Bridge Loans To Nowhere: A Central Bank Safety Net For Moscow?

Introduction

Some eighty central bankers from both the East and West are meeting behind closed doors this week in Basel, Switzerland at the Bank for International Settlements (BIS). High on their agenda is finding a stopgap solution to the rapidly deteriorating creditworthiness of the Soviet Union.

This matter has taken on particular urgency in the months since last October when Moscow began missing payments due Western suppliers. Estimates of the Soviet repayment arrearages to foreign suppliers have been reported now to be in the range of $2-10 billion.(1)the Japanese, French, and British governments are reportedly threatening to withhold insurance coverage for trade with the Soviet Union unless payments are assured under confirmed letters of credit. So severe has this payments crisis become that

What is more, government insurance premiums on trade transactions with the Soviet Union have roughly doubled over the past thirty days. Indeed, in some cases (notably that of Japan), taxpayers have already taken a direct loss from the reimbursement of corporate claims under government insurance schemes. This strong reaction by Western credit markets contrasts sharply with the long-standing practice of Free World suppliers who, as demanded by Moscow, formerly agreed to conduct virtually all trade on an “open account” basis. This meant that there would be no guarantees of payment by either commercial banks or governments which would have added to Moscow’s overall transaction costs and detracted from its prestige in the marketplace.

For their part, Western suppliers have also begun to act in response to the USSR’s serious delays on payments for goods and services. In many cases, shipments to the Soviet Union by such firms have been suspended until past-due bills are paid in full. Several smaller companies doing business with the Soviet Union are facing imminent financial ruin due to the tardy Soviet response to this crisis. Even many large companies such as Hoechst AG, Union Carbide, Xerox, DuPont, C. Itoh, Mitsui, Mitsubishi, Nippon Steel, NKK Corporation, Sumitomo Metal Industries and Kawasaki Steel Corporation, have been adversely affected. Some of the latter have gone so far as to suspend production of items destined for Soviet projects (e.g., large diameter pipe).

Moscow’s Financial Safety Net?

Viktor Gerashchenko, chairman of the Soviet Gosbank, in a statement during the BIS sessions said that the USSR had already secured an understanding from several Western central banks that it could raise hard currency in an emergency by pledging gold to be bought back at a later date. He also added that his country intends to sell the equivalent of $2 billion in commodities to clear Soviet arrearages to suppliers during the third quarter of 1990.

Western creditors and investors remain properly skeptical of these assertions by Moscow. They have no reason to do otherwise insofar as the Soviets continue to withhold vital financial and economic data such as the scope of the payments crisis, the size of remaining Soviet gold reserves, and several other categories of information commonly revealed by other debtor nations.

In this connection, the Center estimates that, due to the Kremlin dipping into strategic gold reserves since 1986, such reserves may now have a market value of no more than roughly $17-24 billion — not the $25-32 billion most often quoted in the Western press.

Thus far, the BIS has refused to provide a bridge loan to the Soviet Union of the type offered Poland last year ($500 mn) and Hungary this year ($300 mn). After all, Moscow is not a member of the International Monetary Fund or World Bank — as are Warsaw and Budapest — and therefore cannot hold out the prospect of repaying a BIS bridge loan through credit disbursements from these multilateral financial organizations. In short, such a BIS transaction with Moscow would represent a bridge loan to nowhere.

Recommendations

The Center for Security Policy strongly urges that the content of the ongoing discussions between Moscow and all Western central banks be made public immediately. Specific data that is required includes:

• the proposed amounts, terms and conditions of any “stand-by” arrangements between each Western central bank and Gosbank or any other Soviet financial institutions;

• the details concerning the value and location of Soviet gold held as collateral and updated figures on remaining Moscow’s strategic gold reserves and other hard currency holdings;

• a specific breakdown by Western country and company of all past-due Soviet obligations for goods and services supplied;

• a detailed schedule of the amounts owed by Moscow to Western suppliers which are outstanding but not yet in arrears; and

• a list of all Western companies and the respective amounts that have been reimbursed by government insurance and guarantee agencies as a result of Soviet payment delays.

In addition, the U.S. Treasury Department and the Federal Reserve should take joint responsibility for informing the Congress and the public of these important financial deliberations with Western governments and the Soviet Union. Moreover, hearings should be scheduled by both House and Senate Banking Committees (and possibly other interested committees) to scrutinize the strategic implications of the Soviet payments crisis and all Western governmental and non-government activities aimed at aspects of this critically important development.

Finally, the Congress and its counterparts in other Western capitals should ensure that central bank loans and stand-by arrangements with Moscow are not concluded unless and until genuine free market transformation of the Soviet economy occurs and until full data disclosure and financial discipline is realized.

1. Notably, the Economist of 19 May 1990 estimates outstanding arrearages at $10 billion.