‘Jakarta with 10,000 Nuclear Warheads’? Fear-Mongering Begins On Behalf of I.M.F.’s Next Bailout — of Russia
(Washington, D.C.): In the past week, a warning issued this past January by the Center for
Security Policy’s William J. Casey Institute came to fruition — with a vengeance. As the Institute
noted on 7 January 1998:
- “…Waiting in the wings is Russia — a nation whose smaller markets
and financial
requirements [than China’s] may help it remain lower on the radar screen for a time.
But the Kremlin’s hybrid socialist/market/kleptocratic economy has already produced
successive requests for IMF interventions, to say nothing of a roughly $100 billion
rescheduling of Western government and bank debt to the former Soviet Union
accomplished within the past few months.
“… the only reason Russia has not been a candidate for a new emergency
bail-out initiative by the IMF — and the Clinton Administration and other
Western governments assiduously politicizing it — is that there is already one
underway. That politicization, like the multilateral cronyism now so much in
evidence in Asia, is ensuring that Russia continues to receive disbursements from
the IMF under its existing $10 billion standby agreement, long after such outlays
should have been suspended due to the Kremlin’s non-compliance with the IMF’s
conditionality (particularly with regard to tax-collection).”
The Fat’s in the Fire, Now
The following are among the indicators that Moscow’s financial chickens — and those of the
Western governments, lenders and investors that have helped prop up the Russian economy for
years — are now coming home to roost:
- Russian hard currency reserves are acknowledged by Moscow to have
fallen to some $14
billion (of which roughly $4.5 billion is comprised of less-liquid gold holdings) — a thoroughly
inadequate cushion to defend the ruble and stem the flight of Western and Russian capital now
underway. - Interest rates on Russian government-backed bonds (known as GKOs)
were tripled this week
to a staggering 150% in a desperate bid to induce investors to continue holding such paper —
and the ruble in which these financial instruments are denominated. - New indications of major labor unrest, as evidenced by the recent,
debilitating closure of two
major trans-Siberian rail lines at the hands of coal miners and their sympathizers striking for
payment of long-overdue back wages. - A substantial drop in world oil and gas prices, coupled with
weakness in the gold market
— commodities which together still represent some 70-75% of Moscow’s total annual hard
currency income. These realities translate into immense pressure for overseas sales of Russia’s
other main export, sophisticated armaments (including technologies and hardware relevant to,
among other things, weapons of mass destruction and ballistic missile technologies). Even
before Russia’s present financial crisis, it was ill-advised to give credence to the Kremlin’s
official promises to curb proliferation of such weaponry; under these circumstances it is utterly
fatuous to do so. - The recent cap imposed on foreign investment in a major Russian electric utility enterprise,
UES (Unified Energy Systems) — demonstrating that the much-anticipated liberalization
of
key industrial sectors, including the opportunity for such assets to be available for
foreign
ownership, will not proceed along the promised time-table. Not surprisingly, given this
economic and political backdrop, there were no takers for the much-heralded auction of a
sizeable percentage of the Rosneft oil company’s stock earlier this week.
The ‘Multilateralist’ Prescription: When in Doubt, Bail-Out
Last night, the PBS program “The NewsHour with Jim Lehrer” featured a discussion of the
Russian financial trauma involving the Harvard Russian Research Center’s Marshall
Goldman
and the Carnegie Endowment’s Arnold Horelick. In response to cogent
arguments made by the
former about the gravity of the situation and its systemic underpinnings, the latter
referenced what
can safely be predicted will be the mantra for the Clinton Administration and other “assertive
multilateralists”: An economic bail-out package must be assembled at once, justified on national
security grounds insofar as Russia is “a Jakarta with 10,000 nuclear
warheads.”(1)
Such fear-tactics may already be bearing fruit for the Kremlin and others seeking protection
from
a collapsing Russian market. Yesterday’s 6% partial recovery in Moscow’s stock exchange is
being widely explained as resulting from the perception that the West is about to step in to save
Russia’s bacon. Expectations in this area were only heightened by the G-7 governments’
recent, highly politicized decision formally to admit a clearly unqualified Russia to become,
for all intents and purposes, a full-fledged member of the “G-8.”
Watch This Space
In furtherance of this agenda, the following are among the initiatives that can safely be
expected
to be advanced by the Clinton Administration, other Western governments and/or international
financial institutions:
- In addition to the immediate disbursement of the next $670 million
tranche of what
remains of Russia’s existing $10 billion, three-year IMF facility — a step that is
unwarranted
given Moscow’s continued non-compliance with the Fund’s conditionality governing such
borrowing — there may well be what could be termed an “accelerated disbursement” of
the
balance of this stand-by arrangement, worth as much as $5 billion. - Yet another raid on President Clinton and Treasury Secretary Robert Rubin’s favorite
foreign
policy slush fund — the so-called Exchange Stabilization Fund — to support the
ruble and
help restructure Russia’s short-term domestic debt profile. - The arrangement of similar, bilateral bail-out schemes on the part of other
G-7
governments, as well as coordinated disbursements by other multilateral
institutions (e.g.,
the World Bank and the European Bank for Reconstruction and Development) for what will,
no doubt, be described as legitimate “project finance” requirements. - A new minimum $10 billion IMF or Bank for International
Settlements “bridging” facility
to see the Kremlin through what will be, in reality, an informal debt rescheduling of at least its
increasingly unsustainable domestic debt maturity schedule and high borrowing costs. As a
practical matter, the pressure will be intense to cover Moscow’s near-term hard currency
obligations, as well. - A simultaneously structured, multi-billion dollar “private sector” lending
package. This
will likely be depicted as a safeguard against the increasingly common by-product of IMF
emergency lending — i.e., the notorious “moral hazard” problem of making private Western
lenders and investors whole for their unwise, or even reckless, herd mentality in pursuit of
supposedly “high-yield” emerging markets. In fact, this private sector
“burden-sharing”
initiative will be, to some extent, a ruse because, as is so often the case, Western
taxpayers
are effectively underwriting it via the cash being concurrently provided by bilateral and
multilateral government lending mechanisms.
Where Is the Money Really Going?
Before more new U.S. taxpayer money goes into Russia, there is a requirement for
urgent House
and Senate hearings to examine rigorously Russia’s hard currency and ruble cash-flow.
Specifically, the American taxpayer must be informed of the sources and uses of Russian cash in
order to judge the appropriateness of any further assistance schemes for the Kremlin.
What would almost certainly be discovered in the course of any such review — whether by the
Congress, an apolitical intelligence analysis or independent review — is the fact that
Russia
maintains a robust and hugely expensive strategic modernization program. Among the
expenditures associated with this program are the development and production programs for new
ballistic missiles and land- and sea-based launchers, multi-billion dollar deeply buried
command-and-control facilities and advanced conventional weapon systems.
In addition, an empirical accounting is needed for such odious and costly Russian
activities as:
ongoing client-state support (including supplier-credits for proliferation-related
activities, the
construction of a dangerous nuclear power complex in Cuba,
develop the Iranian South Pars gas fields
for
the purpose of isolating, if not toppling, leaders of littoral states — like Azerbaijan’s
Aliyev and
Georgia’s Shevardnadze — who want to do business with the West, rather than Moscow
sluicing of funds out of Russia by official and unofficial organized crime figures
and syndicates;
and other items on the utterly unreformed foreign policy agenda of Foreign
Minister Yevgeny
Primakov.(5) These activities — and the
ancien regime apparatchiks that pursue them — severely
limit the latitude of those like Prime Minister Kiriyenko said to be committed to a genuine
democratic and market transformation of Russia.
Other Required Steps
Such transparency can help to reduce the now-inordinate risk that any future U.S. or
multilateral aid to Russia that involves funds from the Treasury will simply wind up
advancing such undesirable Russian activities. In addition, the Congress should ensure
that
whatever further assistance to Moscow is considered be accompanied by the following near-term
steps:
- The debate on IMF replenishment in the wake of the Asian financial melt-down should
factor
in the now-demonstrable pattern of what will happen if the Fund’s Managing Director Michel
Camdessus and the Clinton Administration are allowed to continue to violate the
organization’s institutional integrity and financial discipline. Congress must ensure that a
condition of granting the IMF any additional lending authority is that the Fund’s
deliberations be more transparent and based on sound financial, not political,
considerations — to say nothing of other reforms necessary to prevent a repetition of the
IMF’s past counter-productive policy prescriptions. - There should be congressional oversight of — if not actual pre-approval required
for —
disbursements from the Treasury Department’s Exchange Stabilization Fund so as to
assure that this important stand-by facility can no longer be used to make possible ill-advised
executive branch foreign policy initiatives that would not otherwise pass muster. - Russia should be removed forthwith from the “critical path” of the International
Space
Station (ISS). This project is too important to allow Russia’s illusory status as a “full
partner”
with the United States to jeopardize it. This is particularly true since Moscow is quickly
approaching — if it has not already surpassed — $1 billion worth of defaulted obligations for
construction of its portions of the ISS (i.e., the Service Module, etc.) Russia’s non-performance is
significantly delaying and greatly adding to the costs to the U.S. taxpayer of the
space station, unnecessarily imperiling already tenuous support for the program in Congress. - Russia must become a responsible player on the world energy scene by:
renouncing its efforts
to complete the fatally flawed nuclear reactor complex in Juragua, Cuba
participation in the South Pars development project (via Gazprom) and in the emerging Iranian
nuclear program; cease and desist any further efforts to impede — or channel through Russia —
the westward flow of oil from the Caspian Sea region; and stop promising Saddam Hussein
large-scale credits to develop its oil fields while simultaneously undermining U.S./UN sanctions
on Baghdad. - Finally, there should be a demonstrated commitment to bring genuine, systemic reform to
Russia. This would be reflected, at a minimum, in: the replacement of Yevgeny
Primakov,
the shrewd thug whose proclivities developed during a career with the Communist KGB are
much in evidence in his effective domination of Russia’s so-called power ministries (i.e., the
intelligence, interior and security as well as foreign affairs portfolios). The presence of
Primakov and his associates is, arguably, one of the greatest obstacles to the sorts of
reformist policies advocated by younger political leaders like Kiriyenko — policies that
have a chance of attracting, retaining and making effective use of foreign assistance and
investment.
The management of the Russian financial crisis should be seen as a litmus test of IMF
operations and reform requirements. This takes on additional urgency as the prospect
of yet another stealthy multilateral bail-out — this time for China — may loom on the
horizon.
If any further reason were required for confining Russia to the role of a paid
subcontractor on the ISS, the conduct of the Russian Space Agency and its director,
Yuri Koptev, and other Russian research and design institutes serving as suppliers to
the ISS with respect to missile proliferation to Iran would warrant such a step. Just as
U.S. support to Chinese space-launch activities have reportedly accrued to the benefit
of Beijing’s ICBM programs, it stands to reason that American efforts to help subsidize
the Russia space program with cash and sophisticated technology transfers will
redound to the detriment of this country’s security interests — especially since much of
the Kremlin’s “civilian” space apparatus is, in reality, under the auspices of military
intelligence (i.e., the GRU).
For its part, the United States must accompany a more disciplined approach to lending
(either
direct or indirect) to and investment in Russia with efforts to ensure greater disclosure
and
transparency with respect to Moscow’s efforts — and those of China — to enter the
American debt and equity markets (i.e., bonds and stock). The most important such
effort to
date has been mounted by Sen. Lauch Faircloth (R-NC), chairman of the
Senate Banking
Committee’s Financial Institutions and Regulatory Relief Subcommittee, and Rep. Gerald
Solomon (R-NY), chairman of the House Rules Committee, in the “U.S.
Markets Security Act
of 1997″ (S. 1315)(7). This legislation would
require the creation of an Office of National
Security at the Securities and Exchange Commission, charged with assuring the preparation of
quarterly reports to relevant congressional committees of those foreign government-controlled
entities which have entered, or are seeking to enter, U.S. capital markets during the previous
90-day period.
The Bottom Line
Americans genuinely concerned about U.S. national security must not allow that
principle
to be further adulterated by those who have proven themselves consistently to be
indifferent to, if not actually contemptuous of, the Nation’s long-term defense and foreign
policy interests. The real grounds for fear is that the United States might
adopt a policy
approach that — in the name of “national security” — winds up bailing out Russia without
correcting the serious, systemic problems and malevolent behavior identified above.
Should the Congress and the American people allow that to happen, scenarios worse than any
imagined by the fear-mongers may eventuate. One thing is for sure, the same template will be
used in the future to justify a bail-out for China, and perhaps other authoritarian regimes prepared
to extort the United States and its allies into pulling their financial chestnuts out of the proverbial
fire, without mitigating the threat they pose to U.S. national security.
– 30 –
1. This “national security” argument for otherwise unjustifiable
bail-outs — first exploited when
Secretary of Defense Cohen was featured prominently in the Administration’s sales campaign on
behalf of expanding IMF lending authority in the wake of the Asian financial crisis — will
doubtless be accompanied in the future by other dire predictions. Such fear-mongering scenarios
might include: massive refugee flows into Central and Western Europe; a domino effect should
the financial contagion spread to the latter regions; further unraveling of Russia’s
command-and-control over its nuclear forces; the destruction of Russia’s budding middle class;
strikes which
deny essential services to the Russian public and economy; the prospect of intensifying
proliferation to make ends meet; and the demise of the last hopes for reform in the Kremlin.
2. See Makeover: Castro Is No ‘Moderate’; Cuba Is
Still a Threat (No. 98-C 75, 29 April
1998), Castro’s Cuba: A Classic ‘Asymmetric’ Threat (
Apologies to Castro: Politicized Pentagon Study Misses Abiding Nature of Threat From Cuba,
Promotes Wrong Response (No. 98-C 54, 30 March
1998).
3. See The French and the Russians ‘Don’t Get It’ on
Iran — The Question Is: Does the
Clinton-Gore Team? (No. 97-C 148, 2 October
1997).
4. See, for example, Caspian Watch # 11: U.S.
Interests Jeopardized as Moscow’s Man in
Armenia and Armenia’s Man in the Kremlin Prevail (No.
98-D 56, 31 March 1998) and
Caspian Watch # 10: Russia Makes its Move in Yeltsin’s ‘Pipeline
War’ (No. 98-D 28, 12
February 1998).
5. See Primakov Watch: Destroying NATO From
Within (No. 98-D 14, 22 January 1998).
6. See Clinton Legacy Watch # 19: Will
Gore-Chernomyrdin at Last Put a Halt to Russia’s
Dangerous Nuclear Sales to Cuba, Iran? (No. 98-D
40, 6 March 1998).
7. See The Dog That Didn’t Bark: Moody’s, Et. Al.
Fail Investors in Asian Markets, Miss
Warning Signs in China and Russia (No. 97-C
200, 23 December 1997).
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