New Russian Defaults on Debt Raise Doubts Over Ex-Im Loan Plan

By MICHAEL S. LELYVELD
Journal of Commerce , January 13, 1993

Russia’s growing defaults on debts to the United States is raising concerns about the US.
Export-Import Bank’s proposal to extend another $2 billion in loans for Russian oil and gas
projects.

A bank official confirmed this week that Russia defaulted on an Ex-Im loan guarantee last month
at a time when the agency is seeking to open a new lending program to back U.S. sales of oil field
equipment and services to Russia.

The official indicated that Russia’s failure to make a $2.1-million loan payment on Dec. 15 for
computers sold by Minneapolis-based Control Data Corp. represents a relatively minor default.
But critics said the previously undisclosed arrearage is the tip of an insolvency iceberg and that
Ex-Im should not be urging new loans when debts to other U.S. agencies, Western governments
and commercial banks are going unpaid.

An official at the Department of Agriculture’s Commodity Credit Corp. said that Russian defaults
on loans for grain sales reached $160.7 million Monday, sparking fears among critics that all $6
billion of CCC’s outstanding Russian credits may be at risk. Cameron Bruemmer, deputy public
affairs director at CCC, said that the country has not made a payment since November.

At press time, an Ex-Im official said he was assured by Russian authorities that a deposit for the
delinquent $2.1 million would be made Tuesday and could be drawn upon today. But international
banking sources are taking the incident seriously in light of Russia’s $80-billion foreign debt and a
reported failure to negotiate repayment terms with lenders since mid-1992.

There are also signs that commercial banks may try to block the Ex-Im plan. “We haven’t been
comfortable with what’s going on there.’ said one European banker with overdue loans in Russia.

European creditors are said to be angry over Ex-Im’s plans to be repaid by Russian oil producers
as private, or “non-sovereign,” entities while sovereign debts go by the boards. Commercial
banks, which see Russian oil as their only chance of payment, may take steps to block any
“preferred lender” arrangement for new Ex-Im debt, the banker said.

The official called the “non-sovereign” designation “an artificial distinction that could spark a
“dog fight among creditors.” The banks “might be successful in stymieing any further action” on
the Ex-Im program in international court, he said

Questions about Ex-lm have come during the final days of the Bush administration as U.S.
officials have pressed Russia to accept loan terms that include the use of an “offshore account” at
Moscow Narodny Bank Ltd., a London-based institution owned by the Russian government.

Russia has resisted the deal despite the desperate state of its oil industry, preferring to make
payments through the International Moscow Bank on Russian soil. The sticking point has raised
doubts among some experts about whether the Russians want the program as much as U.S. oil
interests do.

“The pressure on the Export-Import Bank comes largely from Americans who want to sell
equipment,” said Marshall L Goldman, associate director of Harvard University’s Russian
Research Center and an expert on Russia’s oil industry. That’s one area where the commercial
sector should be self-financing. Why is the Ex-Im being involved?”

Critics also have raised doubts about Moscow Narodny, a bank reportedly used as a front for
former Soviet intelligence operations despite strict British banking laws. Advocates of the Ex-Im
program argue that oil development is Russia is only way to earn needed cash to meet all
obligations.

Ample safeguards have been written into the plan to assure repayment of the new credits. officials
said.

Experts are uncertain whether last months default on the Ex-Im guaranteed credit is a case of mismanagement or a sign of the depth of Russia’s problems at a time when the biggest U.S.-Russian
joint business deal in history may be on the line.

“Maybe both, but they are defaulting right and left.” said Mr. Goldman. “You wouldn’t think they
would let themselves be in default on the agriculture program, which is so important to them,”
he said, adding that insolvency would not exclude the possibility of mismanagement.