‘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.
(1) See, for example, the Center’s Decision
Briefs entitled A Tale of Two Cities — Baghdad and
Moscow: The Un- Making of the President? (
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 (
(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.
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