce the advanced circuitry
necessary for high-tech weaponry, the
multi-billion dollar VHSIC initiative was
born. In the event, the first VHSIC chips
produced in 1988-89 were an embarrassing
seventy-five percent slower than the PC
chips Intel was manufacturing at the
time.

The Problem With China

Much of the discussion in this
Symposium involved the nexus between
national security and economic interests
concerning the Peoples Republic of China.
It was noted that despite its repressive
political regime and continuing — if
selectively applied — communist economic
system, China is reaping vast economic
benefits from trade with and investment
from the capitalist world.

These benefits are enabling Beijing to
translate a rapidly expanding economy
into major underwriting for the
modernization of China’s military forces,
including a new-generation strategic
ballistic missiles. Concern was expressed
by many participants about Beijing’s push
for regional and even global superpower
status.

The question facing the United States,
then, is whether to attempt to curb
China’s rapid growth through a policy of
containment, or to “engage it”
in hopes that democratic pluralism and
respect for human rights will flow from
increased exposure to Western
institutions and societies?

A number of participants emphasized
the difficulties associated with trying
to contain China. Unlike the Soviet
Union, which presented itself easily to
economic isolation, China has sought to
push its tendrils out into the
international economy, and has done so
with considerable success.

On the other hand, the policy of
unbridled economic engagement being
pursued by the Clinton Administration
could carry serious implications for
American security. The record to date
suggests that, rather than becoming
‘democratized’ through economic growth,
open access to Western markets and
investment merely serves to enrich,
empower and embolden China. Notably,
since the People’s Liberation Army (PLA)
is comprehensively engaged in much of
China’s commercial operations, its
profits can go straight into PLA coffers
for the purpose of buying, among other
things, advanced conventional and
unconventional weaponry.

‘Strategic Bonding’

The Casey Symposium also illuminated
another, less noticed down-side to
China’s yawning access to American
corporations and investors: Doing
business with Beijing tends to creates a
U.S. constituency comprised of interested
parties (e.g., securities firms, pension
plans, insurance companies, leasing
firms, corporations and individuals) that
could effectively hamper, if not
preclude, Washington in taking political,
economic or military actions against the
Chinese government should the need arise.

A case in point is the use China,
among others, is making of international
and U.S. financial markets to secure
undisciplined, unconditioned and largely
non-transparent resource sources. By
issuing sovereign bonds or similar
instruments offered by government-owned
or controlled corporations, China is able
to gain access to large sums of
inexpensive, general purpose cash without
having to meet the requirements imposed
by the International Monetary Fund.

For example, China’s Military
Commission (which oversees the People’s
Liberation Army) has reaped hundreds of
millions of dollars by issuing U.S.
dollar-denominated bonds. Using front
companies such as the China International
Trust and Investment Corporation (CITIC),
the Chinese military can obtain funding
from America’s companies and individuals,
and then use the money for goals inimical
to U.S. interests.(1)

Through such borrowing hundreds of
firms, and tens of thousands of Americans
and foreign nationals may be converted
from investors into advocates bent on
ensuring that no economic action is taken
against China, irrespective of its
policies and behavior. Indeed, they may
even push for financial support for
Communist China. After all, holders of
Chinese “paper” will not want
their un-reschedulable assets to lose
value; it stands to reason that the
prospect of a cash-flow or liquidity
crisis in China when the bonds mature,
will translate into intense pressure on
the US government to bail out Beijing in
much the same fashion that it did
previously with respect to Mexico City.

Financial Sanctions

Markets are extremely powerful forces,
which is why economic sanctions have such
problems in being influential and
sustainable. Attempts by Washington to
levy sanctions unilaterally are often
ineffectual, especially with the rapidly
changing international environment. Even
when effective, such sanctions tend to be
a blunt instrument, frequently harming
innocent citizens of the target country
while having little, if any, impact on
their leadership elite.

These realities give rise to an urgent
need to define and, as appropriate,
utilize carefully crafted financial
measures designed to penalize foreign
misdeeds in a discriminate and effective
way. The Symposium identified financial
sanctions as one potentially promising
new policy tool that might be considered
in this regard. The recommendation that a
screening process for the bond market
should be implemented in order to weed
out those who would use American
investment for goals contrary to U.S.
national security received considerable
favorable attention.

Relevant Factors Affecting
U.S. Options

  • Defense Contraction

Since the Clinton Administration came
into office, the contraction in U.S.
investment in its military and the size
of the armed forces has been outpaced by
contraction in the defense industry.
Excessive consolidation of the defense
industrial base could have potentially
adverse consequences on America’s
military power in the long run. It is no
accident that there have been 103 major
mergers under President Clinton, however.
Short-sighted profit-taking without
regard for the larger national interest
has transformed a reasonable effort to
streamline the defense sector into a
feeding frenzy resulting in excessive
consolidation and an industrial base that
may prove unresponsive to the Nation’s
needs as conflicts loom in the future. By
reducing competition through the
centralization of defense contractors,
the Pentagon risks repeating the earlier
VHSIC debacle — paying more for an
inferior product that takes longer than
necessary to bring on-line.

  • Insufficient Policy Attention
    Economic Security

No Cabinet-level body exists in the
Clinton Administration to consider
economic matters in the context of
national security. In contrast to the
Reagan era, when fundamental national
security interests were carefully weighed
against exports, jobs and profit margins,
President Clinton has seemed almost
exclusively concerned with pursuing the
latter factors without regard to the
former.

It may be some time before the
full cost of such monomaniacal
policy-making becomes evident. The
Symposium nonetheless signaled that that
cost with respect not only to China, but
Russia, the Europeans, Japanese and
others may prove to be very high, indeed.

Conclusion

Clearly more attention must be paid by
both U.S. official policy-makers
and business leaders to the growing nexus
between economic and national security
issues. Global integration dictates that
new strategies be devised — including
some of the above-mentioned ones — to
combat the increasing threats to U.S.
leadership in the areas of national
defense and technological competitiveness
superiority. The William J. Casey
Institute of the Center for Security
Policy looks forward to encouraging and
facilitating such progress through its
future Symposiums, which will be held
semi-annually on an alternating basis in
New York and Washington.

— End of
Summary —










The Casey
Institute of the Center for Security
Policy
Symposium on “The Growing Nexus
Between Geopolitics and the Markets”
The Harvard Club, New York City
13 March 1997
List of Participants wp=”br1″>

Ms. Tatiana Androssov, Global Forum of
Spiritual & Parliamentary Leaders
Col. Edward V. Badolato, USMC (Ret.),
CMS, Inc.
Dr. Norman A. Bailey, Potomac Foundation
Mr. James M. Barkas, Business Network
International, Inc.
Mr. David Baron, Foundation for
International Business & Economic
Resources, Inc.
Mr. Robert L. Bartley, Wall Street
Journal
Mr. Falk-W. Beindorff, Beindorff
Strategic Relations
Mr. Michael Belkin, Belkin Limited
BGen. Harry H. Bendorf, Boeing Defense
& Space Group
Ms. Rinelda Bliss, Center for Security
Policy
Mr. John A. Bohn, J. Bohn & Company
Mr. Thomas A. Bolan, National Review
Institute
Ms. Suzanne M. Bosze, Marfin
International, Inc.
Mr. Thomas Boyd, Bankers Trust Company
Mr. Barret F. Bryant, Center for Security
Policy
Hon. Jack W. Buechner, Manatt, Phelps
& Phillips
Mr. Daniel W. Caprio, Jr., KPMG Peat
Marwick LLP
Mr. Lawrence Casey, McCary & Rood
Mrs. Sophia Casey
Ms. Wai Wah Chin, Charterhouse Group
International, Inc.
Mr. James Claybough
Mrs. Denise Cocciolone, National Life
Center
Ms. Devon Gaffney Cross
Ms. Monica Crowley
Ms. Judy D’Agustino, American Council on
Science and Health
Mr. Kenneth Damstrom, Bankers Trust
Company
Mr. Gerald J. Davis, EQ Financial
Consultants, Inc.
Mr. Thomas C. Dawson II, Merrill Lynch
International
Mr. Joseph DeSalvo, Bankers Trust Company
Mr. Joseph R. DeTrani, Department of
State
Mr. Lawrence H. Douglas, Yankee Investor,
Inc.
Mrs. Ann English, Westchester Catholic
Coalition
Mrs. Mary Lou Forbes, Washington
Times
Mrs. Gabriella Fuisz
Joseph Fuisz, Esq.
Mr. Frank J. Gaffney, Jr., Center for
Security Policy
Hon. Evan G. Galbraith, Moet Hennessy
Louis Vuitton
Mr. Julian H. Gingold, Dean-Witter
Reynolds, Inc.
Mr. Thomas Glenn
Mrs. Thomas Glenn
Ms. Laura Hadjolian
Mr. Charles A. Hamilton, Charles A.
Hamilton Associates
Mr. Laszlo Hamos, Hungarian Human Rights
Foundation
Prof. C. Lowell Harriss, Columbia
University
Mr. G. William Heiser, GWH Consulting,
Inc.
Mr. Tom Hoopes, Tricentennial Foundation
For America
John L. Howard, Esq., Tenneco
Mrs. Mary Reilly Hunt, Mary Reilly Hunt
& Associates
Mr. Niger Innes, Congress Of Racial
Equality
Mr. Roy Innes, Congress Of Racial
Equality
Hon. E. Pendleton James, Pendleton James
Associates, Inc.
Mr. Geoffrey Jones
Mr. Norbert W. Josten, Boeing Defense
& Space Group
Mr. Sven F. Kraemer, Global Challenge
2000
Ms. Karen Kurrasch, Smith Barney, Inc.
Grant M. Lally, Esq., Lally & Lally
Mr. Thomas Langan
Larry Latourette, Esq., Preston Gates
Ellis & Rouvelas Meeds
Dr. Thomas J. Ledwith, Saint Patrick’s
College Maynooth
Mr. Steven M. Lefkowitz, Caxton-Iseman
Capital, Inc.
Hon. John F. Lehman, Jr., J.F. Lehman
& Company
Mr. David K. Lifschultz, Lifschultz Fast
Freight, Inc.
Mr. David L. Luke III
Stephen R. Macdonald, Esq., Dewey
Ballantine
Dr. Vincent G. Massaro, CW Post, Long
Island University
Mr. Robert J. McDermott, Charan
Industries, Inc.
Judge Owen McGivern, Donovan Leisure
Mr. R.T. McNamar, AVIC Group
International, Inc.
Mr. J. Paul McNamara, Sequoia National
Bank
Hon. Edwin Meese III, Heritage Foundation
Mrs. Ursula Meese
Ms. Ann-Marie Meulendyke, Bear, Stears
& Co., Inc.
Mr. Marc S. Miller, Julian J. Studley,
Inc.
Mr. Thomas G. Moore, Heritage Foundation
Mr. John U. Moorhead II, VM Equity
Partners
Mr. Amir A. Morgan, Center for Security
Policy
Mr. Geoffrey J. Morris, Reader’s Digest
Association
Mr. Denis J. Moynihan II, HRC Services,
Inc.
Ms. Maryann Murray
Mr. George Natalino
Mr. Fred Nimmich
Mrs. Fred Nimmich
Ms. Mary A. O’Grady, Wall Street
Journal
Hon. Sean O’Keefe, Syracuse University
Mr. John O’Sullivan, National Review
Mr. Daniel Nicholas Odescalchi, Strategic
Advantage International, Ltd.
Mr. Edmond P. Odescalchi, Global
Technology, Inc.
Ms. Athena Palumbo
Lawrence M. Parks, Ph.D., Foundation for
the Advancement of Monetary Education
Hon. Howard Phillips, Conservative
Caucus, Inc.
Mr. Richard Pollan, Pollan Trade, Inc.
Mr. Kary D. Preston, U.S. Trust
Mr. Raymond K. Price, Jr., Economic Club
of New York
Hon. Roger W. Robinson, Jr., RWR, Inc.
Mrs. Iris G. Rossi
Mr. Merrill C. Roth
Mr. Christopher Ruddy, Pittsburgh
Tribune-Review
Hon. Donald H. Rumsfeld
Mr. Zack Russ, Lockheed Martin
Corporation
Mr. John J. Ryan, Charan Industries, Inc.
Mr. Kevin T. Ryan, McCary & Rood
Mr. Tom K. Sayed, Camoflauge Inc.
Mrs. JoAnn Scebold
Mr. Stephen F. Scherock, Morgan Stanley
& Co.
Mr. Peter J. Scrobe, A1 Marine Adjusters,
Inc.
Mr. Edward Sellazzo, Solomon Brothers
Inc.
Mr. Jay Shaw
Mr. Thomas C. Shull, Federated
Merchandising Services
Rev. William Slattery, Legionaires of
Christ
Mrs. Bernadette Casey Smith
Mr. Owen Smith
Mr. W. Dennis Stephens, Preston Gates
Ellis & Rouvelas Meeds LLP
Mr. Ronald J. Sylvestri, Fleet Investment
Management
Ms. Alicia D. Therrien, Center for
Security Policy
Mr. James Tolmie
Mr. Stephen A. Traver, TRW Space &
Technology Division
Peter J. Wallison, Esq., Gibson, Dunn
& Crutcher LLP
Mr. Mark Weaver, National Center for Home
Education
Mr. Edwin Weisl, Jr.
Dr. Elizabeth M. Whelan, American Council
on Science and Health
Stephen T. Whelan, Esq., Thatcher
Proffitt & Wood
Prof. David Wigg, Southern Illinois
University at Edwardsville
Mr. Joseph R. Wright, Jr., AVIC Group
International, Inc.
Mr. Justin Yu, World Journal
Mr. Walter Zaryckyj

1. For more on this
important subject, see the following
Casey Institute Perspectives:
Russian ‘Bondage’: Moscow’s
Financial Breakout Gets Underway With
Wildly Oversubscribed Eurobond Sale
(No. 96-C
119, 26 November 1996) and Dangerous
Upshot of Clinton-Gore’s China ‘Bonding’:
Strategic Penetration of U.S. Investment
Portfolios ( href=”index.jsp?section=papers&code=97-C_47″>No. 97-C 47, 1
April 1997).

Validation of the Aegis Option: Successful Test is First Step From Promising Concept To Global Anti-Missile Capability

(Washington, D.C.): Last week, the
United States made an important advance
in the quest to provide the American
people, their allies and troops overseas
with protection from the growing danger
of ballistic missile attack. On 24
January, the United States Navy
successfully shot down an incoming
ballistic missile over the White Sands
Missile Range in New Mexico. In so doing,
it offered the first tangible
validation of the single most promising,
near-term and affordable option for
defending world-wide against theater and
national ballistic missile threats.

A Proven, If Rudimentary
Missile-Killer

The test used a modified Standard
Missile 2 Block IV (SM2 Blk IV)
interceptor missile to destroy an
incoming Lance theater ballistic missile.
The SM2 Blk IV is an anti-aircraft
missile currently in the inventory and
widely deployed aboard the Navy’s large
and growing fleet of AEGIS cruisers and
destroyers. The United States has
invested nearly $50 billion in these
assets which presently provide robust
air-defense for carrier battle groups and
other naval and Marine combat elements. This
investment represents the vast
preponderance of the infrastructure
required for global anti-missile
defenses.

Indeed, although the AEGIS ships’
radars are far from optimized for
tracking ballistic missiles in flight,
they have already demonstrated the
ability to do so. As the Navy noted in a
24 January press release announcing the
successful Lance missile intercept, one
of the oldest AEGIS cruisers — the USS
Bunker Hill — was on station near
the Taiwan Strait last year during
China’s provocative and intimidating
series of ballistic missile shots aimed
just offshore the two main Taiwanese
ports. The ship’s radar was able to
“record each missile flight in
detail.” Regrettably, however, the Bunker
Hill did “not have a missile
on-board capable of intercepting the
threat.”

Last week’s test demonstrates clearly
that American commanders need no
longer be put in the absurd and
strategically dangerous position of
having the capacity to detect and track
enemy ballistic missiles —
whether they are aimed at U.S. troops,
allies or population centers — but
no capability to shoot such missiles
down. Of course, it will be
necessary further to evolve the Navy’s
interceptors and their guidance and
kill-vehicles in order to counter more
formidable ballistic missiles than the
relatively slow-flying and short-range
Lance. Still, it is now evident
that the only real obstacle to providing
competent, affordable protection from
missile attack is the political will
to do so.

What the AEGIS Test Also
Demonstrated

The success of this first test of the
AEGIS option highlights two other points:

  • It adds new urgency to
    the need for the Clinton
    Administration to abide by
    provisions of the 1996 Defense
    authorization bill     which
    set out specific funding and
    testing milestones for the Navy’s
    ballistic missile defense program
    and for the Army’s Theater High
    Altitude Area Defense (THAAD)
    program. The administration has
    refused to implement this law —
    compelling 41 Members of Congress
    to seek redress in the federal
    courts. Given the clear promise
    of the Navy system, it is
    imperative that the Congress
    compel the Administration to
    comply with the law.
    Should the second-term Clinton
    national security team prove as
    obdurate on this point as was its
    predecessor, the case brought
    before Judge Stanley Sporkin last
    year would clearly become ripe
    for judicial intervention;
    efforts to obtain such
    intervention should be promptly
    renewed.

  • It powerfully reinforces
    the case for emphasizing the
    sea-based option for defending the
    American theater —     as well
    as those overseas — in any
    Congressional missile
    defense-related initiatives in
    the coming legislative year.

The Bottom Line

Now that the Navy’s capability to
detect, track and intercept
incoming ballistic missiles has been
demonstrated, there is no longer any
excuse for the Clinton Administration’s
policy of leaving the American people and
their allies and troops overseas
vulnerable to ballistic missile attack.
Members of Congress must honor their
oaths to uphold the constitutional
obligation to provide for the common
defense by swiftly completing development
and putting to sea at the earliest
possible moment effective anti-missile
defenses.

– 30 –

A New, Appalling Milestone in Clinton’s Contemptible ‘Coddling of Dictators’

(Washington D.C.): The Clinton
Administration is plumbing new depths in
its unctuous appeasement of Communist
China: It has invited the principal
military architect of the massacre
of an estimated 3,700 students, workers
and ordinary citizens in Tiananmen Square
on the night of 3-4 June 1989 to spend
ten days of feting by the Pentagon and
shopping for militarily relevant U.S.
technology.

During his visit, General Chi
Hoatian — who held the
equivalent rank of Chairman of the Joint
Chiefs of Staff during the brutal
crackdown on pro-democracy demonstrators
seven and one-half years ago — will
reportedly be accorded a full-honors
cordon involving a 21-gun salute and
walking review of troops at the Pentagon.
He will also visit five military
installations and one of the Nation’s
nuclear weapons laboratories (the U.S.
Military Academy at West Point, the Navy
base at Norfolk, Maxwell Air Force Base
in Alabama, Fort Hood in Texas, Sandia
National Laboratory in Albuquerque, New
Mexico and ending his tour at the
headquarters of the U.S. Pacific Command
in Hawaii). A highlight of Gen. Chi’s
excursion is expected to be a “staff
ride” through the Gettysburg
battlefield, one of America’s most
hallowed sites, in the company of
Secretary of Defense William Perry — a
prime-mover behind the Clinton policy of
appeasing Beijing.

Crimes Against Humanity

According to an important and
well-researched op.ed. article in today’s
Washington Times ( href=”index.jsp?section=papers&code=96-C_124at1″>see the attached)
by William C. Tripplett II, formerly
Chief Republican Counsel to the Senate
Foreign Relations Committee: “[General
Chi] was in operational control and
responsible for the detailed planning of
the assault on Beijing.” He
cites Time Magazine, which noted
as far back as 1989 that, “as
Chief of Staff, Chi bears major
responsibility for the violence unleashed
on Beijing’s citizenry by his
troops.”

The Tripplett piece goes on to
describe in some detail the massing and
deployment of troops under General Chi’s
command — and the intense political
indoctrination of the young peasant
soldiers involved in the run-up to the
assault — to ensure that the democratic
ferment in the Square was ruthlessly
liquidated. Incredibly, when
asked if his Department had any
reservations about hosting an individual
who had unleashed tanks and troops to cut
down unarmed civilians, the Pentagon’s
Press Spokesman Ken Bacon had the
temerity to respond: “The answer to
the question is ‘No.'” What
is more, the Washington Times reports
that the Central Intelligence Agency’s
official biography of General Chi fails
to make any mention of his
direct involvement in the Tiananmen
crackdown (1).

In addition, as Mark Yost notes in the
attached
op.ed. published in today’s Wall
Street Journal, Gen. Chi is
presiding over sales of weapons of mass
destruction and other military technology
to many of the world’s most dangerous
nations. These include
transactions involving nuclear, chemical,
and biological technologies and missile
systems with which they might be
delivered by states like Iran, Iraq and
Syria. Such sales stand to make
the General’s responsibility for
genocidal slaughter at Tiananmen Square
pale by comparison.

The Bottom Line

The Casey Institute of the
Center for Security Policy regards the
official treatment in prospect for
General Chi to be morally repugnant as
well as strategically shortsighted.
By transforming American military
personnel into props for the General’s
visit, the Clinton Administration is once
again demeaning our men and women in
uniform and associating the United States
with a preeminent enemy of human freedom.
In fact, it is almost as though the
Pentagon and White House had conspired to
offend as many sensibilities and values
of the American people as possible in
configuring this sordid event.

As an organization concerned with the
nexus between traditional national
security policy and the emerging
international financial, economic, energy
and technology portfolios, the
Casey Institute believes that the
Administration’s appeasement of Beijing
is also indefensible on the grounds on
which it is primarily justified — i.e.,
to curry favorable trade relations.
The attached
editorial in this week’s New
Republic elegantly underscores this
point.

– 30 –

1. This is,
unfortunately, but one of a number of
indications of the politicization of
intelligence under the Clinton
Administration. See It Walks
Like A Duck…: Questions Persist That
Clinton C.I.A.’s Missile Threat Estimate
Was Politically Motivated ( href=”index.jsp?section=papers&code=96-D_122″>No. 96-D 122, 4
December 1996).

Roger W. Robinson CNBC Interview

Russia’s Eurobond Issuing
Thursday, November 21, 1996

CNBC: Russia has issued its first
international bond in more than 75 years-the one billion dollar,
five year Eurobond. The emerging markets have been very keen on
this offering. There is, however, some growing concern about what
exactly those bonds will be funding due to the political
instability in the Kremlin and the fact that the country is
indeed in an illiquidity squeeze. Our next guest thinks investors
should look before they leap for the Eurobonds. Roger Robinson is
a former Chief Economist at the National Security Council at the
Reagan Administration and he currently heads up his own
consulting firm in Washington. And he joins us now from
Washington. Mr. Robinson, thanks for dropping by.

Roger Robinson: Thank you, Sue.

CNBC: Give me your take on why Russia is
floating this issue and how successful it will be.

Mr. Robinson: Well, I think it’s already
clear that its been very successful–oversubscribed from 500
million to about a billion dollars. I think it’s pretty clear
that they have a number of benefits here: they expand their
borrowing base enormously. Since 1917, they’ve primarily borrowed
from Western governments and banks only. Now you have securities
firms, pension funds, insurance companies, individual investors
all able to take a piece of this.

CNBC: And what is it that makes this
particular issue so attractive–hence it being oversubscribed?

Mr. Robinson: I think they are a new address
on the international capital markets. This is obviously a debut,
as I say, from 1917. That is an unusual event for the emerging
market groups.

CNBC: And in terms of what’s ahead for Russia
though, with the political instability and Mr. Yeltsin just
getting back on his feet, does that worry you at all about the
ultimate backing behind that bond?

Mr. Robinson: Oh, I think it does, Sue. I was
surprised and I think most analysts were surprised by the
favorable credit rating received by IBCA, Moody’s and Standard
& Poor’s that gave rise to this success. It’s a politicized
process at some level. Look at the IMF which was being relied
on–that was thoroughly politicized. And in the midst of this
bond offering they have suspended disbursements. Russia hasn’t
even signed the formal debt rescheduling on the $100 billion in
Soviet Union debt owed to western governments and banks, at least
at this time–at least it hasn’t been reconciled.

CNBC: What kind of rating would you have
given it, because obviously Moody’s and some of the other
investor services gave it a better rating than you thought was
appropriate and I have heard that from others. Would you have
even given it an investment grade rating?

Mr. Robinson: I frankly wouldn’t have a this
time. I mean I just don’t think they meet the criteria. We need
to look at where that money is going and how it’s being used.
This is not necessarily a benign event. They say it is for
funding the fiscal deficit, Sue, but if we think about it, they
also have a Topol ICBM missile, they have strategic modernization
goals, a more belligerent foreign policy as I mentioned and the
funding of a lot of former client states, like Iraq to Cuba with
a great deal of money involved. So, we have to ask ourselves–not
to mention the war in Chechnya–what are we funding here? And
that’s why I think it’s probably useful to have the appropriate
congressional committees at least ask some pertinent questions.

CNBC: So, are you saying we could be, in a
way, doing some backdoor funding for countries or political
affiliations that normally the United States would be against?

Mr. Robinson: I think it’s true. I mean after
all, you have here unconditioned, largely non-transparent,
undisciplined cash flowing into the coffers of folks like
Yvengeny Primakov–no friend of the West–and I think we need to
try to look at these questions carefully to make that it’s
consistent with the national interest and Western security
interests more broadly.

CNBC: Now, if Russia falls again or gets into
more trouble or political unrest increases in Russia, are those
bonds re-schedulable or re-financeable or not?

Mr. Robinson: I think that’s one of the big
problems–they are not reschedulable generally. The secondary
markets make the distribution too prolific. In fact, that’s kind
of the problem we got into with Mexico and the Tesobonos and why
we had to inappropriately use the Exchange Stabilization Fund of
the Treasury to have the American people fund out those bond
holders. Not to mention we have new constituencies being formed
all over the world on the political side to make sure that, for
example, Russia’s not to subject to economic sanctions or any
other serious penalties for misdeeds around the world.

CNBC: Is there a timetable, you think, on how
soon we will be able to tell whether or not these are actually
going to be successful? Obviously they have been initially, but
is there any kind of timetable to see their future success?

Mr. Robinson: Well, I think we will know
plenty as to whether the IMF, for example, kicks back in with
disbursements. And how does the Congress react to this? I may be
exaggerating their concern, but nevertheless, we have to look at
the political and security angles which have not at all been
scrutinized to date. I think we will probably know in the first
quarter how it is going because Russia has a very ambitious plan
in terms of bond offerings and this expanded penetration into the
Western securities markets.

CNBC: Very interesting. Mr. Robinson, thank
you so much.

Mr. Robinson: Thank you, Sue.

CNBC: We appreciate it. We’ve been speaking
with Roger Robinson, former Chief Economist at the National
Security council in the Reagan Administration. He joined us from
Washington.