‘Defense Conversion’ (Read Modernization) And Other Economic Flim-Flams Of The Moscow Summit

As the media hype and presidential public relations handlers concentrate on the START signing ceremony, Middle East peace prospects, the Bush meetings with reformers in Moscow and Kiev and the like, the real action at the summit is likely to be on a different, far less transparent agenda — economic, financial and technological assistance to the USSR. The main elements of such an assistance program appear to have been discussed in the course of the London Economic Summit two weeks ago. The Center for Security Policy believes that these initiatives, which include the following, are likely to gain further, possibly dangerous momentum in President Bush’s meetings with Gorbachev in Moscow:

• Political, financial and technological aid to the Soviet Union, ostensibly for the purpose of facilitating the conversion of the USSR’s vast defense industry. Unfortunately, as long as the Soviet political and economic system remains fundamentally unreformed, much of such aid will simply go towards abetting Moscow center’s campaign to restore and maintain its military competitiveness.

• Indeed, a substantial commitment to assist the Soviet Union in implementing an ill-defined — and probably ill-monitored — “defense conversion” program could, with Western assistance and technology, easily become a device for promoting Soviet defense modernization (for example, obsolete, peripheral Soviet defense facilities might be offered up to attract Western “dual-use” technologies, financing, etc., while the most capable Soviet plants continue weapons building.) 
• An infusion of assistance into the strategic Soviet energy sector. Previous discussions of this initiative have been deliberately misrepresented to be little more than “technical assistance;” in fact, this aid will likely entail billions in taxpayer guarantees for investments and exports (e.g., U.S. Eximbank and its counterpart agencies). These funds will probably produce a major new stream of untied, hard-currency revenues which Moscow center will use to preserve its power and expand its future economic leverage against those heavily dependent on Soviet energy supplies.

• A more forthcoming attitude toward Moscow’s campaign to be admitted to the IMF and World Bank as a full member. It is, in fact, entirely possible — Treasury Secretary Brady’s denials to the contrary notwithstanding — that the “technical assistance” from these organizations to which the Soviet Union will become entitled by dint of its “associate membership status” will rapidly evolve into full membership status before or at the Munich Summit next year.

• It is worth noting that, in the meantime, associate IMF membership might also have the virtue of vitiating the prohibitions imposed by the 1934 Johnson Debt Default Act — enabling the USSR for the first time to issue bonds and other securities instruments in the United States. By this device, Moscow could access U.S. securities firms, pension funds, insurance companies and corporations as new lenders of untied funds down the road. 
• Conditionality again ignored concerning ruble convertibility. The view of another senior Treasury official, Under Secretary David Mulford, (expressed on the record at the London Economic Summit) to the effect that a currency stabilization fund for the Soviet Union would not be possible for at least 2-3 years — a period of sufficient duration to permit structural reforms to precede ruble convertibility, will probably go by the boards within 6-9 months.

• Relaxation of Soviet restrictions on EBRD borrowing. Notwithstanding the nominal “EBRD turn-down” in London, expanded Soviet access to the resources of the European Bank for Reconstruction and Development — and/or the creation of a new Soviet Bank for Reconstruction and Development as proposed by some in Germany — may well get an American okay in Moscow.

• Debt relief. The Bush Administration will likely agree to do its part to secure a series of “quiet” debt refinancings for the USSR among G-7 nations on a bilateral basis — an effort to help the Soviets find ways to avoid a formal Paris Club rescheduling which Treasury Secretary Brady in London strongly discouraged the USSR from undertaking.

Instead of the foregoing initiatives — which are likely to retard rather than catalyze the necessary transformation of the Soviet political and economic systems, the Center for Security Policy believes that the United States should be following a radically different strategy for aiding the USSR. Such a strategy would have as its centerpiece a commitment to aid the reformist republics on the basis of their progress toward structural economic change and democratization rather than the central authorities under Mikhail Gorbachev.

This approach would conform to the fundamental shift in Western aid priorities recommended in recent months by President Richard Nixon, Senator Bill Bradley and others — a “bottom-up” versus “top-down” reform strategy. It would simultaneously involve incentives for structural reform and disincentives for further obstruction of systemic change by Moscow center. Component parts of such an initiatives would include:

• Insisting on full and immediate Soviet data disclosure. First and foremost, this should apply to the military-industrial complex. Before any consideration is given to aiding this largest and most important facet of the Soviet economy in the name of converting it to non-military purposes, the United States must understand such currently unanswerable questions as: How large is the complex; who controls it and how is it managed; and can elements of the complex be upgraded for civilian purposes without the benefits flowing to the Soviet military as well?

• Even once the answers to these questions are in hand, it is far from clear whether U.S. assistance in the name of conversion of the Soviet military industrial complex is a good idea. Conversion in the West has had a checkered history; most firms undertaking it have failed. Moreover, U.S. firms may legitimately wonder why tax-dollars should be expended on supporting potential competitors (for example, in the Soviet space industry) when the federal government declines to help its own companies experiencing traumatic market shifts. Certainly, there should be no additional liberalization of COCOM controls that would facilitate Moscow’s efforts to obtain dual-use technologies of incalculable importance to Soviet defense modernization. 
• Opposing the “European Energy Charter” — designed to facilitate an undisciplined crash Western program of energy-related assistance to Moscow center. Western security interests will not benefit from a resuscitation of this strategic sector of the Soviet economy, with the attendant increase in Moscow’s political leverage over its energy-importing neighbors and a vital revenue stream for untied, disposable hard-currency income.

• Requiring that Soviet collateral (e.g., gold, diamonds or oil) be placed in the physical possession of the U.S. Treasury or Federal Reserve sufficient to secure any future taxpayer-underwritten credit guarantees, official investment insurance coverage, etc. undertaken with Moscow center;

• Retaining Stevenson and Byrd limits on U.S. Export-Import Bank funds ($300 million overall and $50 million in the energy sector, respectively);

• Enacting the House-passed (374-41) version of the Kyl-Pressler amendment into law and encouraging all Western nations’ to adopt a similar requirement that structural change in the USSR precede further taxpayer-underwritten assistance;

• Extending, as proposed by Sen. Bill Bradley, Most Favored Nation status to the Baltic States now or at least separately from any simultaneous granting of this status to the USSR;

• Scrutinizing any bilateral Soviet debt “refinancings” with G-7 partners — steps which would be the “stealth” substitute for a more formalized rescheduling of Western government and bank obligations;

• Avoiding any preferential treatment for the USSR in Western financial arrangements and the unequal treatment by Moscow of Western creditors (notably, the rewarding of those nations which provide large, subsidized credits by liquidating out of sequence their companies’ arrearages); and

• Forestalling the Gorbachev-Kohl plan aimed at permitting the USSR’s economic woes to dominate next year’s Economic Summit in Munich to an even greater degree — at the expense of other, more pressing issues and more worthy aid recipients. Among other things, the Western nations should be called upon to stipulate that Gorbachev achieve specific and irreversible political and economic milestones before he is invited to attend the Munich summit.