“East-West Relations At A Crossroads: The Role Of Western Economic And Financial Assistance”

Remarks by

Roger W. Robinson, Jr.,
President, RWR Inc.,
former Senior Director for International Economic Affairs
at the National Security Council (1982-1985)

Before the Board of Governors of the International Policy Forum
and the Council for National Policy

Seville, Spain
July 21-22, 1989

I would like to extend my appreciation to the International Policy Forum and the Council for National Policy and their Board of Governors for the invitation to join this distinguished gathering to speak on the role of Western economic, and particularly financial assistance to Soviet bloc countries. The specific question posed is whether such assistance will advance or retard genuine economic and political reform in these countries. Similarly, will such assistance lead to a more inward-looking and peaceful Soviet Union or to an economically stronger and more dynamic adversary?

I think an appropriate point of departure for my remarks is the recent Paris Economic Summit where an extraordinary amount of attention was paid to these issues. For example, a concerted Western strategy to revitalize the failed economies of Poland, Hungary, and possibly other "reforming" East bloc countries was, in many respects, the centerpiece of the Summit discussions. Mr. Gorbachev’s dramatic written appeal for Western leaders to remember Moscow when formulating major trade and financial initiatives for Eastern Europe increased the profile of this family of issues even more.

Indeed, in September the first high level follow-up sessions in the 15-year history of economic summitry will be dedicated to catalyzing expanded East-West economic and financial ties — specifically, West to East flows of new credits, debt relief and trade benefits. This surprising and, in my mind, distorted Western policy priority is all the more striking when some two dozen Third World leaders also in Paris, were left marooned outside the gates of the Summit discussions. A comparable North-South dialogue on economic revitalization was summarily rejected by the United States and other summit leaders, despite strong French support for the concept. Although skepticism concerning such a dialogue is legitimate, the circumstances of the rejection were unfortunate. If there was any doubt in the minds of leaders of the developing world concerning which group of countries — the communist East or the Third World — are receiving preferential treatment by the industrialized West, there should be little confusion on this point in the post-summit period.

Gorbachev’s message to Summit leaders made clear that the satellites of the Soviet empire are not going to be alone as recipients of new Western trade and financial largesse. Moscow plans to be at the head of the line, notwithstanding the Bush Administration’s "differentiation policy." Excerpts from the Soviet leader’s letter include the following: "Our perestroika is inseparable from the policy tending toward full and entire participation in the world economy…. the rest of the world can only gain by the opening of the world economy to a market such as the Soviet Union….we could also begin procedures to merge, at a global level, the different organs of macroeconomic coordination."

These statements can be interpreted as saying: thanks in advance for providing us with observer and eventual membership status in the GATT, the IMF, the World Bank, and the Asian Development Bank as well as expanded access to Western credits (particularly the taxpayer guaranteed variety). Thanks also for overturning the Jackson-Vanik and Stevenson amendments providing MFN and U.S. Export-Import Bank credits and the International Energy Agency Agreement of May 1983 limiting Soviet natural gas deliveries to Western Europe. By the way, we also appreciate your lifting of COCOM restrictions on the flow of strategic Western technology. We’ll get back to you on the remaining items on our wish list.

This set of developments at the Summit was a far cry from the mood of the Senate. The U.S. Senate passed three virtually unanimous resolutions over the past 12 months calling on the President and alliance leaders to forge security-minded agreements on Western credit flows, joint ventures, and other forms of Western assistance to Warsaw Pact countries. Rather than tackle the challenge of greatly enhancing alliance discipline and transparency in the conduct of East-West economic and financial relations, President Bush may well be on the threshold of expanded Western concessions to these countries, primarily at the expense of U.S. taxpayers. The Congress and other interested groups should insist that certain facts about Soviet policies be addressed prior to signing on to premature Western measures designed to alleviate economic hardships in the Soviet bloc. These include:

• An increase last year of 3 percent in real terms of Soviet defense spending, despite the bloated military sector of the economy already absorbing between 17-25 percent of annual Soviet GNP;

 

• A sharp increase in Moscow’s arms sales to the developing world in 1988 to an estimated total of $13 billion– or a 38 percent share of the world’s arms market;

 

• A massive increase in Soviet military deliveries to the Kabul regime — an estimated $300 million per month since March — bringing Moscow’s total annual expenditures in Afghanistan to at least $3 billion;

 

• A multi-billion dollar arms deal concluded between Moscow and Tehran over the strong objections of the Bush Administration;

 

• Continued shipment of SU-24 fighter bombers to Libya during the period when the Rabta chemical weapons facility is nearing completion;

 

• Uninterrupted arms supplies via Cuba or directly to Nicaragua, Panama, and the FMLN in El Salvador;

 

• A postponement of systemic economic reform in the USSR, including price reform, and no reform whatsoever in the GDR, Czechoslovakia, Bulgaria, and Romania; and

 

• A stepped-up effort by Soviet bloc nations to steal militarily-relevant Western technology along with the broadening of Moscow’s foreign espionage activities.

Time does not permit continuing this list, but I think we can agree that it is a long one.

We now find ourselves at a crossroads in East-West relations. Either the Warsaw Pact still represents a major threat to vital Western security interests — hence justifying the B-2 bomber, SDI, and other major defense expenditures — or it does not. The Administration is apparently confused on this question. For example, it asserts that the Soviet threat remains real enough for a possible $70 billion expenditure on the stealth bomber, then turns around and ignores the call for national security safeguards in Western economic and financial activity with East bloc nations. This is particularly tragic when U.S. taxpayers are being penalized billions of dollars annually in additional defense and foreign assistance spending to counter the consequences of undisciplined Western financial flows to Warsaw Pact countries. Far from alliance defense burden-sharing, our allies are often callously engaged in "burden-imposing" practices in the economic and financial portfolio.

In this connection, it is ironic that the Bush Administration claims that money is fungible and therefore the use of any type of capital controls toward Warsaw Pact countries will not work. At the same time, however, the Administration is using capital controls against Panama and, at the Summit, strongly supported the creation of a "financial task force" to track drug money through the banking system and staunch the laundering of drug profits.

The foreign policy establishment would also have us believe that we can humanize communist societies simply by offering healthy doses of Western credits, investment, and technology, along with preferred access to Western markets. They endorse Gorbachev’s call for economic "interdependence" between East and West as though the Soviets were capable of playing a constructive role in the global economy. In truth, they advocate economic appeasement of the USSR, hoping that Western concessions will automatically be followed by Soviet moderation.

The bad news is that we can expect to hear much more of these arguments, even from members of the Administration, in the period ahead. The good news is that they will probably fail to shape U.S. policy in this direction. There are simply too many policy inconsistencies and counter-pressures, not the least of which is the common sense of the American people and their representatives in Congress.

There is now before us a real chance of winning the East-West struggle on terms that those gathered here could endorse. The Soviet empire is beginning to break up economically — in the USSR itself, in Poland, Hungary, Cuba, Nicaragua, Angola, Mozambique, Ethiopia, and Vietnam. This is not just my view, but what the Soviets themselves are saying about their country’s plight. The maverick Boris Yeltsin and prominent Soviet economists have gone so far as to predict massive social upheaval within two years if the crisis in the civilian economy is not alleviated.

Gorbachev is in a tight spot with little time. What he wants most of all is to avoid making the hard choices between guns and butter — between empire and domestic stability.

The Kremlin is saddled with the fact that Brezhnev overreached himself by trying to extend Soviet influence deep into the Third World. Brezhnev did not anticipate the exorbitant cost of Soviet empire, now an estimated $27 billion annually (some $9 billion of which is in hard currency) or the election of Ronald Reagan. He did not imagine that Third World freedom fighters would be able to challenge the mighty Red Army. Even with growing detente toward the West and easy access to credits, the cost of the Soviet empire has become too great to shoulder.

Gorbachev’s strategy is a subtle one — convince the West to bail out the empire’s bankrupt economies while leaving intact communist political institutions. With the resources he saves, Gorbachev could pursue his military modernization program, while maintaining control of the captive nations. He is counting on expanded East-West finance and trade to provide a high technology bonanza for the Soviet military establishment.

I call this process one of internationalizing perestroika. It is defined as a "restructuring" which off-loads Soviet financial obligations to impoverished allies and client states from Moscow’s books to Western balance-sheets. From Andrei Sakharov to Senator Bill Bradley, we are being warned of what lies ahead if we allow Gorbachev to set the agenda on Western economic and financial assistance to the communist economies. Specifically, we can expect a continued arms race, a slow-down in Soviet and East bloc reforms, continued global adventurism, and the squandering of finite Western resources.

In the months ahead, the West has the opportunity to launch its own economic offensive in Eastern Europe. The widest democratic opening lies in Poland thanks to President Reagan’s resolute stand in 1982. By imposing economic sanctions on equipment and technology destined for the huge Siberian gas pipeline project, he put the Soviet Union on notice that if troops were used against Polish workers this crucial project would be scrapped entirely. Brezhnev got the message and kept his troops out. Subsequently, Jaruzelski has been forced to tolerate the democratic opposition as at least a part of the power structure.

So where do we go from here? The allies have just promised consultations under the auspices of the European Commission to flesh out Western economic and financial commitments to Poland and Hungary. Thus far, the Poles have found the President’s will is much bigger than his wallet. The harsh realities are that Poland is unable to achieve systemic economic reform given the rigidity of Soviet-imposed economic management and infrastructure. As Lawrence Brainard of Bankers Trust has said, the IMF and the World Bank will likely be ineffective in Poland because they do not attack structural defects, only the economic symptoms such as inflation, subsidies, and deficits.

Western commercial banks know this and will probably not return to Poland, absent government guarantees, unless a genuine economic revolution occurs first. They are happy to stay on the side-lines and collect their interest while contributing minimal amounts of new short-term money. Instead, Poland has become the special burden of Western taxpayers and thus far, a "free ride" for the Soviet Union. It is ironic that the Soviets can afford to spend billions of dollars each year to support their commitments in Afghanistan, Cuba, Nicaragua, Ethiopia, Angola, and Vietnam, but refuse to contribute major new resources to the Polish recovery effort.

Poland and Hungary are now seeking access to a number of U.S. trade and financial privileges, including: permanent or multi-year most-favored-nation status, tariff benefits under the generalized system of preferences, eligibility for Overseas Private Investment Corporation programs and large-scale debt relief. Why not grant these trade and financial benefits only if the President is able to certify to Congress that these countries have abandoned activities that endanger U.S. security such as technology theft, espionage, support for terrorists, and the sale of chemical and biological weapons capabilities to third countries? Eastern Europe should be obligated to choose between pleasing the Soviet military establishment and not jeopardizing Western democracies.

I believe the time has come to see whether the Administration’s differentiation policy can truly be made to work for Western security interests by applying these sensible legislative preconditions to East European countries seeking assistance.

Another major area that requires corrective policy action is the ease with which the Soviets tap the resources of the international banking system. The present system of financial reporting is entirely inadequate to monitor West to East credit flows even from the perspective of commercial prudence. In addition, no alliance-wide, systematic program is in place to track — and hence discourage — the Soviet bloc’s diversion of billions of dollars annually in borrowed Western funds to support client states, arms sales, technology theft, guerrilla organizations and other purposes inimical to Western security interests.

As with the technology theft problem in the 1970s, Western governments seem loath to admit anything improper or dangerous is going on in the financial sphere. That includes the U.S. executive branch which, over a two-year period, has ignored a total of six bipartisan congressional initiatives calling for action on the security dimensions of East-West finance.

The Paris Economic Summit has come and gone, and like Toronto and Venice before it, this subject was predictably ignored. It is enough to make a cynic believe that the State Department hopes to somehow smooth the way for arms control agreements and the blossoming of a new detente by allowing the Soviets undisciplined access to Western financial resources. I hope this is not the case. But I recommend that the Congress be urged to stay on top of this issue until satisfactory alliance agreements are achieved. The highly provocative PBS television documentary entitled "Follow the Money," produced by the Blackwell Corporation and recently aired nationwide, should greatly advance this alliance policy goal.

I also recommend that we strongly support the initiative of Senators Bradley, Symms, Helms, DeConcini and others that the U.S. take the lead in urging our allies to phase out all government guaranteed credits to the Soviets which are, by definition, subsidies that transfer the risk of any future Soviet debt rescheduling or default from the commercial banks to Western taxpayers. It is time to let the free market decide on the future of perestroika without the artificial stimulus of publicly-financed inducements.

Further, Soviet entry into the international bond market should also be brought to a halt. This strategic development allows Moscow to recruit, for the first time, Western securities firms, pension funds, insurance companies, corporations, and even individuals as lenders of untied money to support the Soviet external empire. Over time, millions of Western citizens could be wittingly or unwittingly holding Soviet paper in their bond portfolios and pension funds. In this connection, Congress should pass legislation which would maintain Johnson Debt Default Act prohibitions on U.S. untied lending to the Soviets, irrespective of any settlement of defaulted czarist bonds to the United States. Moreover, Moscow’s intention to open a branch in New York City this fall of the Soviet Bank for Foreign Economic Affairs should likewise be thwarted. This concession is premature. If these and other actions are taken, the West will have made substantial headway in protecting its economic and security interests.

As far as Cuba and Nicaragua are concerned, we have it within our grasp to force an end to their regional aggression. In the coming months, as the Soviet economic crisis becomes more acute, there will be far fewer Soviet resources for the Castro and Ortega brothers. Our urgent task is to persuade the allies and multilateral institutions to cut back their substantial annual financial support to these regimes. It is critical that we disrupt these financial lifelines from the West before Cuba, Nicaragua and Panama cement an anti-democratic alliance in Central America that would pose a grave risk for U.S. security.

Finally, the powerful lessons of China, including the memory of the differences between the policy response of the Administration and the Congress, should be transferred to shaping future economic, financial, and technology security policies toward Soviet bloc countries. Deng Xiaoping, that former friendly face of communism — who was viewed by most Americans during his earlier visit to the United States in 1979 as a kind of oriental leprechaun — has now shown his true colors. It is likely, due to the nationalities crisis and labor strikes in the USSR, that the immensely popular Mikhail Gorbachev will one day show his.

On that day or week-end, how much Western high technology and capital will be, in effect, frozen in Soviet vaults? What kind of leverage will the alliance have to influence Soviet restraint if we have already made largely irreversible economic concessions such as granting Moscow observer status or membership in the West’s major trading and financial institutions? The recent 418 to 0 vote in the House of Representatives for tougher economic sanctions against China, combined with a Senate vote of 81 to 10 in the midst of the Paris Summit, should have sent certain unmistakable messages to the Bush Administration.

Among these messages are the following: The American people will not tolerate the supremacy of commercial relations over human rights. They will not allow the signal to be sent to Chinese leaders that brutal repression is somehow cost-free. The Congress will not protect the business and banking communities –which is the Administration’s inclination — when pro-democracy demonstrators are being arrested and even executed on a wholesale basis. Members on both sides of the aisle refuse to buy onto the State Department’s fiction that economic and financial sanctions only hurt the Chinese people we wish to help.

Finally, the majority of the Congress and the American people are not going to permit some in the executive branch to achieve their principal "hidden agenda" goal. That goal is to avoid any precedent being established for the imposition of serious U.S. economic and financial sanctions in cases of domestic repression by communist regimes, and thereby insulate Soviet bloc countries from paying a high price for future crackdowns.

In sum, neither the Soviet Union nor Eastern Europe should be allowed to have it both ways — that is, enjoy the benefits of Western financial and trade largesse, while continuing to undermine our vital security interests, basic human rights, and the movement toward greater political freedom.