FINALLY, DISCIPLINE, CONDITIONALITY AND COLLATERAL — IN TIME FOR MEXICO? TOO LATE FOR MOSCOW!

(Washington, D.C.): At long last, the Center for
Security Policy’s repeated pleas ⁽¹⁾
for U.S. sovereign lending to be based upon sound principles – –
pleas long ignored by the Bush and Clinton Administrations in the
context of lending to the former Soviet Union and Russia — have
taken hold in connection with the Mexican financial crisis. This
welcome development has been triggered by the requirement to
obtain congressional approval of a vast, $40 billion
taxpayer-guaranteed loan program for Mexico in the wake of that
country’s currency and economic free-fall.

Striking Parallels Between Mexico and Moscow

A distinguished member of the Center’s Board of Advisors,
Roger W. Robinson, Jr., a former chief economist at the National
Security Council and international banker, has noted in his
analysis of the Mexican assistance package a potentially historic
coincidence: Russia and Mexico find themselves competing for the
same, finite pool of Western financial resources in roughly the
same time period even as both countries confront similar
economic, currency and political crises. Indeed, the similarities
between the two nations are remarkable. They include the
following:

• Both are oil-based economies burdened with bloated state
  sectors and other structural rigidities;
• Both are grappling with rampant corruption and capital
  flight;
• Both have experienced currency free-falls of forty
  percent or more since last summer;
• Both are facing serious domestic insurgencies and ethnic
  conflicts; and
• Both are in the throes of momentous leadership crises.

To be sure, Mexico, by and large, enjoys a considerable
advantage over Russia in such categories as: progressive economic
development; the levels of integration into the world economy;
the ability to attract foreign investment; the role of its
military-industrial complex; progress in the construction of
democratic and free-market institutions; the intensity of
domestic insurgencies and ethnic strife; and geographic as well
as geopolitical alignment with the United States.

A Legacy of U.S. Government Ineptitude

In reviewing the past decade, the contrast between
the approach of Western government and multilateral institutions
and commercial banks toward Mexico and Moscow, respectively, has
been stark. After its first major financial crisis of August
1982, Mexico’s economic growth was revitalized, thanks, in part,
to its positive response to disciplined lending and other
arrangements imposed by the world’s financial community. By
contrast, Moscow was able to secure tens of billions of dollars
in borrowings during this period without having to accept
Western strictures of transparency, conditionality and collateral.

It is instructive to recall that then-President George Bush
and then-Secretary of State James Baker repeatedly assured the
U.S. Congress and the American people that the contingent
liabilities represented by government guarantees to Moscow would
never come due in a default scenario. As a result, billions and
billions of dollars in taxpayer-guaranteed loans were dispersed
by the ruinously mismanaged Commodity Credit Corporation (CCC) at
the Department of Agriculture and, to a far lesser degree, by the
Export-Import Bank. The Bush-Baker team routinely deprecated the
Center for Security Policy, concerned Members of Congress and
others for daring to suggest that an energy- and resource-rich
nation like the former Soviet Union which (up to that point) had
a solid repayment record, could default on its obligations.

In fact, the net effect of these earlier, unconditionally
extended contingent liabilities was to prove the skeptics
correct: Some $90 billion in public and private sector Western
credits were “rescheduled” (read, written-off, at
least by commercial banks) beginning in January 1992.
Billions of dollars in losses may yet be incurred by the American
people out of CCC — even though accounting sleights-of-hand are
being employed to portray these credits as still recoverable.

Not This Time!

Incredible though it may seem, the Clinton Administration
will shortly be echoing the Bush-Baker team’s earlier assurances
about the viability and prudence of extending new, insufficiently
conditioned multilateral (e.g., by the IMF) and bilateral lending
to Moscow, expected to total roughly $13 billion in 1995. As part
of this sales pitch, the Congress will no doubt be told by
Secretary of State Warren Christopher and Treasury Secretary
Robert Rubin, among other things, that:

• the Kremlin has put into place a disciplined,
  anti-inflationary budget for 1995, even though hardly
  anyone assigns any credibility to that paper exercise;
• the costs associated with the Chechen offensive were not
  budget-breakers, even though such costs — estimated
  to be as high as $2 billion and still rising — are
  having a debilitating impact on Russia’s already perilous
  financial condition;
• capital flight has slowed and privatization is back on
  track, even though funds dispersed to Moscow continue
  to be diverted to secret accounts in the West,
  particularly as high rates of inflation reemerge in
  Russia;
• the democratic and market reform process is still alive
  and well under Boris Yeltsin’s competent stewardship, even
  though there is little evidence to support such a
  contention.

Fortunately, the crash course in sensible sovereign lending
practices now being provided to the Congress, the media and the
American people in the context of the Mexican assistance package
will be crucial to breaking the code on the next round of U.S.
taxpayer funding for Moscow. In short, strict conditionality
and collateral to protect the American taxpayer’s interests
cannot be demanded in Mexico and then have these same
prerequisites waived for Moscow.

U.S. Financial Assistance: A ‘Zero-Sum’ Game

It should be obvious that, under present U.S. economic
circumstances and budgetary constraints, even if a far smaller
sum were necessary to stabilize the Mexican economy, the Clinton
Administration would be obliged to choose whether it will assist
Mexico or bail-out Russia. It cannot, as a practical matter, do both.

Recognition of the “zero-sum” quality of this
Mexico vs. Russia competition is increasingly evident in the
nervousness of many European countries — notably, the Kremlin’s
most consistent advocate, Germany. The Center for Security Policy
has learned, for example, that just last week a German
representative at the International Monetary Fund strongly argued
against the Mexican assistance package on the basis of size and
conditionality considerations. This suggests that the Germans,
and presumably others among its European partners, expect that
Russia’s claim on projected Western financial resources are in
the process of being diverted from their economic backyard
to that of the United States.

The Bottom Line

If one narrows the lens to examine the
Mexican-Russian competition for U.S. and other Western taxpayer
financing and is forced to choose sides in this debate, the
Center for Security Policy comes down squarely on the side of
Mexico. In any event, the Center believes an urgent, rigorous
retrospective is in order concerning the blunders on both sides
of the Rio Grande that have helped precipitate, if not cause,
the wrenching Mexican predicament. Any assistance program for
Mexico, however, must be characterized by appropriate financial
conditionality and collateral in the form of future Mexican
oil-generated revenue streams.

What should be added to the current U.S. strategy to
stabilize the Mexican economy and currency and restructure its
debt is a sell-down or syndication of American taxpayer credit
exposure to other wealthy allies which have a concrete stake in
the outcome of Mexico’s financial drama (e.g., sizeable,
pre-existing capital investment, involvement in Mexico’s energy
sector, etc.) After all, Mexico is energy-long and capital-short,
while some key American allies are in the reverse situation; they
could step forward for the benefit of all parties. Such an allied
syndication could be accomplished on the front-end of the package
as a precondition to congressional approval or within a year or
two (as this is a multi-year, tranched disbursement of U.S.
taxpayer credit guarantees).

In addition, 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 sovereignity 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.

In the unlikely event that there are any sizeable U.S.
taxpayer funds still available after legitimate Mexican
assistance requirements have been satisfied, the wisdom of
providing additional American aid to Moscow under present
circumstances should be carefully debated. Under no
circumstances, however, should any future American assistance
flows to Russia go forward on a basis less disciplined,
transparent, conditioned and collateralized than is
currently being planned for Mexico.

(1) See the attached
list of a representative sample of Center analyses reflecting
its concerns and recommendations regarding the folly of
undisciplined lending to Moscow.