Don’t Bail Out a Belligerent Russia

By ROGER W. ROBINSON JR.
Wall Street Journal, 28 August 1998

In the flurry of discussion about Russia’s failure to restructure its debt, collect taxes and
reduce its
budget deficit, little attention has been devoted to Moscow’s multibillion-dollar military programs.
Russia’s desperate state of affairs demands that Western financial decision-makers take greater
account of national-security considerations.

Despite its collapsing economy, the Kremlin has continued pouring enormous sums into its
strategic forces and weapons programs. During this decade, even as some Russian workers were
going unpaid, Moscow continued construction of a massive network of underground
command-and-control bunkers, deployed a new mobile “Topol-M2” intercontinental ballistic
missile, commissioned a new aircraft carrier and nuclear cruiser, refitted its Typhoon Class
submarines to accommodate SS-N 24/26 missiles, began a stealth-fighter program and built a
fifth-generation Borei Class ballistic missile submarine. This list, only partial, totals as much as
$10 billion–roughly half of the ill-fated IMF aid package.

Western largesse has also seemed entirely dissociated from the escalating dangers attending
an
ever more belligerent Russian foreign policy. Under Foreign Minister Yevgeny Primakov,
Moscow has launched initiative after initiative fomenting instability and threatening U.S. and
Western security interests.

Among the priorities of this “Primakov Doctrine” are a pro-Iraq tilt at the United Nations
Security
Council, the transfer of nuclear technology to Iran, a concerted effort to destabilize the oil-rich
Caspian Sea region and monopolize regional pipeline routes, the fostering of a crisis on Cyprus
with the scheduled October delivery of S-300 missiles to the Greek Cypriots, diplomatic
maneuvers to disrupt U.S. and NATO responses to the crisis in Kosovo, a renewal of Moscow’s
commitment to complete a dangerous nuclear reactor complex in Cuba, and continued large-scale
sharing of strategic technology and intelligence with China.

This agenda, potentially both costly and dangerous for the West, should not go unaddressed
as
the U.S. and its allies consider how to use their extraordinary financial leverage.

A road map for a more suitable approach can be discerned from a recent, little-noticed
episode
involving the energy conglomerate Gazprom, Russia’s dominant industrial entity, which used to be
run by Prime Minister Viktor Chernomyrdin. In an effort to offset the forced payment last summer
of some $4 billion in tax arrears, Gazprom began arranging a $3 billion bond offering in the U.S.
market.

Shortly before the bond offering came to market, Gazprom took a roughly 30% share in a
consortium, led by the French oil company Total, to develop Iran’s South Pars offshore gas fields.
Such an investment was in violation of U.S. law under the Iran-Libya Sanctions Act. Following
tempestuous hearings last October and November in the U.S. Senate Banking Committee,
Gazprom’s roughly $750 million Export-Import Bank credit line (intended to facilitate the
purchase of U.S. equipment) was suspended. Eventually, Congress’s criticism of Gazprom grew
so intense that the company abandoned its bond offering.

The conglomerate increased significantly the amount of a more expensive, and collateralized,
syndicated loan that was being readied for market in Europe. When this loan was ultimately
brought to market last November, it turned out to be for some $2.5 billion to $3 billion–nearly
the same amount Gazprom had planned to seek, on better terms, in the U.S. bond market.

A managing director of a major commercial bank who closely followed these transactions
termed
the Senate banking committee hearings in October the “coup de grace” for the Gazprom bond.
The result was that for the first time, a major foreign bond offering in the private U.S. capital
markets was derailed due primarily to U.S. national-security considerations. This
precedent-setting development shows that neither governments nor enterprises should expect to
enjoy completely unfettered access to the U.S. debt and equity markets when engaged in activities
harmful to U.S. security interests.

Prospective sovereign borrowers, as well as Western lenders and investors, should begin
taking
more seriously U.S. national security and foreign-policy concerns when performing initial due
diligence and creditworthiness assessments. U.S. lenders, in particular, need to understand that
nations undertaking costly military programs harmful to U.S. interests, such as Pakistan’s
multibillion-dollar nuclear weapons program, not only risk being sanctioned by the U.S.
government, but are also squandering precious financial resources. In either case, military
programs or foreign-policy initiatives that threaten U.S. security interests increase the chance of a
nation and its corporate enterprises defaulting on their debt obligations.

Greater scrutiny of nations’ foreign and military policies should encourage not only needed
political and economic reforms, but also more constructive international behavior. The West
would also be doing a favor both for Russia and its creditors by making it clear that Moscow
cannot have it both ways. Unreformed and unconstructive behavior will not be ignored by those
who govern financial decision-making.

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Mr. Robinson is president and CEO of RWR Inc., a Washington-based consulting firm,
and was
senior director of international economic affairs at the National Security Council under
President Reagan.