Tag Archives: Mexico

Russian ‘Bondage’: Moscow’s Financial Breakout Gets Underway with Wildly Oversubscribed Eurobond Sale

(Washington, D.C.): Official
Washington may have not been paying close
attention but a momentous and
potentially ominous development took
place late last week — Russia’s
first international bond offering since
1917. This offering was eagerly
anticipated by “emerging
markets” and other fund-managers for
some time, as evidenced by the response:
Originally planned to raise $500 million,
the Kremlin’s debut issue was
over-subscribed by 100% (i.e., $1
billion) despite the extraordinarily low
interest rate offered (3.45 percent over
the five-year U.S. Treasury note rate)
and a relatively long-term maturity (five
years). (1)

What is Wrong With This
Picture?

Is Russia’s new access to the
international capital markets desirable?
The conventional wisdom holds that
Russia’s entry into the sophisticated
Western securities markets can only
accelerate Moscow’s integration into the
international financial and trading
systems. Some believe that it will also
serve to advance the decentralization of
economic decision-making and cause the
Russian leadership to be more responsive
to the markets.

Unfortunately — as is made clear in
the attached
CNBC interview with the William J.
Casey Institute’s Roger W. Robinson, Jr.
and column
which appeared in today’s Washington
Times by the Center for Security
Policy’s director, Frank J. Gaffney, Jr.
— these potentially positive
developments have a distinct downside: For
the first time since the Russian
Revolution, the Kremlin has the
opportunity to borrow massively from
sources other than Western governments,
commercial banks and multilateral
institutions. Now securities firms,
pension funds, insurance companies,
corporations and individual investors, to
name but a few, can and will be
tapped by Moscow.

Therein lies the rub. These sources
offer Russia an opportunity for
“financial breakout” — a goal
arguably even more coveted by the Russian
security services and foreign policy
apparatus than it is by the fledgling
Russian financial community.
Interestingly, in the final years of the
Soviet Union, Mikhail Gorbachev launched
a charm offensive aimed at Western
investors in the hope of keeping a
failing communist system on Western
life-support until the Kremlin could
construct a more viable economic system
(one such gambit was the oxymoronic
“command market” economy).

A key component of this
“Save-the-Union” plan was to
issue Soviet bonds in Western markets.
Such unconditional, general-purpose,
non-transparent, undisciplined sources of
cash, obtained at an inexpensive rate,
lent themselves nicely to underwriting a
range of foreign policy and security
priorities that might otherwise have been
unsupportable. Accordingly, the USSR
issued about seven or eight Eurobonds in
major currencies (yen, lire, francs,
Deutsche marks, etc.) that ultimately
yielded Moscow about $1.8 billion. The
crowning achievement of this
eleventh-hour “Perestroika
Bonds” salvage effort was to be a
direct run on the U.S. capital markets,
involving a dollar-denominated offering
out of New York. At the time, however,
certain legislative and political
impediments — now removed —
stood in the way.

Back in the USA

According to the London Financial
Times, some 44% of last
Thursday’s $1 billion bond issue was
bought up by US fund managers.
The remainder was placed with investors
in Asia (30%) and Europe (26%). As a
result, it is reasonable to
assume that certain American investors
will now end up — wittingly or
unwillingly — holding Russian bonds in
their mutual funds, pension funds and
insurance portfolios.

Moscow could, in short, be on its way
to recruiting over time formidable
new American and Western lobbies.
These lobbies could — as was recently
done in the case of Mexico’s tesobonos
— bring pressure to bear on the U.S.
government to make investors whole in the
event of a future Russian liquidity
crisis. The Kremlin is also
simultaneously creating powerful new
political constituencies which will
fiercely resist the imposition of US
economic, financial or other sanctions
against Moscow for serious misdeeds
around the world. After all, such actions
could seriously damage bond repayment
prospects.

Worse yet, these constituencies could
unknowingly be contributing to the
funding of activities inimical to U.S.
interests. Based on experience with the
Soviet system — which General Alexander
Lebed contends is still largely alive and
well — and contemporary evidence, it is at
least as likely that bond proceeds
will end up funding: the new Topol M
mobile ICBM and other strategic
modernization programs; the Kremlin’s
efforts to exercise control over secular
Muslim states in the oil-rich Caspian Sea
region; a robust international espionage
program (recently on display in
Washington); large-scale supplier credits
for the sale of two nuclear reactors and
arms to Iran; the completion of the two
irretrievably-flawed nuclear reactors
near Cienfuegos, Cuba; and other
operational aspects of what the Casey
Institute calls the “Primakov
Doctrine.”

Calling the 105th Congress

Do average Americans really have in
mind helping finance these activities
inimical to U.S. security interests? Is
the Congress going to abdicate its
responsibility to scrutinize the foreign
policy, national security and economic
implications of this Russian financial
breakout into the western securities
markets? If not, prompt hearings on the
subject must be convened in the 105th
Congress in the relevant House or Senate
forums, including foreign relations,
banking and finance, national security
and intelligence committees. The
following are among the questions
legislators should be examining:

  • Where are the cash
    proceeds from this and other
    Russian bond issues going and how
    are they being used?     The
    Western firms managing bond
    offerings would probably argue
    that the money is going to help
    reduce the country’s fiscal
    deficit — a deficit that would
    be considerably worse if wage
    arrearages were cleaned up. Is
    this true?

  • Even from an economic and
    market perspective this Eurobond
    offering appears premature at
    best and reckless at worse.
    For example, at a time when the
    IMF has suspended disbursement on
    its Extended Fund Facility to
    Russia to protest anemic tax
    collection efforts, is it in
    Russia’s best interest to be able
    to attract totally unconditional
    and undisciplined cash from the
    securities markets? What does
    that do to the IMF’s efforts to
    hold Russian feet to the fire on
    even modest systemic reform?

  • The European and American
    credit rating agencies appear to
    have judged that the thoroughly
    politicized IMF disbursements
    during the Yeltsin election
    campaign are a sure sign that
    Moscow would not be permitted by
    G-7 or other Western governments
    from falling below a certain taxpayer-underwritten
    floor.     Are such
    judgments warranted? Will the
    Congress be prepared to bail out
    investors in the event of a
    Russian liquidity crisis?

  • Is it not troubling that
    this bond offering debut comes in
    advance     of a formal
    reconciliation and signing of a
    rescheduling agreement for some
    $100 billion in unpayable Soviet
    debt owed to Western governments
    and banks?     From an
    investor’s point of view, is it
    not worrisome that the Russian
    Ministry of Finance was recently
    obligated temporarily to withhold
    payment on domestic
    dollar-denominated bonds
    (MinFins)?

The Bottom Line

In sum, the West has been down this
road before — with many of the same
players. The diversion of untold
billions of dollars of borrowed Western
funds by Moscow in the Soviet era to
finance activities inimical to Western
security interests is a fact. The past
default by the Kremlin on billions of
dollars of US taxpayers money is likewise
a fact.

Accordingly, the burden of proof
should be on the Securities and Exchange
Commission, the Treasury and State
Departments, the Federal Reserve and
ultimately the White House to explain to
the public: What is substantively
different this time?
What safeguards and prudent financial
disciplinary measures are in place now to
protect the financial and national
security equities of the United States?
American taxpayers and investors alike
have a “need-to-know.”

– 30 –

1. In part, this
response may be due to the elaborate road
show around the United States put on by
the co-lead managers of the first Russian
Eurobond offering — J.P. Morgan and SBC
Warburg, along with the Russian Ministry
of Finance. An even more important
consideration, however, is probably the
“gift” rating bestowed by the
European and American credit rating
agencies — far higher than is warranted.
For more on Russia’s inflated rating see
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).

Bad for (the nation’s) business

By: Frank Gaffney Jr.
The Washington Times, 26 November 1996

Ominous international trends suggest that what is now called
the “post-Cold War” period by politicians, academics
and pundits may soon be known as the “interwar years.”
And if a new cataclysmic war does erupt in the years ahead,
America’s adversaries are likely to be more formidable, thanks to
the shortsighted attitude the Clinton administration and allied
governments are taking to advance short-term business interests
without regard for the ultimate cost to Western security
interests.

Consider three worrisome cases in point:

  • Last week, Russia issued its first
    international bonds since 1917. This $500 million Eurodollar
    offering was oversubscribed by 100 percent to $1 billion – and
    reportedly received some $2 billion in offers – despite the fact
    that the interest offered was a modest 3.45 percent over the
    five-year U.S. Treasury rate. Such an extraordinary showing is,
    in part, attributable to the undeservedly strong credit rating
    Moscow received from the cognizant European and U.S. rating
    organizations – higher than that of Brazil, Turkey, Argentina or
    Venezuela and on a par with Mexico and India. In light of the
    success of this offering, the Kremlin and other Russian borrowers
    are expected to issue a plethora of such bonds on the world
    market next year.

    • In this manner, Russia is achieving a two-fer:

    1. The Kremlin is poised to secure a “financial
      breakout” – a source of potentially vast, undisciplined,
      unconditioned and largely non-transparent revenues. It seems
      reasonable to expect that at least some of these funds will wind
      up being used for purposes inimical to U.S. and Western security
      interests. These may well include the underwriting of: Russian
      nuclear reactors being built in Iran and Cuba, strategic force
      modernization, intelligence operations against the West and
      Moscow’s campaign to control the oil resources of the Caspian
      Sea.

    2. The large number of likely holders of Russian paper and
      the secondary markets for these instruments make it virtually
      impossible to reschedule bonds and notes. This, in turn, can be
      expected to give rise to a potentially large number of
      constituencies – including American securities firms, mutual and
      pension funds, insurance companies, corporations, and individual
      investors – that will almost certainly demand U.S. government or
      multilateral bailouts in the event of liquidity crises that
      impede Moscow’s ability to redeem its bonds on the respective
      maturity dates. (Remember the circumstances that led to the
      misuse of the Exchange Stabilization Fund of the U.S. Treasury to
      redeem Mexico’s tesobonos!)

    Worse yet, these constituencies can be predicted to produce
    powerful political advocacy groups that could come to rival the
    China Lobby. These New China Hands-in-the-till have successfully
    emasculated many U.S. foreign, economic and security policies
    toward Beijing, lest American financial and commercial interests
    be adversely affected. Ever since the days of the notorious
    “Trust,” the Kremlin has eagerly sought to cultivate
    such influential friends.

  • Rarely has the power of the China Lobby
    been more evident than in last weekend’s Asian-Pacific Economic
    Council (APEC) meetings.

    • In APEC’s wake, legitimate U.S. concerns about China’s
    strategic buildup, proliferation of weapons of mass destruction,
    hostile intelligence activities, aggressive behavior toward
    Taiwan and Hong Kong and repressive domestic policies have been
    effectively jettisoned. To be sure, the Clinton administration
    continues to pay lip service to such issues, but its actions
    speak far louder than its words. And its actions are going to
    ensure that there is no diminution in Beijing’s access to Western
    technical and capital resources and therefore no slowing in its
    ambition to establish itself as a regional superpower, if not the
    United States’ pre-eminent global rival.

  • Finally, the spectacle of the Italian
    government, the press and the anti-communist papacy behaving like
    starstruck groupies for Fidel Castro during his visit to Rome
    last week is evidence of the mounting international campaign to
    eviscerate the Helms-Burton bill. This legislation, which
    President Clinton chose to sign in the runup to the 1996
    election, codifies and tightens the U.S. embargo on Cuba.

Even though Mr. Clinton acted to postpone implementation of
key Helms-Burton provisions, Canadian, European and other
businesses and governments who have found it profitable to help
prop up Mr. Castro’s totalitarian regime are indignant that the
United States is attempting to jeopardize their gravy train.

The trouble with the theory that the post-Cold War world
would be transformed into one secure for Western interests by the
global growth of free markets – whether accompanied by democracy
or not – is that all too many capitalists in the United States
and elsewhere are quite content doing business with authoritarian
regimes. The latter typically promise stability, low wage rates
and relaxed attitudes toward the exploitation of workers and the
local environment.

Of still greater concern from a strategic point of view,
however, is the indifference of such capitalists to the
contribution their investments are making to perpetuating and
strengthening the authoritarians with whom they are
collaborating. It is telling that Alexander Lebed – the former
general whose promises of restored discipline in Russia have a
totalitarian ring – emphasized in Washington last week that his
interest in not “scaring” the West has a lot to do with
his desire, and that of his backers, to continue to secure
Western investment. In considering this line and that of Jiang
Zemin and Fidel Castro, Americans should bear in mind the fabled,
contemptuous Lenin assertion that the West’s capitalists would
sell the rope with which they will be hung.

Frank J. Gaffney Jr. is the director of the Center for
Security Policy and a columnist for The Washington Times.

If You Like the Rigging of the Lebed Dismissal, You’ll Love the Rigging of the Global Credit and Securities Markets

(Washington, D.C.): It is ironic that
the firing of Russian National Security
Advisor Aleksander Lebed — a key
indicator of the political instability
and potential for turmoil in Russia —
occurred just hours after the last U.S.
presidential debate passed without a
single question about the security
policy challenges that will confront the
next occupant of the White House. Few
actions could more forcefully underscore
the folly of believing that the world can
be safely ignored or demonstrate more
clearly the dangers of the Clinton
practice of over-investing in the
Kremlin’s ruling elite.

Specifically, the transparently
orchestrated dismissal of General Lebed
put into sharp focus the recklessness of
several Clinton initiatives designed to
prop up the Yeltsin-Chernomyrdin
government. These include the following:

Unjustifiable Lending by
the IMF

In the months leading up to this
summer’s presidential elections in
Russia, the International Monetary Fund
responded to intensive pressure from
Washington and other Western capitals by
relaxing the criteria and the
conditionality terms that borrowing
nations are expected to meet before
receiving disbursements on IMF loans. As
the Casey Institute of the Center for
Security Policy noted on 10 September:

“…The IMF, after
temporarily suspending the July
tranche of a $10.1 billion loan
to Russia, suddenly deemed that
Moscow had finally come to grips
with its tax collection problem
(despite the fact that tax
collection fell by 62% in the
first six months of 1996). This
decision, made only two weeks
after the original suspension,
came on the heels of comments
made by the new Russian Finance
Minister, Aleksandr Livshits,
that equated Russian tax
collection with a ‘black hole’
and said that Russia is an
unusual country because it is
possible to ‘pay no taxes at all
and nothing whatever will
happen.’

“Moreover, the IMF agreed to
raise Russia’s budget deficit
target from 4% to 5.25% of GDP,
allowing it to qualify for
further disbursements of the
loan, despite a ballooning
deficit. It appears to many
informed observers that these IMF
decisions were designed to allow
President Boris Yeltsin to make
good on at least some of his
outrageous election campaign
promises and to ensure that the
Clinton Administration’s
misguided Yeltsin-centric Russian
policy does not collapse prior to
the November elections.” href=”96-C100.html#N_1_”>(1)

On 24 September 1996, the Casey Institute
called attention to relevant remarks made
in Washington five days earlier by Grigori
Yavlinsky. href=”96-C100.html#N_2_”>(2)
Before a Radio Free Europe/Radio Liberty
audience, the economist and former
self-declared democratic candidate for
the Russian presidency, confirmed the
Center’s long-held suspicion that IMF
disbursements to Russia were directly or
indirectly being used to help finance
what Yavlinsky described as
“genocide” in Chechnya, saying
in part:

“…It looks like
our government is collecting
taxes from you…via IMF — and,
by the way, spending them on the
war, the war in Chechnya.
Nobody can say that this money is
not used for that. It [is
being] used to finance the war.
But they’re not collecting even a
half of the taxes they have to
collect, but they have money from
the IMF to use it for the war in
the same time.”

The OPIC Scam

The Clinton Administration next moved to turn
the Overseas Private Investment
Corporation (OPIC) into the latest White
House slush-fund-of-choice for extending
aid to the Russian government. In July
and August alone, OPIC provided $830
million toward guaranteeing or insuring
against political instability and other
country-of-risk factors in Russia. The
intensifying instability there has only
served to reinforce concerns that these
contingent liabilities will become
due-and-payable liabilities, in a manner
reminiscent of other
taxpayer-underwritten guarantee schemes
gone sour (e.g., the Savings and
Loan crisis, the Agriculture Department’s
Commodity Credit Corporation
multi-billion debacles in Iraq and the
Soviet Union, etc.)

Worst yet, in September, the
Administration sought congressional
approval to double its credit guarantee
and insurance ceilings to roughly $45
billion. The Center joined with a number
of other organizations across the
political spectrum to oppose this
unwarranted expansion of U.S. contingent
liabilities. Thanks to the leadership of
Reps. John Kasich (R-OH), Ed Royce (R-CA)
and others, this ill-advised initiative
was soundly defeated in the House of
Representatives.

The Penetration of Western
Securities Markets — It Begins…

Russia currently has total
indebtedness of roughly $130 billion —
the vast majority of which has been
“rescheduled” due to the former
Soviet Union’s default on Western private
sector and government credits. Even the
estimated $19 billion in loans extended
to Russia since 1991 has experienced late
interest payments, with the prospect that
this debt could also be rescheduled down
the road.

Against this backdrop it is
stupefying that credit rating agencies of
Europe and the United States are giving
Moscow an inflated credit rating
— so much so that it is higher than that
of Brazil, Turkey, Argentina or Venezuela
and on a par with Mexico, India and
Hungary. Not surprisingly, the
most egregious rating was provided by the
European agency IBCA of BB+ (i.e., one
notch below “investment grade”).
Moodies offered a rating of BA2 (two
notches below investment grade). And
Standard and Poors gave Russia a rating
of BB- (three notches below). According
to some experts, the European rating
would serve to encourage even
conservatively managed pension plans to
hold Russian paper. href=”96-C100.html#N_3_”>(3)

In short, Russia is in a
position to secure a roughly $500 million
bond issue with a probable five-year
maturity following what money managers
almost universally judged to be an
unexpectedly high (read, unwarranted) set
of credit ratings. As soon as
November 1996, Moscow plans to go to
market with an initial Eurobond offering
and expects to receive an interest rate
of only 300-350 basis points (3-3.5%)
above comparable U.S. Treasury bonds.
Prior to this surprise rating, Russia
could not have expected a rate less than
400-450 basis points. According to
Russia’s draft 1997 budget, the Kremlin
is planning to raise at least $1.3
billion in Eurobonds next year alone. The
lead managers for Russia’s first issue
are J.P. Morgan and SBC Warburg.

Prime Minister Viktor Chernomyrdin is
likewise looking to the Western
securities markets to raise capital for
the enterprise that serves as his
political base and source of immense
personal wealth, Gazprom. The world’s
largest gas company is expected to raise
$500 million by selling 1.5% of its
equity to international fund managers. It
will first issue a $380 million offering
of American Depository Shares (each of
which represents 10 ordinary shares) for
a total of 23.7 million shares this year.
These international shares will sell for
about $1.40 apiece — substantially
higher than the $0.40 per share domestic
price — and will be traded initially on
the London Stock Exchange. A New
York offering is expected within as
little as 12 months.

What Will Russia’s
‘Financial Breakout’ End up Funding?

The prospect that the Kremlin will for
the first time begin selling securities
not only to European and Japanese
investors but to American securities
firms, mutual and pension funds,
insurance companies, corporations, and
individual portfolios is made all the
more ominous by the potential uses to
which such new sources of funds may be
applied. Probably unbeknownst to
the typical American investor or employee
who may wittingly — or unwittingly —
wind up holding Russian paper, these
undisciplined, unconditioned and largely
non-transparent revenue streams flowing
into the Kremlin’s coffers could be used
to underwrite activities inimical to U.S.
and Western security interests.
These might include:

  • The funding of Russian
    supplier credits to facilitate
    the transfer of nuclear reactors
    to the fanatical Islamic
    government of Iran    , a
    regime determined to divert the
    associated technology,
    infrastructure, know-how and
    training to the production of
    nuclear weapons.

  • The completion of
    irretrievably flawed Soviet-era
    VVER 440 reactors under
    construction at the Juragua
    nuclear complex near Cienfuegos,
    Cuba.

  • A contribution to
    Russia’s ongoing
    strategic force modernization
    programs     including new
    classes of mobile ICBMs (the
    TOPOL-M), SS-N-24/26
    submarine-launched ballistic
    missiles and retrofitted Typhoon
    submarines on which they will be
    deployed.

  • Helping to finance
    Moscow’s efforts to intimidate,
    coopt and coerce secular Muslim
    states involved in the
    extraction, processing and
    transmission of the estimated 200
    billion barrels of oil in the
    Caspian Sea basin    .

  • Underwriting a major new
    initiative by the Russian
    intelligence services intended t    o
    secure critical military,
    industrial and financial
    information at the expense of
    Western interests.

  • Enabling Moscow to meet
    its existing pledge of a $10
    billion credit to expand and
    accelerate Iraqi oil production
    the moment UN-imposed sanctions
    are eased or lifted. And

  • Providing new revenues to
    be skimmed by corrupt officials,
    joining untold billions of
    dollars already diverted to
    secret bank accounts in
    Switzerland, Cyprus and
    elsewhere.

What Will Be Reaped

If allowed to go forward under present
circumstances, two further developments
seem predictable: First, the
politicized process that has given Moscow
today’s inflated credit ratings will, in
due course, improve further — ultimately
passing the threshold of “investment
grade” securities. At that
point, it will be highly problematic to
impose the necessary discipline,
transparency and conditionality on this
sophisticated funding mechanism for the
Kremlin’s activities.

And second, the large number of likely
holders of Russian paper and the
secondary markets for these instruments
make it virtually impossible to
reschedule bonds and notes. This, in
turn, can be expected to give
rise to a potentially large number of
constituencies that will almost
certainly demand U.S. government or
multilateral bailouts in the event of
liquidity crises that impede Moscow’s
ability to redeem its bonds on the
respective maturity dates. (Recall the
circumstances that led to the misuse of
the Exchange Stabilization Fund of the
U.S. Treasury to redeem Mexico’s tesobonos.)

Worse yet, these
constituencies can be predicted to
produce powerful new political advocacy
groups that could come to rival the China
Lobby, which has successfully
emasculated many U.S. foreign, economic
and security policies toward Beijing,
lest American financial and commercial
interests be adversely affected.

The Bottom Line

These ominous prospects demand that
Moscow’s stealthy financial breakout be
subjected to urgent and close scrutiny.
Even though Congress is out of session
and otherwise preoccupied at the moment,
the stakes are such that committees like Senate
and House Banking and Commerce
Committees, House National Security and
International Relations Committees,
Senate Armed Services and Foreign
Relations Committees and the respective
bodies’ Intelligence Committees
should elicit as much information as
possible from relevant executive branch
and independent agencies.

The latter should include: the Treasury
and State Departments, the Federal
Reserve, the Securities and Exchange
Commission, the CIA and FBI.
Formal hearings should then be held
promptly next year upon the convening of
the new Congress as the horse will
already be out of the barn in Europe and
at least some U.S. fund managers will
probably have begun taking Russian paper
into their international portfolios.

If Congress does its job, it will
clearly establish the increasingly
strategic dimension of the international
efforts being mounted by governments like
that of Russia and China to diversify the
way they fund themselves and their global
activities. It can only be hoped that the
national security implications of these
seemingly benign and legitimate market
initiatives will be addressed in time.

– 30 –

1. See Double
Trouble at OPIC: Exposing Taxpayers and
Underwriting Foreign Adventurism
(No. 96-C 82,
10 September 1996).

2. See Yeltsin
Has Been Politically Terminal for Months;
What Did Al Gore Know — and When Did He
Know It? ( href=”index.jsp?section=papers&code=96-C_89″>No. 96-C 89, 24
September 1996).

3. The Casey
Institute will shortly publish a more
detailed examination of the forthcoming
Russian bond offering and its
implications for the equities of both
Western governments and private
investors.

Summary Of A Symposium On The National Security Dimensions Of The Emerging Crisis In The Caspian Basin

The ANA Hotel
Washington, D.C.
13 March 1996

I. Strategic Overview — The International Politics of
Energy in the Caspian Sea Basin

The lead discussant for the first part of the morning’s
proceedings was Senator Jon Kyl (R-AZ), who sits on the Energy
and Natural Resources, the Judiciary and the Intelligence
Committees of the Senate. The following points were among those
raised during his presentation and the discussion that followed:

  • The oil in the Caspian Basin has motivated people for a
    century to attempt to control the area. This is certainly
    true today.

  • The main geopolitical question in the region today is
    whether a neo-imperialist Russia, aided and abetted by
    Iran, will dominate the development and export of this
    oil, or will Moscow prove to be an equal and fair player
    in the region, working cooperatively with the other
    states in the region — notably, Turkey, Georgia, Armenia
    and Azerbaijan.

  • Unfortunately, Russia’s desire to dominate the region’s
    oil resources is clear and manifests itself in the
    Kremlin’s instigation of — or other involvement in — a
    number of the conflicts occurring in the region now. For
    example, one of the pipelines that would transport
    Caspian oil passes through Chechnya, a
    breakaway region of Russia that the Russian government is
    desperately — and brutally — trying to keep from
    escaping Moscow’s sphere of influence.

  • Another part of this pipeline passes through Azerbaijan,
    an independent state suffering from ethnic conflict
    between Azeris and Armenians fomented, many believe, by
    Russia in an effort to retain control of that part of the
    region. Unfortunately, the United States has tended to
    support the Armenians — who are in turn supportive of
    Russian goals in the region — rather than the secular
    Muslim, Western-leaning government of Azerbaijan, which
    has shown itself much more supportive of the United
    States’ interests in the region.

  • Russia has also used heavy-handed tactics in Georgia
    in order to have its way concerning pipeline routes. In
    fact, Georgian President Eduard Shevardnadze believes
    that the recent assassination attempt against him was
    hatched in Russia and was a direct response to his
    decision to support a pipeline route that would not pass
    through Russian territory, and that does not therefore
    enjoy Moscow’s support.

  • As part of its effort to dominate militarily the Caspian
    Basin region, Russia has violated the Conventional Forces
    in Europe Treaty by keeping troops, tanks and other
    military equipment in the region in excess of levels
    permitted by the treaty.

  • As these events indicate, the Kremlin clearly understands
    the importance of its domination of the region’s oil
    supply and has taken steps to maintain hegemony in the
    area. Unfortunately, the United States has thus far
    failed to appreciate the interrelationship between all of
    these events which Russia, in many cases, may have been
    directly responsible for fomenting.

  • The United States must continue to support
    secular Muslim regimes — such as Turkey and Azerbaijan
    — which can act as a check on Russia’s intentions in the
    region.     Also, the United States should
    demonstrate that it is in Russia’s economic interests to
    develop the region’s resources cooperatively, rather than
    by attempting to dominate those resources and deny them
    to the West.

  • Regrettably, the Clinton Administration has largely
    neglected the Caspian Basin in favor of trouble spots
    like Haiti and Bosnia. Both the executive and legislative
    branches need to start paying more attention to the area.

  • Of particular concern is the difficulty experienced in
    educating policy-makers about the fact that Azerbaijan
    has proven far more supportive of America’s geopolitical
    interests in the region than has its neighbor and
    adversary, Armenia. This is due to a number of factors.
    Not least is the disproportionate political power
    exercised by Armenian-Americans and the absence of any
    comparably influential ethnic constituency speaking out
    in the United States on behalf of Azerbaijan. As a
    result, many legislators have been supportive of the
    Armenian point of view; the rest have largely been
    unaware of the strategic significance and stakes for the
    United States of maintaining a stable, secure and
    friendly Azerbaijan.

II. Caspian Sea Oil — U.S. Economic Dimension

The lead discussant for this portion of the symposium was Dr.
T. Don Stacy, Chairman and President of Amoco Eurasia Petroleum
Company — the lead player in the Azerbaijani International
Operating Committee (AIOC). His presentation and the ensuing
discussion included the following main points:

  • It is sometimes difficult for Western companies to make
    commercial deals in this region because the
    newly-independent governments have very little experience
    with basic economic practices, such as borrowing money
    from a bank. When the region was dominated by the
    communist economic system, money was borrowed from the
    central bank and was paid back in-kind with product, with
    no expectation that the cash would actually be repaid.

  • The breakup of the Soviet Union created opportunities for
    companies in the West, especially in Azerbaijan, for both
    energy producers and energy contractors.

  • Much of the coverage of the Caspian region in the world
    media today treats it as a subset of the larger issue of
    the future of Russia. However, due in no small part to
    its rich hydrocarbon resources, the Caspian region
    deserves to receive careful international attention in
    its own right.

  • The hydrocarbon resources from Azerbaijan, Kazakhstan and
    Turkmenistan will most likely be transported from the
    region elsewhere. Although Russia has few hydrocarbon
    resources in the region, it will play a crucial role in
    the transportation of the resources and in the
    geopolitics of the Caspian Basin. Other nations likely to
    experience the benefit of development and transportation
    of the Caspian Sea’s resources include: Turkey, Georgia,
    Armenia and Uzbekistan.

The Caspian Basin’s Hydrocarbon Resources

  • The first oil well in the region was drilled near Baku in
    1848, starting the first generation of the region’s oil
    industry. This area actually provided 75% of the Soviet
    Union’s oil production from the early 1920s until the
    start of World War II. And nearly one hundred years ago,
    the region provided about 50% of the world’s oil
    production.

  • The oil in and around the Caspian Sea is referred to as
    the fourth generation of Soviet oil, with the previous
    generations being Baku, the Volga Urals and Western
    Siberia.

  • The countries in the Caspian Sea region possess both oil
    and natural gas in great abundance, but in order
    effectively to exploit those resources, they need
    technology, investment and proper business procedures.
    The typical reaction from former Soviet countries when
    told that the West is interested in helping them develop
    their resources is “all we need is money. Please
    give us your money, and then go home, because we don’t
    really need you.”

  • In fact, these governments do need the West,
    because at present they have no concept of what it takes
    to run a business, remain profitable, be efficient and
    compete in a free economy. They have an educated and
    well-trained work force and they do possess much of the
    technology necessary effectively to develop their
    resources, but they lack fundamental expertise in modern
    business practices.

  • The Caspian Sea has a total of about 70 billion
    barrels of proven oil equivalent reserves (this includes
    both oil and oil-equivalents of gas).     For the
    sake of comparison, the Middle East has about 800 billion
    barrels and Russia has about 450 billion barrels. Most
    other oil-producing regions of the world have been
    heavily explored, whereas the Caspian Sea has not. In
    fact, the Soviet Union actually exported oil from Siberia
    into the Caspian region — due, in part, to the Soviets’
    reluctance to operate off-shore in the deep waters of the
    Caspian as opposed to the more accessible, on-shore
    Siberian fields. As a result, all of the oil pipelines in
    the region currently flow into the Caspian
    Basin. One of the major challenges now facing companies
    wishing to export Caspian oil is reversing existing
    pipelines to allow oil to flow out of the
    region.

  • The Caspian Sea is believed to rank third in the world in
    terms of undiscovered hydrocarbon resources (including
    both oil and gas) and second in terms of undiscovered
    oil. Some estimates of the region’s resource potential
    put the Caspian Sea in close competition with the Middle
    East. The Caspian region could eventually replace Norway
    as the fifth largest oil producer in the world.

Developing the Caspian Sea’s Hydrocarbon Resources

  • The great economic potential for states in the region
    arises from the prospect that the Caspian Sea will allow
    them both to provide for their own domestic consumption
    needs and to export the sizeable surplus.

  • Russian cooperation — that is, non-interference — is
    absolutely crucial for the economic development of the
    region, and for the importing of critical construction
    materials that will be used to build pipelines.

  • Most oil production in the Caspian Sea has been done in
    the very near-off-shore, in water that is no more than
    about 15 meters deep. But the vast resource potential of
    the Sea will require advanced deep off-shore technology,
    similar to that used by American companies to drill in
    the Gulf of Mexico.

  • U.S. companies are currently competing with British firms
    to design and construct the off-shore drilling
    facilities. The British expertise comes from their
    experience in the North Sea, an extremely hostile
    environment compared to the Caspian. The Caspian Sea is
    more similar to the Gulf of Mexico, where U.S. firms have
    experience.

  • The Azeri-Chirag and the Gunashli fields are currently
    being developed. These fields may contain 3.5 to 4
    billion barrels of oil resources. An eleven-company
    consortium — with significant U.S. representation —
    signed a contract with Azerbaijani President Heydar
    Aliyev in September 1994 to develop these fields. To its
    credit, the Clinton Administration actively encouraged
    President Aliyev to sign on. And Mr. Aliyev has
    preferentially tilted the playing field towards Western
    companies, even going so far as to turn his back on
    historical allies such as the Iranians who were very
    anxious to be part of the deal.

  • Other promising fields in the Caspian Sea include the
    Caspishelf region, an off-shore region bordering
    Kazakhstan. There has been very little American
    involvement in the production of this oil as of yet.

  • In addition to Azerbaijan, Kazakhstan shows great
    potential as a developer and exporter of the Caspian’s
    resources. In order to exploit the resources, however,
    Kazakhstan desperately needs relevant technology and
    money. The Kazakhs desire Western investment, but
    investors have found that in addition to the high
    taxation and excessive bureaucracy that is so common in
    the region, they are also subjected to some critical
    challenges dealing with transportation out of the area.

  • Kazakhstan has received the full benefits of the Freedom
    Support Act, including cash loans, access to the Overseas
    Private Investment Corporation, and all other programs
    under the Act passed by the United States Congress. Azerbaijan
    — even though it is allowing American companies to have
    significantly more access to the region’s resources than
    is Kazakhstan — has been systematically excluded from
    any help under the Freedom Support Act, and has even been
    excluded from receiving humanitarian aid.     Such
    restrictions are embodied in Section 907 of the Act.
    [Subsequent to this Roundtable Discussion, legislation
    was considered in the Congress which would have made
    matters still worse. (1)
    While this initiative was ultimately rejected in the
    closing days of the 104th Congress, the unbalanced and
    self-defeating effects of the original Section 907 are
    still governing U.S. policy toward Azerbaijan.]

  • There are several challenges to doing business in the
    Caspian region. One of them is the influence that Russia
    and Iran are attempting to exert there    . There
    are also environmental concerns.

The Caspian Basin’s Logistical Challenge and Its
Strategic Implications

  • Transportation is one of the most complex issues
    to resolve.     The existing oil pipeline system was
    designed to move crude oil and refined products from
    Russia to the Caspian region. Even if the existing
    pipeline flows were reversed, there still would not be
    enough pipeline capacity to transport the potential 3
    million barrels of oil per day from the region.

  • The existing pipeline travels from Baku in Azerbaijan
    through Grozny, the capital of Chechnya, to Tikhoretsk
    and finally to the Black Sea port of Novorossisk, the
    main Russian oil export point. All oil that would flow
    through this pipeline to Novorossisk must transit through
    the Bosporus Strait, an extremely
    environmentally-sensitive area in Turkey. American oil
    companies and Turkish citizens alike are worried about
    the effects of an oil spill in the Straits and would
    therefore prefer an alternative to the existing pipeline.

  • A second pipeline is being planned that will help
    transport the so-called “early oil” — the oil
    being exported from the region immediately while the
    larger fields are being developed — from the Caspian,
    which will total between 90,000 and 150,000 barrels per
    day. This pipeline, dubbed the “western route,”
    will travel from Azerbaijan through Georgia, to the
    Georgian Black Sea port of Supsa. This pipeline has the
    advantage of not traveling through the very unstable
    areas such as Chechnya that the existing pipeline does.

  • Having two pipelines also improves the chances that the
    early oil will still have a transit route even if one
    pipeline is shut down due to political instability or
    other factors. As long as both pipelines are in operation
    to transport early oil, the oil from the second pipeline
    would be used for Turkey’s domestic consumption needs,
    thereby making it unnecessary for it to be transported
    through the Bosporus. Both pipelines have been approved
    by the Azerbaijan International Operating Company, and
    Georgia has agreed to have the western route pass through
    its territory.

  • The decision about where to build the main exporting
    pipeline — which will carry the three million barrels of
    oil that will eventually be exported from the Caspian —
    has yet to be made. It will be a very difficult
    decision to make politically.     The extra capacity
    provided by the second pipeline for early oil will allow
    for more time for this decision to be made.

  • The most economical route for the main pipeline would be
    for it to parallel existing pipelines in Turkey which
    lead to its Mediterranean port of Ceyhan. Of course, the
    route that the main pipeline will eventually take will
    depend on both geopolitical as well as economic concerns.

  • There is currently a dispute over whether the
    Caspian Sea is a sea or a lake.     If it is a sea
    — as Russia and Iran maintain — then its resources
    belong to all of the littoral states. Each state would be
    able to lay exclusive claim to only a narrow band near
    its coastline. If it is a lake, as Azerbaijan and
    Kazakhstan claim, then every part of the Caspian would be
    assigned to a specific country, and that country would
    own the rights to the mineral resources in its zone. Such
    a division would leave Russia and Iran with a very small
    share of the Sea’s resources. These two states submitted
    in January of this year a joint letter to the United
    Nations expressing their view that the Caspian Sea is a
    sea, and therefore the states bordering it should reach a
    collective agreement on the development of its resources.
    Experts in international law agree that there is no
    clear-cut solution to this dispute.

  • Azerbaijan’s President Aliyev has allowed the National
    Iranian Oil Company to help develop the Shakh-Deniz oil
    field. He has also allowed Lukoil, a Russian firm, to
    help develop Azerbaijani oil fields in hopes of softening
    the dispute about Russian and Iranian involvement in the
    exploitation of the region’s resources.

  • To date, the investor-friendly governments of Azerbaijan
    and Kazakhstan have ratified a total of six
    production-sharing agreements. The first oil is expected
    to flow in the second half of 1997.

  • The hydrocarbon resources of the Caspian Sea region
    present a great opportunity for western investment, while
    providing alternative sources of oil and helping to
    enhance the development of sound and independent
    economies in the region.

  • Some have accused American companies of bending to
    Russian pressure in deciding to go with the
    “two-pipeline” option for exporting the
    Caspian’s early oil since one of those two pipelines is
    supported by Russia. Industry responds by noting that the
    Russian-favored pipeline is already built, so oil can
    begin flowing through it relatively quickly and
    relatively cheaply. Therefore, American industry did not
    “bend” to any Russian pressure: Russia and
    industry both agreed — albeit for different reasons —
    that the existing pipeline through Chechnya and Russia
    should be used to transport early oil.

III. Defining and Defending American Interests in the
Region

The lead discussant for the final portion of the day’s
proceedings was Hon. Richard Perle, former Assistant Secretary of
Defense for International Security Policy. Among the points
raised during this discussion were:

  • The United States, as a great power, has interests
    virtually everywhere in the world. It is a mistake to
    discount those interests that may not be an immediate
    matter of life and death. It is dangerous to ignore
    interests until they become vital and to defend only
    those interests that are vital.

  • It is generally recognized that the United States and its
    allies — as modern industrial societies — have a broad
    interest in the sources of energy upon which they depend.
    It does not require much work, then, to develop the idea
    that the United States has an interest in an area as rich
    in energy resources as the Caspian Sea region.

  • The United States has an interest in discouraging and
    retarding the re-emergence of a hegemonic center on the
    Eurasian land-mass, which some elements in Russia
    undoubtedly would like to see. Unfortunately, those
    Russians who would favor the re-establishment of the old
    Soviet sphere of influence — such as Foreign Minister
    Yevgeny Primakov — are being brought back into positions
    of influence in the Kremlin.

  • The United States has an interest in encouraging
    modern and secular democracies in parts of the world
    where it is by no means a foregone conclusion that
    democracy is the form of government that will emerge
    after so many years of communist rule.     Countries
    in the Caucasus region with large Muslim populations are
    trying to decide whether to have a Western-style
    government — or one structured more like Iran’s. If the
    United States does not pay close attention to the
    countries in the Caucasus region, it runs the risk of
    driving those countries toward dangerous fundamentalism.

  • The United States has an interest in diminishing its
    dependence, and that of its allies, on the sources of
    energy in the Middle East that have been enjoyed — with
    occasional interruptions — for decades. The likelihood
    that the Middle East will become relatively stable in the
    near future is not particularly high. And such dependence
    creates opportunities for entities that wish to exploit
    that dependency.

  • Based on these interests, some conclusions can be drawn.
    For example, the United States should support
    those countries that are both a source of energy and a
    battleground between secular democracy and fanatical
    fundamentalism    . Turkey — which is squarely on
    the side of democracy, secularism and free markets, is
    one such country. An alliance between Turkey and the West
    — led by the United States — can enhance the
    effectiveness of Turkey as a model for development in the
    region.

  • One of the ways that the United States could enhance its
    standing with Muslims in Turkey and throughout the region
    is by taking a more aggressive stance in assisting the
    beleaguered Bosnian Muslims. Many in the Muslim world saw
    the arms embargo against Bosnia as a desire not to assist
    a predominantly-Muslim country like Bosnia. Another way
    is to stop acquiescing to Russia’s war in Chechnya.

  • The United States should take a more balanced
    view of the conflict between Armenia and Azerbaijan, and
    it should end the legal discrimination whereby the
    Azerbaijanis are denied American assistance.     The
    United States has taken sides in this conflict for
    reasons that have nothing to do with the merits of either
    side’s arguments    .

  • It is understandable that Americans might have a soft
    spot for the Armenian people. But it is possible to feel
    friendly toward Armenia without at the same time
    punishing everyone who has a dispute with the Armenian
    leadership. American industry is quite lucky to be doing
    so well in Azerbaijan, considering the unkind treatment
    that the Azeri government has received at the hands of
    American diplomacy.

  • Although the American people can be excused for having
    little knowledge or interest in the complex Caspian
    Basin, the people who are elected and paid by the
    American people to look after American interests cannot.
    The legislative and executive branches must take a more
    active role in defining and defending American interests
    in this region.

  • Although industry is correct in stating that the
    decisions about where pipelines will be built should be
    dictated primarily by economic concerns, it is nearly
    impossible in this situation to separate economics from
    politics. It is the responsibility of the United
    States government to assist American companies by
    ensuring that the geopolitical environment in the region
    is one that will foster a stable climate for economic
    success. Doing so will require sufficient American
    military strength and leadership to deter anyone tempted
    to affect adversely American interests in the region.

1. See the Casey Institute’s Perspective
entitled Meltdown in Armenia Demands Reassessment,
Redirection of U.S. Policy in the Caspian Basin ( href=”index.jsp?section=papers&code=96-C_94″>No. 96-C 94, 1 October 1996).

CANADA SLY

By Charles Lane
New Republic , 5 AUGUST 1996

Ian Delaney’s kids won’t be going to
Disney World this year. Dad’s company,
the Canadian metals firm Sherritt
International, runs a nickel mine and
processing plant in Moa Bay, Cuba, which
belonged to Americans before Fidel Castro
nationalized it. Under the new
Helms-Burton Law, Delaney is considered
to be trafficking in stolen U.S.
property. As punishment, he can’t cross
the border. Nor can his wife or minor
children.

Should we feel bad about this? Yes,
say The New York Times and other
high-minded critics of Helms-Burton. The
new law, the paper laments, runs
“counter to normal American
standards of conduct” and
“offend[s] the sovereignty of
America’s closest allies.”

Canada, Mexico and Europe are crying
foul, threatening retaliatory sanctions
of their own. These countries, along with
American foes of Helms-Burton, also
contend the law (like the U.S. trade
embargo itself) deprives Cuba of
liberalizing contact with the outside
world. If you want democracy, they say,
start with capitalism. ”

But Sherritt’s example, and that of
other Canadians who do business in Cuba,
shows that these foreign operations are a
caricature of competitive capitalism.
Their impact is anything but subversive.
Rather, they reinforce Castro’s grip on
power, just as American banana companies
once bolstered the comprador elites
of Central America. What’s really
“offensive” is the moral
obtuseness with which the political and
business elites of Europe and Canada view
Castro’s dictatorship, and the sanctimony
with which they exploit Helms-Burton to
vent cheap anti-American sentiment.

When Canadian investors come to
Havana, they don’t shop around for
partners among the Cuban populace at
large; the average Cuban can’t own
private property much less engage in
ventures with foreigners. All deals are
negotiated with the government, often
with Fidel personally. No competitive
bids, no international tender offers in The
Economist, just a nod from the man
in charge much as Fulgencio Battista used
to cut back-room deals with U.S. firms in
the Havana of the 1950s.

The Canadian government sometimes
discreetly greases the wheels. Take the
case of York Medical, Inc., an
Ontario-based firm established recently
for the express purpose of marketing
Cuban-made drugs and medical equipment.
Last year, Canada’s foreign-aid agency
paid travel and other costs for a
representative of the firm to meet in
Havana with Cuban biotechnology
officials. The trip included a meeting
with Castro at the Canadian Embassy
arranged by former Prime Minister Pierre
Elliott Trudeau–an “adviser”
to York Medical whose relationship with
Castro dates to the Trudeau government’s
opposition to U.S. Cuba policy.
Saskatchewan’s government invested almost
$250,000 in York Medical and further
subsidizes it by testing Cuban diagnostic
equipment in a provincial public
hospital.

Cuba’s Foreign Investment Law forbids
Cubans from going to any foreign-owned
mine or hotel to ask for a job. Nor, of
course, are there free Cuban labor unions
to bargain for the workforce
collectively. Rather, Canadian companies
agree in advance to hire their Cuban
workers through the island’s national
employment agency, which is controlled by
the Communist Party–and vets workers for
political obedience. Simon Cooper, a
Canadian hotelier on the island, told The
Globe and Mail that he makes sure not
to be “perceived as contracting
directly with individuals [or]
encouraging a free market in any
way.”

So much for liberalizing contact.
What’s more, Canadian firms don’t pay
Cuban workers directly. They give the
employment agency a per-worker fee–in
U.S. dollars–of which the vast majority
is pocketed by the Castro regime. The
Cuban state-run Geominerca enterprise,
for example, gets $2,700 per month for
each Cuban geologist employed by Canada’s
MacDonald Mines. (MacDonald is developing
gold deposits from which the Cuban
government could realize half of all
profits.) The geologists get 350 Cuban
pesos from the government–less than $10
at black market exchange rates. Foreign
firms must set aside a modest number of
dollars for “incentive”
payments to workers, but this doesn’t
nearly make up the difference.

Delaney, the largest Canadian investor
in Cuba, may be the most egregious
beneficiary of this cozy system. In
September 1990, he engineered a hostile
takeover of Sherritt and its shuttered
Alberta nickel refinery. The plant had
gone bust for lack of a cheap source of
raw material. Meanwhile, the Soviets were
pulling out of Cuba, and Castro was stuck
with his own moribund nickel mine: Moa
Bay, which the U.S. firm Freeport Sulfur
built for $75 million, only to have it
nationalized in 1909 and run into the
ground by Soviet and Czech advisers. In
January 1991, Delaney flew his corporate
jet to Havana and cut a purchase deal
with the comandante en jefe. Along
with millions in working capital, Delaney
brought the appropriate political
sensibility to the table. Of Castro, he
has said: “You don’t keep his job by
being a repressive dictator. You keep his
job because you have a deeply felt sense
of national pride and unity. He’s
charismatic, charming, a terrific
listener whose depth of knowledge is very
good.”

Sherritt’s management practices have
brought Moa Bay back up to the level of
production Freeport once envisioned.
Cuban nickel output climbed from 26,000
tons in 1994 to 44,000 tons in 1995.
Castro’s regime profits from its share of
the $16 million annual payroll at Moa
Bay. As of December 1994, it also gets
half the earnings, which totaled $26.6
million in 1995, from sales of finished
nickel made by Sherritt’s refinery in
Alberta. Before his U.S. visa was
revoked, Delaney said he planned to
invest $165 million more in Cuba over the
next five years. He is buying into hotels
and recently paid Castro $10 million for
oil deposits claimed by a U.S. firm.

Cuban workers at Canadian firms are,
to be sure, treated a bit better than
those who drudge away in wholly state-run
Cuban enterprises. Sherritt gave miners
overalls, hard hats, steel-toed boots and
new washrooms. The company is also
investing in an environmental cleanup of
the Moa Bay operation, because residents
have told Canadian reporters of stinging
rust-colored smoke pouring from the
plant’s chimneys and metal-laced mine
run-off flowing into the bay.

Nevertheless, Canadian investors in
Cuba sound defensive about their
participation in a labor system no
Canadian worker would tolerate for five
minutes. Just as Castro’s academic
apologists cite Cuba’s allegedly
bountiful social services to extenuate
Castro’s political repression, so
Canadian businessmen invoke free Cuban
healthcare to rationalize their
exploitation of cheap,
government-supplied Cuban labor. Cooper,
for one, told The Globe and Mail
that Cuba is “a cradle-to-grave
socialist country that takes care to one
degree or another of all the needs of its
people. I wouldn’t presume to judge the
degree to which the population is or
isn’t exploited.”

Delaney, too, poses as a protector of
Cuba’s egalitarian status quo. “If
we were paying them directly, would it be
better?” he mused to The Globe
and Mail “You can have
a long, long social debate about that . .
. if we went in and put all the employees
on a dollar wage, it would destroy the
social fabric of Moa Bay. You would have
a two-tier society and that’s not in our
interest.” Ian Delaney is not one
for long, long social debates. As the Toronto
Star put it, “doing business
with a dictator has been a rewarding
personal and business experience.”
“I only have two
responsibilities,” he said.
“that is to keep the balance sheet
solvent and get the strategy right.”

Trying to contain the ire of Canada
and other Western governments, the
Clinton administration has said it will
postpone implementation of some
Helms-Burton provisions, pending a
campaign to convert the allies to its
cause. One idea is to apply to Cuba a
version of the Sullivan Principles, the
code of humane conduct for U.S.
businesses in South Africa during
apartheid. It’s hard to see how
democratic governments could object to
this, but they’ll probably try.

President Clinton got tough on Western
subsidization of Castro only after the
Cuban air force shot down two
Cuban-American civilian planes in
international airspace last February,
threatening to make Cuba an election
issue in 1996. But Clinton’s lonely stand
is the right one, whether he sincerely
believes in it or not. Helms-Burton may
not be the most surgical instrument.
Certainly it’s not the most diplomatic.
But throwing Cuba open to Ian Delaney and
his ilk is no solution, either. When it
comes to dealing with Castro, it is our
neighbors to the north who occupy the
moral low ground.

Steve Forbes at the inauguration of the Casey Institute

ON THE OCCASION OF THE INAUGURATION OF

THE WILLIAM J. CASEY INSTITUTE OF

THE CENTER FOR SECURITY POLICY

 

The ANA Hotel, Washington, D.C.

13 March 1996

 

"WILL THIS BE AN AGE OF MISSED OPPORTUNITIES — OR ONE IN WHICH AMERICAN LEADERSHIP IS RENEWED?"

 

Introduction

Bill Casey, I think as Ed made very clear, did epitomize the best that is in America. And I know that it is the fashion these days, in certain circles, to criticize some of the things he did when he headed up the Agency. I’d just remind those who lob these criticisms to remember that we were engaged in a war. It was a Cold War, but nonetheless, it was a real enemy.

And when you face a war, when you face the pressures of war, you can’t always do things in a way that may satisfy arm-chair academicians, looking many years hence. Because part of the problem of looking back, however fascinating it is, is the idea that somehow the results were inevitable, that it was going to happen anyway, regardless of what individual players did.

Well, when you’re in the midst of battle, that is simply and totally untrue. But Bill Casey, in the midst of battle, when it looked like, at the beginning of the Reagan administration, that the Russians, the Soviets, as we called them in those days, did have the upper hand, they were the moving power, they had invaded Afghanistan, they had built up their military, they were running in Latin America. We weren’t even concerned about Nicaragua anymore; it was El Salvador we were hoping to save. The rest looked like it was lost.

So put yourself back at that period of time, and what Bill Casey helped to do was truly extraordinary. He did help cut off the supply of money and technology to the Soviet Union. That was vitally important. He did everything humanly possible to keep Solidarity going during a very critical time.

And he also made sure, in a very general sense, to bolster our friends and undermine our enemies. Sounds easy to say, but try it, and try it in Washington. He did it. He made it work. And to get something done in this town, not only to have a sense of vision, a sense of determination, but to be able to know how to operate in this town to get something done, inside a bureaucracy, where you know that you don’t have too many friends, even perhaps where you expect to find them, not to mention on some of those committees and quarters on Capitol Hill, is truly remarkable.

He’s earned a high place in history, and it is fun to be here today to give him honor, where honor is richly deserved and due.

The Challenge

The legacy that Ronald Reagan and Bill Casey left us is very easy to summarize, but as we look around us today, sadly, it is very easy to ignore. And that is to have a strong America here, at home, and a purposeful and confident America overseas.

When you look at that legacy, and look at the dismal contrast of America today, and the real question that faces us today is: "Will future generations of Americans look back on us, and our times, and say, ‘This was an age of missed opportunities’?" Will that be the epitaph of this generation and of this era? We stand in danger of that epitaph.

The fundamentals are there, here, at home, for a very strong America. The economic fundamentals have never been better….[But] we’re not growing the way we should, even though the potential is there for the greatest economic boom in our history.

Look at what else Bill Clinton has done. Let’s look at the topic today. Foreign policy. To talk about a Clinton foreign policy is almost to talk about an oxymoron. It’s not just incoherent and comical anymore. It is now getting downright dangerous.

It was kind of amusing, three years ago, in the aftermath of the Cold War, to think of a serious President, or any President of the United States spending at least a half hour a day with his pollster, going over the previous night’s polls, and visiting with his National Security Adviser 15 minutes every two weeks. That kind of was humorous, but it’s no longer humorous, that kind of incoherence in foreign policy….It is once again a dangerous world.

[Take, for example,] casual commitments made in Bosnia. Now our people are on the line there. We stand the danger — we stand the danger of making, in spirit, the kind of mistakes that we in the West made after World War I. After World War I, even though communism triumphed in the Soviet Union, what became the Soviet Union, democracy had triumphed, too, in much of Europe and much of the world.

But because we turned our backs on the world, and because of mistakes that the other great powers made, in the ’20s and ’30s, over 20 democracies collapsed in Europe and around the world, not because of aggression, not because of invading armies, but simply because the environment was inhospitable, both at home and overseas….

This is the danger that we face today. The world still appears very secure. We are still, as they say, the only superpower. But if we make the mistakes and continue the kind of dithering and incoherence of this administration, we will create the kind of forces that turned the promise of the post-World War I era into the purgatories of the 1930’s and into the world war of the 1940’s. It can happen again.

Human nature has not changed, the nature of power has not changed, and America had better not forget it. Just look around the world at some of the missed opportunities, starting with the biggest one, in Russia.

Economically, we foisted on them something called "shock therapy" which combined austerity, high taxes, so-called privatization which became a corruption binge, and ended up destroying people’s savings, and as we know from the Weimar Republic, as we know from czarist Russia, as we know from Nationalist China, that when you have hyperinflation, you set in motion the possibility of bad political forces arising.

That’s what’s happened in Russia today. The forces of freedom, the forces of reform, the forces of democracy are on the run, hopelessly on the defensive, it seems. Just look at elections. Communists winning elections again, doing well in elections. That tells you how far we’ve fallen.

Did we ever sit down with the Russians and show them how we stabilized our dollar 200 years ago, when it was worthless, or how other countries, like Argentina, stabilized their currency? No. It wasn’t worth it; just threw some aid over there; threw them the IMF, which is really malpractice, economic malpractice. Everywhere they go, there’s disaster in their wake.

And look at what’s happening. Not only bad election results, but now, ultranationalism is starting to get back in the saddle again. Look at this potential union with Belarus. Look what’s happening on the pressure on Ukraine. It’s starting to happen again, and we bear a major form of that responsibility.

Let’s go now to what’s in the headlines today: China and Taiwan. That was an easily avoidable crisis. All that had to have been done, when a few months ago it became apparent that pressure might be applied, was go behind the scenes, and say in unmistakably clear terms, "Force is not going to be tolerated against Taiwan."

But instead, we sent over our technology, did everything we could to appease the Chinese, and we had a Secretary of Defense who not only has turned a blind eye on this transfer of sophisticated military technology, when he was asked, a couple of weeks ago, what would happen if China started to lob missiles at Taiwan, went to war over Taiwan, he said: "Our response will depend on the circumstances."

Now, if that isn’t an invitation for trouble-making, I don’t know what is. What should have been done is what Teddy Roosevelt would have done: Go behind the scenes, make unmistakably clear the consequences [and] send the Seventh Fleet to the Straits of Taiwan….So with China and Taiwan, that disaster could have been avoided with a little bit of firm diplomacy.

* * *

…If we continue to dither about China and Taiwan, is it going to be too many years before Japan feels the pressure to rearm? Do we really want a re-armed, nuclear-armed Japan? The Japanese don’t want it. Their Asian neighbors don’t want it. And by our presence in Asia, we can help prevent it.

But this kind of ambiguity that we demonstrated with Taiwan and China is what got us in such deep, bloody trouble in Korea 45 years ago, what led to the disaster with Iraq in Kuwait six years ago. Why in the world are we repeating it again?

* * *

Look at another country, Cuba. We all know about the airplanes [shot down] there. We also should know a little more about two nuclear reactors that are under construction in Cuba, Chernobyl-like design, on seismically sensitive ground….They’re starting to construct them again. They had to stop a few years ago when the Soviet Union collapsed. Now they’re starting to build them again.

Do we really want two nuclear reactors of Chernobyl-like design, built in shoddy fashion, which all the defectors and observers say is happening, on seismically unstable ground, right off our shore? Why don’t we stop it before it’s completed? Do you hear anything from the administration on that? Not much. Not unless you bring it up. Doesn’t show up in the polls.

Then look at another part of the world, India and Pakistan. They’re two countries that could drift — skid — into nuclear war. Anything being done coherently in that part of the world? We haven’t heard about it.

Look closer at home. Look at Mexico, once a promising country, starting to develop, developing a middle class. What did we do? We foisted upon them, urged them, the deadly toxic poison of devaluation, which led Mexico into a depression, which has had social consequences in this country, people trying to cross the border. Mexico is in a depression. Mexico has a middle class that is now truly frustrated and dangerous. They had growing expectations; now they’re ruined. That could have been avoided.

Look at Libya, now in the midst of developing chemical weapons, deadly chemical weapons. Anything being done about that? No, not with this administration.

Look what’s happening to defense….We’re starting to cheat on spare parts, starting to underpay our people in uniform again, cutting back, cutting back. It’s not a thing of throwing money at it, but we do have real obligations in the world and we’d better be prepared to meet those obligations. We’re not in a position to do it today. That is truly asking for bloody trouble.

…Reference is made to the need for a missile defense system. We do need a missile defense system. China is soon going to be able to lob missiles, not just at Taiwan, but at the United States. So, too, are other rogue nations around the world.

Why wait for it to happen? All we have to do is upgrade, for starters. It’s cheap. The Aegis program with the Navy, make it Upper Tier, can do it in three or four years. That’s mobile. It would have been very helpful today with the Taiwan crisis. But is anything being done about it?

I must say here, one of my opponents, Senator Dole, has taken the lead in trying to move that forward, but again, the blockages come from the White House. They just don’t think it’s a matter of high importance anymore. They don’t think it’s really a matter of importance. They assure us that these rogue regimes will be years away from being able to do us real harm.

That kind of reminds me. Didn’t they say something about Iraq’s nuclear program a number of years ago — that it was many, many years away? Then we discovered how much progress they’d made. Why trust to estimates that can only be guesses, at best? Why not have that defense system, and have it soon? It’s our own safety.

* * *

And what about starting to negotiate a free trade agreement with Japan? It may take 10 years to do it; took six years to do one with Canada. But why not try it now? They’re in the throes of change. Let’s try to make those forces of change positive ones in Japan. Stranger things have happened.

A free trade agreement with Japan is no stranger, no more seemingly Pollyannish, than the idea that 50 years ago, a war between Germany and France would be inconceivable. Yet in Western Europe it is inconceivable today, thanks to democracy sinking real roots, thanks to the positive forces of change we helped put in motion. They had been at each other’s throats for a thousand years. Yet now war’s inconceivable. So why not look to the stars, why not dream about what we can do, and then try to make it a reality?

Diplomats like to say they’re realists. If we had trusted the realists all the time, we’d still be living in caves. So occasionally, we have to come out of our caves and throw the long pass, try to do something that may seem unrealistic today, but in a positive sense make the conditions possible to make what is unrealistic today positively realistic tomorrow.

Conclusion

In short, my friends, what is going to be our epitaph? I’m an optimist. I do think when the American people understand the issues, they will do things more right than wrong, just as they did when Ronald Reagan and Bill Casey went before them in 1980. I think we can do it again.

And I’m convinced that when historians look back on this period, they’re going to conclude once more, that the American people have proven wrong the critics and the skeptics, and the doubters and the naysayers, and that America, once again, [will] resume her place as the leader and inspiration of the world.

Vive La France! French Determination To Perform Necessary Nuclear Testing Should Be Wake-Up Call To US

(Washington, D.C.): On Bastille Day, it is appropriate to salute an instance of courage and principled pursuit of sound national security policy all too rare among Western leaders today. In the face of nearly universal condemnation, the new French government of Jacques Chirac has decided to resume limited underground nuclear testing. The backdrop for this decision is an unavoidable reality: To maintain an effective, safe and reliable — and therefore credible — nuclear deterrent, it is necessary to perform periodic detonations of actual weapons.

 

 

Those responsible for U.S. deterrent policy have a duty to follow the French lead. The new Congress should join them in rejecting the current anti-testing policy which is, together other Clinton "denuclearization" measures, leading inexorably to unilateral American nuclear disarmament.

 

An Incomprehensible Test Ban

 

Unfortunately, the Clinton Administration remains wedded to the approach largely forged by Mr. Chirac’s predecessor, Socialist Francois Mitterand. It seeks a permanent Comprehensive Test Ban (CTB). The Chirac government announced its intention to conduct a series of eight underground detonations at its Pacific test site, so as to perform reliability- and modernization-related experiments that would be essential if France were to become party to a CTB. The Clinton team is determined to ignore the compelling arguments being made by the current French government that higher yield nuclear testing is necessary at the very least to prepare a nation’s arsenal for the sort of environment in which all such testing is prohibited.

 

The Law Permits U.S. Testing

 

Ironically, such a series of American underground tests is specifically authorized by statute. In 1992, legislation was adopted by the then-Democrat-controlled Congress and signed by President Bush endorsing a Comprehensive Test Ban. This law also directed a moratorium on U.S. testing after up to fifteen tests were conducted to help prepare the American nuclear arsenal for a permanent cessation of underground detonations. The legislation also expressly provided for a resumption of U.S. nuclear testing in the event that other nuclear powers conducted tests.

 

Upon coming into office, the anti-nuclear zealots put into senior Administration posts in the Department of Energy, Arms Control and Disarmament Agency, State and Defense Departments, Office of Science and Technology Policy and National Security Council saw to it that the United States would forego any further testing. They also ensured that the continuation of nuclear testing by communist China would not be reciprocated by renewed U.S. testing.

 

The Clinton team has argued that such steps are justified since an end to U.S. underground testing is an essential factor in dissuading would-be nuclear powers to give up their ambitions. It repeated this dubious contention with mantra-like regularity in the course of its campaign to achieve a permanent extension of the Nuclear Non-Proliferation Treaty (NPT). And now, with the successful conclusion of that campaign, the Administration’s denuclearizers are citing commitments made in the course of it to prevent even a revisiting of the no-testing decision — to say nothing of conducting any U.S. tests.

 

Whether such a policy materially advances the cause of non-proliferation appears, frankly, to be a secondary consideration. The real reason for the Clinton insistence on no American nuclear tests appears to be more straightforward: Without periodic, realistic underground tests, the U.S. arsenal will over time inevitably become unreliable. At that point, it will be problematic to resist implementation of even the most radical, unilateral disarmament agendas.

 

Back to First Principles

 

The Center for Security Policy believes that the fiftieth anniversary on Sunday 16 July of the world’s first nuclear test — the "Trinity" experiment in Alamogordo, New Mexico is an appropriate moment to reflect upon the reasons why the Clinton Administration’s no-test policy is irresponsible. Toward this end, it is instructive to review the findings of one of the most comprehensive official U.S. government studies done on the subject of nuclear testing, a report submitted to Congress in September 1988 by the Reagan Administration. This report, entitled The Relationship Between Progress in Other Areas of Arms Control and More Stringent Limitations on Nuclear Testing, concluded that:

 

"Nuclear testing is indispensable to maintaining the credible nuclear deterrent which has kept the peace for over 40 years. Thus we do not regard nuclear testing as an evil to be curtailed, but as a tool to be employed responsibly in pursuit of national security." (Emphasis added.)

The fundamental reasons for nuclear testing are matters of thermonuclear physics and other relevant facts that have not changed since this report was sent to Congress:

 

  • "First, we do so to ensure the reliability of our nuclear deterrent."

    •  

  • "Second, we conduct nuclear tests in order to improve the safety, security, survivability, and effectiveness of our nuclear arsenal. Testing has allowed the introduction of modern safety and security features on our weapons. It has permitted a reduction by nearly one-third in the total number of weapons in the stockpile since 1960, as well as a reduction in the total megatonnage in that stockpile to approximately one-quarter of its 1960 value."

    •  

  • "Third, the U.S. tests to ensure we understand the effects of a nuclear environment on military systems."

    •  

  • "Finally, by continuing to advance our understanding of nuclear weapons design, nuclear testing serves to avoid technological surprise and to allow us to respond to the evolving threat."

The Bottom Line

 

Advocates of a Comprehensive Test Ban blithely assert that advances in computer simulation technology can reliably substitute for "live" tests. However, the current U.S. nuclear stockpile was created on the assumption that actual weapons testing would continue to be available. Although technological advances may theoretically permit other effective means of testing the reliability and safety of our stockpile, the demonstration of such capability is still years down the road. If a structured program of nuclear tests does not resume, the Nation’s nuclear deterrent — something that the American people and their allies continue to depend upon for their security — will undoubtedly degrade.

 

It is past time for Congress to take a hard look at the debatable premises of the Clinton nuclear testing policy and its dire implications should the United States fail, at a minimum, to follow France’s lead by conducting tests aimed at making the Nation’s nuclear arsenal less susceptible to the pernicious effects of a nuclear test ban. Hearings should be convened at once by sober-minded legislators like Senators Jesse Helms (R-NC) and Strom Thurmond (R-SC) and Representatives Floyd Spence (R-SC) and Ben Gilman (R-NY), who have supported in the past a robust nuclear deterrent. These hearings should explore the evident irrelevance of U.S. testing policies to the programs of nuclear minipowers or wannabes like India, Pakistan, North Korea, Iran, Iraq, Syria, Algeria, etc. Such hearings should also investigate the sorted history of how this country came to abandon nuclear testing, the only reliable means of insuring the safety and reliability of U.S. nuclear weapons.

 

At the very least, the relevant congressional committees must reckon with this unhappy reality: A continued U.S. moratorium on nuclear testing will result in a sharp erosion in the Nation’s deterrent posture. Under present and foreseeable circumstances, such a degradation would be intolerable and irresponsible.

CUBAN CHERNOBYL: CONGRESS MUST SEND A MESSAGE TO MOSCOW, ALLIES — NOT IN OUR BACKYARD!

(Washington, D.C.): Cuban dictator Fidel Castro is at it
again: With at least $800 million in help from his friends in
Moscow and Europe, he hopes at last to bring on-line a troubled
nuclear reactor 180 miles off the U.S. coast. It has been clear
for several years (1)
that, should he succeed in doing so, it is just a matter of
time before this reactor melts down with catastrophic
Chernobyl-style consequences for much of the United States.
Tomorrow, concerned Members of Congress led by Reps. Robert
Menendez (D-NJ) and Ileana Ros-Lehtinen (R-FL) will offer the
first of possibly numerous legislative initiatives aimed at
blocking efforts to complete the Juragua reactor complex — and
at penalizing those who propose to assist Havana in doing so.

The Only ‘Fix’ for the Juragua Reactors: Start Over

Among the most lethal detritus left behind by the collapsed
Soviet empire are a string of poorly designed, ill-constructed
and/or incompetently operated nuclear reactors that pose a risk
of human and environmental calamity. Most of these are within the
former Soviet Union itself and Eastern Europe and have been
subject to chronic, unscheduled shut-downs for safety reasons.
Many are regarded as nothing less than ticking time-bombs.
Indeed, the German government was so concerned about the four
VVER 440 reactors it inherited from East Germany that it shut
them down within days of reunification.

The two partially completed VVER 440 reactors near
Cienfuegos, Cuba are in a class by themselves, however. Experts,
including defectors previously involved in what passed for a
“quality control” program at the construction site,
have identified the following, fatal defects:

  • Sixty-percent of the Soviet-supplied materials used in
    these reactors is defective.     Soviet advisors
    reportedly told Cuban officials they could not guarantee
    that valves installed in the first reactor’s emergency
    cooling system would function under certain conditions.

  • Worse yet, much of the reactor’s equipment —
    including the reactor vessel, six steam generators, five
    primary coolant pumps, twelve isolation valves and other
    sensitive gear — was left exposed to the elements and
    sea air for as much as eighteen months    . In tropical
    areas, such machinery must be stored in climate-
    controlled facilities to avoid serious corrosion and
    other damage.

  • In a number of cases, equipment designed for one
    specific function has been used for other purposes when
    the appropriate components were unavailable    . This
    sort of jerry-rigging increases the chances of systemic
    failures.

  • Construction supporting primary reactor components
    contains numerous structural defects.

  • The first reactor’s dome would not be able to
    contain overpressures associated with meltdown
    conditions.     The upper portion of the containment dome
    has been designed to withstand pressures of seven
    pounds-per-square-inch — versus some 50
    pounds-per-square-inch required of U.S. reactors.

  • As many as fifteen percent of the 5,000 welds
    joining pipes used in the reactors’ auxiliary plumbing
    system, containment dome and spent fuel-cooling system
    are known to be flawed    . According to Vladimir
    Cervera, the senior engineer responsible for overseeing
    quality control at the Juragua reactor, X-rays showed
    welded pipe joints weakened by air pockets, bad soldering
    and heat damage.

  • Bear in mind that, if a single weld in a U.S.
    reactor were suspected of being defective, the
    Nuclear Regulatory Commission would suspend its
    operations.     What is more, Cuban intelligence services
    are reported to have destroyed x-ray imagery and other
    documentation concerning safety violations, making
    corrective action problematic.

  • Cuba’s human and technological infrastructure is
    vastly inferior to that of the former Soviet Union     —
    an infrastructure which itself proved inadequate to
    design, construct and operate nuclear plants safely.

  • Finally, there is reason to believe that the
    Cienfuegos area is seismically active     — a reckless
    place to put even well-designed and -constructed nuclear
    reactors.

Taken together, these defects make it impossible to create
safe nuclear power plants out of the partially constructed
Juragua facilities. No amount of sophisticated Western
instrumentation, know-how or training will rectify fatal physical
deficiencies that can, as a practical matter, only be corrected
by razing the site and starting afresh.

A Cuban Melt-down Would Be An American Problem,
Too

Should one or more of these defects cause a failure of the
cooling system in a Juragua reactor, there would likely be a
nuclear meltdown and release of substantial quantities of
radioactivity. Such fallout would not be confined to Cuba,
though. Indeed, according to a National Oceanographic and
Atmospheric Agency analysis:

“Based on climatological data for summer 1991 and
winter ’91-’92, the summer east- to-west trade winds would
carry radioactive pollutants over all Florida and portions of
Gulf states as far west as Texas in about four days. In
winter when trade-winds are weaker and less persistent,
pollutants would encounter strong westerly winds that could
move the pollutants toward the east, possibly as far north as
Virginia and Washington, D.C., in about four days.“

Damage to human life would be further exacerbated by the
pollution of many thousands of square miles of rich ocean fishing
grounds in the Caribbean and Gulf of Mexico, pollution that would
ultimately affect the Gulf Stream and the productive waters of
the Georges Banks. The result for millions around the world will
likely be significant food shortages and/or consumption of
contaminated fish.

With Friends Like These…

Against this backdrop, it seems inconceivable that Russia,
Germany, Italy or France — nations that purport to value their
relationship with the United States — could even consider
contributing to conditions that would likely produce such a
disaster. Yet, according to Rep. Lincoln Diaz-Balart (R-FL),
Russia has recently provided $30 million in credits to help
restore the first facility and supplied its reactor and turbine,
which are now on site.

In addition, an “international joint stock company”
has reportedly been formed to provide Castro with $800 million to
complete the first reactor. Georgy Kaurov, chief spokesman for
the Russian Atomic Ministry (MinAtom), says the plant will be
generating profits and nuclear-powered electricity by 1997,
thanks to help from Germany’s Siemans AG, Italy’s Ansaldo SpA,
and the French government-owned Electricite de France. The
Europeans have, to varying degrees, denied that any deal has yet
been done or would be until after the U.S. embargo on Cuba is
lifted. Still, suspicions abound that Siemans, at least, would be
willing to install upwind from the United States parts
cannibalized from the VVER reactors Bonn thought to be too
dangerous to operate on German soil.

Former NSC chief economist and Center for Security Policy
Board of Advisors member Roger W. Robinson, Jr. — who will be
testifying on this subject before the House International
Relations Committee, Subcommittee on Western Hemisphere next
month — believes there are several possible explanations for why
Russia and these European companies might be undertaking such an
unfriendly act:

  1. It’s a shakedown: Recent Clinton Administration
    diplo-financial gambits aimed at heading off the North
    Korean and Iranian nuclear programs may have prompted
    Russia to conclude that the United States would be
    prepared to pay dearly to prevent the completion of a
    Cuban Chernobyl.

  2. It’s Russia’s only hope to recoup some of the $30
    billion Castro owes the Kremlin:     The prospect of a
    go-ahead on the Juragua reactor, particularly with the
    help of a large European investment could foster an
    otherwise unwarranted impression of stability and
    economic opportunity in Castro’s Cuba. This could, in
    turn, encourage other investment despite Fidel’s standing
    as the worst credit risk in the world according to
    Euromoney’s 1994 Country Risk report and create a
    positive cash flow to Moscow.

  3. It’s a way to give the embargo-lifters additional
    leverage:     At a moment when the congressional
    leadership is actively pursuing legislation designed to
    close loopholes and otherwise tighten the U.S. embargo on
    Cuba, the threat that Fidel could be handed a nuclear
    time-bomb might just help dissuade such initiatives, if
    not greatly help Morton Halperin and other Clinton
    Administration officials in their bid to normalize
    relations with Castro.

  4. It’s no skin off the European companies’ noses: Thanks
    to generous taxpayer-underwriting of risky foreign
    investments, European businesses like those reportedly
    prepared to help on the Juragua reactors have little to
    lose. If they actually realize a return on their
    investment, fine; if not, the German, Italian or French
    government will make them whole. Either way, employment
    can be kept high and balance sheets profitable. The same
    disregard for the consequences of such exports-uber
    alles     policies have produced chemical weapons plants
    in Libya, deep underground command centers in Iraq and
    Russia and weapons of mass destruction programs in places
    like Iran.

The Bottom Line

If ever there were a vital U.S. interest, preventing Fidel
Castro from turning his rusting reactor sites at Juragua into
Chernobyls qualifies. Fortunately, many key legislators
recognize this reality — even if the Clinton Administration does
not appear to do so. In a strong letter to the President dated 8
June 1995, House Speaker Newt Gingrich and over 140 other Members
of Congress told him “the [Cienfuegos] nuclear plant will
pose a serious threat to the safety of the United States, Central
America and the Caribbean” and urged him “to use all
the instruments at [his] disposal to pressure the Russian
government” to abandon any effort to complete construction
of this reactor complex. The congressional signatories concluded:
“We cannot allow this type of threat to the security of
the United States to be present just a few hundred miles from our
shores.” There has yet to be a reply from the
Administration.

The Center for Security Policy believes that under no
circumstances should the United States be euchred into paying for
such a dire outcome — either directly or indirectly. Reps.
Menendez and Ros-Lehtinen are right to seek in an amendment they
will offer on the House floor tomorrow to dock Moscow’s foreign
aid account by one dollar for every dollar it sends to Castro’s
nuclear program to demonstrate U.S. resolve on this matter. They
are also right to pursue every other avenue — from blocking
launches of U.S. satellites on Russian rockets to deferring
rescheduling Moscow’s international debt to suspending American
taxpayer-guarantees for energy development in Russia — to bring
pressure to bear on the Kremlin to stop this transaction at
once.

Congress should also squarely address the malevolent
behavior of companies based in allied nations. Much as Sen.
Alfonse D’Amato and Rep. Peter King propose to do in legislation
aimed at stopping dangerous trade with Iran, such companies
should be offered a choice: You can do business with Fidel or do
business in the U.S. market, but not both. The threat of import
controls on European companies involved in bringing the Juragua
reactors on-line would almost certainly dry up capital and
technology from Europe, without which it seems unlikely that
Russians could go forward.

Finally, Members of Congress need to make it unmistakably
clear to the Clinton Administration that its sub rosa bid
to improve relations with Fidel Castro’s Cuba is at an end. A
despotic government that is determinedly trying to create a
nuclear time-bomb — in utter disregard of the safety of its own
citizens, to say nothing of the detested Americanos 180
miles to the north — is not one with whom the United States can
or should do business.

– 30 –

(1) See for example, Cienfuegos —
‘A Hundred Fires’: Muchas Gracias Moscow, But No American
Chernobyls (No. 91-P 44,
31 May 1991); A ‘Ticking’ Anniversary Present: Will Russia
Give Us a Chernobyl Ninety Miles Off the U.S. Shore? ( href=”index.jsp?section=papers&code=92-D_41″>No. 92-D 41, 23 April 1992); ‘Hear
Us Now and Believe Us Later’: Business Done with Fidel Means Big
Losses When Communists Fall, ( href=”index.jsp?section=papers&code=92-D_51″>No. 92-D 51, 8 May 1992); and Castro’s
Potemkin Shut-Down: Chernobyl at Cienfuegos Still In Prospect
(No. 92-D 108, 10 September
1992).

‘A GATHERING OF HAWKS’: ABUSE OF O.P.I.C. AS FOREIGN AID SLUSH-FUND SHOULD BE OPPOSED BY BOTH DEFENSE AND DEFICIT HAWKS

(Washington, D.C.): In an important lead editorial
published on 12 April 1995, the Wall Street Journal warned
of the dangers of the Overseas Private Investment Corporation
(OPIC) engaging in taxpayer-guaranteed venture capital financing
in the former Soviet bloc. According to the Journal:

“Already operating are the $200 million First [Newly
Independent States] Regional Fund…, the $65 million Poland
Partners Fund and the $155 million Russia Partners Fund. On
the drawing board is another $300 million Russia fund….
“This represents a quantum increase in the exposure
of U.S. taxpayers — to $814 million today from $70 million
when the Clintonites came into office. Combined with the
existing insurance operations, this means OPIC has
committed $6.3 billion of taxpayer money. And the agency
is preparing to make hundreds of millions of dollars in new
guarantees that require a sign-off only from the agency’s
board, made up of representatives of the departments of
Labor, Commerce, State and Treasury.” (Emphasis
added.)

There is a growing risk that such insurance and venture
capital schemes may prove detrimental to U.S. foreign policy
interests, to American congressional prerogatives and to U.S.
taxpayer equities.

Reckless Contingent Liabilities

Just what is the extent of insurance coverage OPIC is
obliging the American taxpayer to assume in places like Russia?
According to the organization’s literature, it includes the
following, breathtaking array of circumstances — all of which
are increasingly in evidence in the former Soviet Union:

“Insurance is available for investments in new
ventures or expansion of existing enterprises and can cover
equity investments, parent company and third-party loans and
loan guarantees, technical assistance agreements,
cross-border leases, assigned inventory or equipment and
other forms of investment. Coverage is also available for
contractors’ and exporters’ exposures, including unresolved
contractual disputes, wrongful calling of bid, performance,
advance payment and other guarantees posted in favor of
foreign buyer and other risks.”

In addition, OPIC provides political risk coverage which
covers currency inconvertibility, expropriation and political
violence. Some of the political risk dimensions attached to
currency convertibility are currently — and worryingly — in
play. It is notable, moreover, that the protection against losses
due to expropriation includes “creeping expropriation”
— i.e., “government actions that for a period of six months
deprive an investor of fundamental rights or financial interest
in a project.”

Finally, OPIC defines “political violence” to
include “hostile actions by national or international
forces,…insurrection…[and] civil strife.” It covers
“loss of assets or income due to war, revolution,
insurrection or politically motivated civil strife, terrorism or
sabotage.” OPIC’s “business income coverage,”
moreover, “provides compensation [that] is based on what the
project would have realized in net income but for the damage,
plus the project’s continuing, normal operating expenses must be
paid during the time the damage is being repaired.”

In short, OPIC’s taxpayer-underwritten contingent
liabilities are enabling the U.S. government to encourage
investors to pursue even dubious business ventures in countries
where such investment is deemed politically desirable. Were
it not for such insurance, it seems clear that — in a Russian
business environment fraught with creeping expropriation and
political violence — few, if any, of the hundreds of millions of
dollars worth of OPIC-covered projects would be proceeding there.
As the Wall Street Journal caustically observed last
Wednesday:

“…OPIC doesn’t cast a vote on where [its venture
capital] funds put their money. OPIC’s primary concern seems
to be that the venture capitalists follow a politically
correct investment strategy….The safety of U.S. taxpayers
who are financing [OPIC’s] escapade [in Russia] doesn’t seem
to figure…high on the priority list. ‘What we’re doing has
very little downside and a lot of upside,’ an OPIC
spokeswoman assured us. Oh really? Few, if any private
investors take such a nonchalant attitude toward the Wild
West marketplace of the former Soviet Union.”

The Old Surrogate Foreign Aid Slush-Fund Trick

Unfortunately, the Clinton Administration’s transformation of
the Overseas Private Investment Corporation from a small,
specialized government agency into a major slush-fund serving as
a surrogate foreign aid account is all too reminiscent of earlier
abuses. These include:

  • CCC: The Agriculture Department’s Commodity
    Credit Corporation was for years a favored device used by
    successive administrations to reward certain generous
    campaign supporters, such as the Archer Daniels Midland
    (ADM) Company, by giving them taxpayer- guarantees for
    large exports of agricultural commodities. It came to
    be used particularly by the Bush-Baker Administration,
    however, as a device for providing what amounted to
    non-transparent payoffs worth billions of dollars to the
    likes of Saddam Hussein and Mikhail Gorbachev for
    temporarily appearing to support U.S. foreign policy
    initiatives.     When, as was reliably predicted (1), their
    governments defaulted on these CCC credits, the taxpayer
    suffered the write-down or loss — not ADM or
    others who benefitted from the extension of such
    subsidized credits.

  • The Exchange Stabilization Fund (ESF): This
    account was established in the mid-1930s to help the
    United States stabilize foreign exchange flows. It has
    recently been mutated beyond recognition by the Clinton
    Administration, which turned the ESF into a medium-term
    creditor to sovereign borrowers, i.e., Mexico.     This
    occurred when Treasury Secretary Robert Rubin — taking a
    page from the Bush-Baker playbook — decided to finesse
    congressional opposition to a $40 billion bailout, in
    part for Rubin’s former firm, Goldman Sachs, and other
    Wall Street investors who were at risk of huge losses as
    the value of Mexican bonds crashed. He decided to convert
    the nearest, most obscure source of discretionary
    executive branch funds into a foreign policy aid scheme,
    pledging $20 billion from the Exchange Stabilization Fund
    to Mexico. Some $6 billion of it has reportedly already
    gone out the door — ironically, in the midst of one of
    the worst global dollar crises in history. (2)

  • Eximbank: The U.S. Export-Import Bank has a far
    better record of avoiding abuse than CCC or ESF. Eximbank
    has, nonetheless, had its moments of ill-advised
    sweetheart deal-making at the taxpayer’s expense when the
    executive branch sought to encourage foreign policy
    initiatives. (3)
    For example, approximately two years ago, Eximbank used
    sleights-of-hand regarding the Bank’s collateral and
    collection arrangements — including the attempted use of
    Moscow Narodny Bank as a supposedly secure,
    “off-shore trustee” to hold deposited
    collateral — in its attempt to conclude a strategically
    premature oil and gas development facility worth roughly
    $2 billion. (4)

What OPIC’s Contingent Liabilities Portend

A sense of what might happen as a result of such contingent
liabilities can be gleaned from the following scenario:

Say Russia continues: to reject American entreaties to
abandon its sale of nuclear reactors to Iran; to intensify its
onslaughts against the Chechens and Tajiks; to stymie NATO
expansion; to violate the CFE Treaty; to pursue an aggressive
“common military doctrine” while pressuring most of the
other Soviet successor states to accept Russian dictated military
command and control arrangements; to support the Serbs in a
widening Balkan war; and to side with Pyongyang in the latter’s
latest, extortionary efforts to push aside South Korean-built
light water reactors in favor of Russian reactors or components.
Then, assume such counterproductive behavior provokes the
inevitable — congressional pressure to suspend all U.S. foreign
aid flows to Moscow and support for multilateral lending to
Russia.

If the 104th Congress has not exercised due care, it will
soon reap the whirlwind for its neglect of OPIC’s rapid, ongoing
ramp-up of insurance and venture capital fund guarantees covering
Russian commercial and political risk: In the event
Congress tries to cut off aid to Russia, a retaliatory cycle will
be threatened. In its course, important OPIC-guaranteed projects
will be candidates for disruption by Moscow (and/or Washington).

In all probability, U.S. firms involved in
taxpayer-guaranteed trade or investment in Russia will then begin
vigorously lobbying Members of Congress, protesting that U.S.
exports and jobs are being needlessly jeopardized and perhaps
lost to European and other competitors. Should these corporate
protests fail, claims will be made under OPIC’s insurance
provisions and a whopping taxpayer pay-out in the hundreds of
millions — or more — would ultimately result.

Where National Security and Deficit Reduction Interests
Coincide

It is in the interest of neither defense hawks nor budget
deficit hawks for such a scenario to play out. The former will be
rightly alarmed at the prospect that the fungibility of such
back-door foreign aid could enable Russia to persist in untoward
military or strategic activities. The latter should be infuriated
at the prospect of the U.S. deficit worsening courtesy of
taxpayer pay-outs for wrong-headed investments gone bad in
Russia.

In particular, Rep. John Kasich, a leading force among
congressional advocates of deficit reduction — and other members
of the congressional budget and banking committees need to get
serious at once about preventing OPIC from losing hundreds
of millions, or even billions, of taxpayer dollars and enlarging
the Nation’s red ink. OPIC and any of the other agencies
involved in accumulating taxpayer-backed contingent liabilities
to volatile, largely non-creditworthy countries (e.g., Russia) —
much less extending direct loans — must be audited quarterly by
the relevant Congressional committees, not annually.
Recall the explosive growth in taxpayer exposure through OPIC’s
operations over the past two years — $70 million to $814
million. This translates into an accumulation of new
contingent liabilities at the rate of some $1 million per day!

In particular, the budget deficit hawks need to come to grips
with how to assess sovereign risk and to obtain an independent
assessment of the creditworthiness of nations under consideration
to receive U.S. funds. The tragic scale of the past taxpayer
losses —- almost all avoidable — to contingent liabilities
gone bad should likewise persuade the budget hawks that they
cannot afford the luxury of remaining preoccupied with domestic
economic issues. Strictly monitoring international financial
aid and currency flows and arrangements is crucial to this
nation’s deficit-reduction efforts as the millions hemorrhaging
from the federal budget today can be largely stanched in the
near-term by adopting a priority plan of “regular audits and
decisive remedies.”

Once evidence mounts that U.S. taxpayer resources are being
recklessly endangered, further loan disbursements or the issuance
of guarantees must be suspended pending a thorough investigation
and, almost certainly, congressional hearings. Regrettably,
history has shown that in such abuse-related circumstances it is
unwise to give the agencies involved another chance at
self-reform.

The Bottom Line

The message from Congress to the Clinton Administration
should be as clear as it is urgent: If the Overseas Private
Investment Corporation is privatized, it can basically do what it
wants — the consequences, for example, of insuring risky
business in Russia will rest on the shoulders of OPIC’s
shareholders and Board of Directors. So long as OPIC remains
under the government’s roof, however — with the U.S. taxpayer as
the “lender of last resort” — the organization must
abide by new rules. These rules should be forged by budget and
defense hawks joining together in a mutually reinforcing effort.
If properly designed, they will discourage in the future what has
happened all too often in the past, namely the abuse of executive
branch discretionary funds at enormous expense to the taxpayer
for dubious foreign aid purposes that would not otherwise have
secured congressional approval.

– 30 –

(1) See, for example, the Center’s Decision
Briefs entitled A Tale of Two Cities — Baghdad and
Moscow: The Un- Making of the President? ( href=”index.jsp?section=papers&code=92-D_55″>No. 92-D 55, 19 May 1992) and Red
Ink Rising: Congress Needs To Take A Hard Look at New Loans to
Defaulting Moscow (No. 93-D
9, 21 January 1993).

(2) See the Center’s Decision Brief
entitled Get Ready for Mexico III? ‘Our Problems Are Over’
— Not! (No. 95-D 08, 1 February
1995).

(3) See, for example, the Center’s Decision
Brief entitled How Not To Lend To A Bankrupt
Russia: Eximbank Energy Deal Should Be Iced, Reworked ( href=”index.jsp?section=papers&code=93-D_03″>No. 93-D 03, 11 January 1993).

(4) In the latter regard, it is worth
mentioning that OPIC offers expropriation coverage for the oil
and gas industry that “insures against the expropriation or
nationalization of petroleum projects, including losses caused by
material changes unilaterally imposed by a host government on
project agreements.” Regrettably, there have been a spate of
decrees and other measures that have been “unilaterally
imposed” that could cause “material changes” to
project profitability.

GET READY FOR MEXICO III? ‘OUR PROBLEMS ARE OVER’ — NOT!

(Washington, D.C.): Champagne corks have been
popping over the past thirty-six hours from Manhattan to
Mexico City with such ferocity as to nearly drown out the
self-congratulatory pronouncements issuing forth from
President Clinton, Mexican central bankers and some
congressional leaders. The source of such celebration:
the widespread belief that a deadly bullet headed their
way has been successfully dodged. This sentiment was
captured in a remark by Ariel Buira, vice-governor of
Mexico’s central bank, who was quoted in the Financial
Times today as saying: “Our problems are
over.”

In reality, the hastily constructed financial
assistance package unveiled yesterday — dubbed
“Mexico II” — that requires no congressional
approval may well meet the same fate as the original
gambit (which would have entailed Congress’ okay). This
downbeat conclusion arises only partly from recent,
bitter experience. Remember, initial market euphoria and
photo opportunities signalling congressional support
quickly gave way to recriminations and adamant opposition
to Mexico I; at least some of the same seems likely to
arise with respect to Mexico II.

Indeed, there are already serious splits on Capitol
Hill with Sen. Phil Gramm (R-TX) telling Fox Morning News
today:

“We need [the $20 billion that is supposed to
come from the Exchange Stabilization Fund] for our
own purposes and obviously, if we lose it here,
everybody in the country is going to be hurt.”

Rep. Patricia Schroeder (D-CO) signalled similar
divisions in the Democratic Caucus.

Even more troublesome though are the obvious,
potentially intractable difficulties likely to arise with
each of the component parts of the Mexico II package:

The Exchange Stabilization Fund (ESF)

Under the new Clinton plan, the bulk ($20
billion) of the financing needed to restructure $28
billion in tesobonos coming due in 1995 is
supposed to come from the U.S. Exchange Stabilization
Fund. Experts are perplexed how the function of that
facility can be stretched so as to permit it to perform
the task of providing medium-term sovereign lending to
foreign countries.

The Clinton Administration seems, nonetheless, to
have decided that it needs a new source of credit — or,
to put it less delicately, a slush fund — with which to
underwrite foreign policy initiatives. (Its predecessors
previously did serious damage to the Agriculture
Department’s Commodity Credit Corporation and to the
U.S. taxpayer’s equities for similar reasons.)

Given the vocal opposition of some 80% of the
American people to what is seen as an undisciplined
bail-out of corrupt Mexican officials and Wall Street
investors, it seems inevitable that Congress will, in due
course, turn on President Clinton. Sen. Frank Murkowski
(R-AK), for example, has already dubbed the Mexico II
package an “end-run around Congress.”

At a minimum, the legislature can be expected to
demand formal presidential notification concerning the
specific arrangements for conditionality and
particularly collateral to protect against losses in
the ESF. If Congress is dissatisfied with the response,
it is entirely possible that an initiative will be taken
to suspend follow-on ESF disbursements until such time as
satisfactory conditionality and collateral arrangements
are in place.

The International Monetary Fund (IMF)

The remainder ($17.8 billion) of the
financing needed to meet Mexico’s critical medium- term
requirements is supposed to come from an IMF Standby
Facility. By some accounts, this amount is double
Mexico’s permitted borrowing limit. Such lending by the
IMF would be unprecedented in the organization’s history
— both in terms of the aggregate amount and in terms of
the extent to which a country’s borrowing limit would be
exceeded.

By stampeding the IMF into such an inordinate lending
facility, the Clinton Administration may do lasting
damage to the Fund’s institutional integrity. This
prospect is made all the more likely by virtue of the
serious unhappiness evident on the part of some IMF
members — notably, the Europeans — who feel
multilateral resources should be going to meet the needs
of their regional financial crisis: Russia.

It should also be noted that the IMF and its
conditioned approach to lending are hot-button political
issues in Mexico under the best of circumstances.
The current situation — in which the PRI Old Guard and
the Zapatistas are putting the squeeze on President
Zedillo from the right and left, respectively, is likely
to produce additional domestic Mexican problems
with the IMF approach. Such a probability is further
increased by the glacial pace at which the Fund generally
operates. It is anything but a quick response team of the
sort President Clinton says the Mexican crisis requires.

Bank for International Settlements (BIS)

The other source of multilateral funds — the Bank
for International Settlements — which is expected to
double the $5 billion credit line it is currently
providing Mexico — has its own problems. First, its
short-term financing capabilities represent a maturity
mismatch given Mexico’s medium-term restructuring
requirements. Second, while the conditions for
disbursement are not known at this point, the reality is
that the BIS is a European-dominated institution. For the
reasons noted above, it is far from clear why the Germans
and others would fast-track disbursements of which they
do not altogether approve.

Investors/Commercial Banks

The other major source of funds — perhaps
on the order of $3 billion — is expected to flow from
American and international commercial banks with much
more coming from private investors. There are at least
two problems with relying on these sources to reignite or
resurrect foreign investment: First, a lot of these
investors have now been burned twice in the Mexican
market within a dozen years (i.e., in 1982 and 1994).
While investors generally will tolerate substantial
losses every twenty years, they are certainly not
going to rush to invest in a market that has proven far
more unstable. In fact, the Center for Security Policy
has learned that some Wall Street firms are encouraging
their clients to take advantage of the current, temporary
rise in the peso to cut their losses and exit the Mexican
market.

Second, there is a continuing deterioration in
President Zedillo’s political fortunes that is hardly
conducive to an attractive investment climate. Indeed,
there is a deepening sense of crisis: His opponents on
both the left and right smell blood in the water as the
economy under Zedillo fails to achieve the growth
necessary to keep them at bay.

What Should Be Done: Mexico III

In an analysis published on 27 January 1995(1) — before
the meltdown of Mexico I — the Center for Security
Policy called for a restructuring of the program in
several important ways, including:

  • reducing the American taxpayer’s credit exposure
    by syndicating the rescue effort among
    multilateral and foreign nation lenders —
    particularly those which are capital-long but
    energy short who might be brought to see the
    benefit of a strategic partnership with a Mexico
    that is in the opposite situation;

  • maintaining strict conditionality and collateral
    requirements; and

  • initiating a crash program aimed at Mexican
    revenue enhancement.

Specifically, the Center recommended:

“…It is possible — and, indeed, prudent
— to turn to the private sector which is now able to
draw on U.S.-based oil-field equipment, services and
technologies. These assets can now be utilized
without oil company involvement or infringing upon
Mexican sovereignty concerns to exploit rapidly
proven, but not yet developed, Mexican oil reserves.
Such an energy-related initiative could utilize a
portion of the government- guaranteed loans to ramp
up Mexican oil production in short order. This would
help to collateralize and protect American and
Western taxpayer interests while simultaneously:
shoring up Mexican President Zedillo; expanding his
revenue base for needed development and social
programs; preserving the capitalist transformation of
Mexico; and putting NAFTA and its planned expansion
back on track.”

The Bottom Line

At this writing, it is clear that there is
going to be a critical congressional retrospective into
the decisions — and indecisions — that led to
the present Mexican financial crisis. That inquiry will
be all the more punishing for President Clinton as its
focus turns, inevitably, to a hastily configured, flawed
Mexico II package.

The Center for Security Policy believes that the
Clinton Administration could significantly improve its
prospects by integrating into its aid initiative what
might be called a “Mexico III” package.
Such a package holds out some prospect for resuscitating
growth in the Mexican economy by substantially increasing
in the near-term that nation’s oil revenues and, thereby,
creating a basis for the kind of properly conditioned
and collateralized lending on the part of U.S. and
foreign taxpayers and multilateral organizations that
will inspire investment and warrant congressional
support.

– 30 –

(1) See the Center’s Decision
Brief entitled Finally, Discipline, Conditionality
and Collateral — In Time for Mexico? Too Late For
Moscow! (Np. 95-D 05, 27
January 1995).