Over To You: Congressional Scrutiny Urgently Required On Aid To Russia

With over $28 billion in new credit and aid flows now promised to Russia — the result of just-concluded "emergency" G-7 ministerial meetings in Tokyo — the Congress will soon be pressed to appropriate $1.8 billion more this year in taxpayer grants, loans and guarantees to bolster President Yeltsin. Before doing so, however, there are a number of troubling developments which bear close scrutiny and Clinton Administration answers. Among them are the following:

ITEM: Conditionality (or Lack Thereof)

While aid to Russia has not been explicitly conditioned on concrete progress toward democratization and free market reform, Western officials have suggested that they expect these goals to be urgently pursued. In particular, some seem to believe that the absence of strict control over the money supply — notably the hemorrhaging of subsidized credits to bankrupt state-owned industries (read the military-industrial complex) — is accepted by the Russian government as the single greatest obstacle to true structural change and that corrective action is in the offing.

Symptomatic of the poor prospects for adequate Russian compliance with this and other conditions, however, is Russian Central Bank Chairman Victor Geraschenko’s statement over the week-end that the agreement between the Yeltsin government and the bank on limiting credit expansion is "meaningless" and "really a trap" for reformist Deputy Prime Minister Boris Fyodorov.

Of a piece with this problem is the growing politicization of the International Monetary Fund (IMF) by G-7 leaders. The Fund is under withering pressure to ease standard lending criteria for Russia on a preferential basis. Nothing short of the IMF’s institutional integrity is now on the line, with numerous other countries currently operating under IMF programs no doubt positioning themselves to demand "equal treatment."

Bottom Line: With nearly $5 billion in taxpayer losses from past unconditional U.S. lending to Moscow already virtually assured — due primarily to abuses of the statutory requirements of the Commodity Credit Corporation — Congress must now ensure that Russia does not continue to garner more funds as it merely pretends to reform.

ITEM: Scandal at the United Nations — Russia’s Role in Aiding and Abetting Serbian Genocide

Russia has unmistakably emerged as one of the most important international benefactors — and protectors — of the genocidal Serbs. Moscow’s adoption of this odious role has been placed in sharp relief as Russia has in recent weeks run political

interference for Belgrade in the United Nations, staving off, or at least postponing, tighter economic sanctions and thwarting needed military action. Among other de facto Russian support for Serbian genocide are the following:

• Continuing reports of substantial covert Russian arms shipments to Serbia (principally via Romania and Greece);

 

• Confirmed reports of Russian "volunteers" fighting alongside and advising the Bosnian Serbs;

 

• Routine sanctions-busting activity, primarily through shipments of oil via Ukraine; and

 

• Of particular concern is the prospect that Moscow will now serve as a safe-harbor forSerbian financial and other assets — which, thanks to the Kremlin’s insistence thatimposition of tighter U.N. sanctions be postponed until 26 April, will likely be able to be transferred to Russia and other sympathetic nations and, thus, avoid international confiscation.

Bottom Line: Congress must not permit itself to be put in a position whereby it seems to accept a sort of "fire-wall" between the Russian aid issue on the one hand and Russia’s complicity in the mindless slaughter of women and children in Eastern Bosnia by its Serbian ally, on the other. Accordingly, an immediate inventory must be taken of Russian activities taken on behalf of Serbia — and legislative measures devised to curtail them and to penalize their perpetrators, if new U.S. taxpayer aid is to flow to Russia.

The principle of "follow the money" — long watchwords of the Center for Security Policy in international economic and financial security matters — should be applied urgently to determine where Serbian financial deposits and other assets are now being transferred to avoid seizure. Moscow and other Russian-owned financial institutions abroad are a good place to begin the search.

ITEM: Eximbank Oil and Gas Framework Agreement

Over the past several months, the Center has carefully evaluated the merits and modalities of the U.S. Export-Import Bank oil and gas framework agreement with Russia recently initialed by the Clinton Administration.(1) In the process, a number of major strategic and financial down-side risks associated with this deal have been identified. Notably, these include the structuring of this Eximbank facility and the inadequacy of steps taken to mitigate the taxpayer risk involved in new lending to a demonstrably non-creditworthy Russia.

Eximbank loans are scheduled to be disbursed to so-called "special purpose entities" in Russia — or artificial constructs which are supposed to provide the patina of private enterprises. The Russian energy sector remains, however, substantially state-owned. It also continues to be the principal funding source for the military-industrial complex as well as a revenue stream for rampant capital flight.

The Eximbank, nonetheless, provided $82 million in a direct loan to Russia in February 1993 to finance Caterpillar tractors — at a time when Russia was not remotely creditworthy and with no pretense of "project finance" arrangements to mitigate this huge taxpayer risk. Worse yet, even proponents of this deal like former Deputy Energy Secretary Henson Moore acknowledge that revenue streams associated with secondary recovery at existing oil wells could be generated in as little as 6-24 months. The Center believes that such revenues could, in tum, potentially help to underwrite activities harmful to vital U.S. interests pursued by a revanchist Russia.

Bottom Line: Congress should demand that no U.S. government credit agency, including Eximbank, can take on new Russian exposure until such time as all arrearages to the Commodity Credit Corporation (now standing at over $715 million) are liquidated and genuinely collateralized lending arrangements are put into place. Legislation to this effect has been introduced by Rep. Jon Kyl (R-AZ), a distinguished member of the Center for Security Policy’s Board of Advisors (H.R. 1247, The Taxpayer Protection Act).

ITEM: Scandal at the European Bank for Reconstruction and Development (EBRD)

Last week, the Financial Times issued a series of damaging investigative reports concerning the appallingly wasteful spending policies of the EBRD under the direction of its French socialist president, Jacques Attali. British and other shareholders of the Bank have launched an inquiry into confirmed reports of exorbitant expenditures on marbled offices, extravagant furnishings, salaries, staff parties, a private jet for Attali, etc.

According to the FT, since the EBRD’s inception two years ago, it has spent some 200 million on overhead and start-up costs. This amount is particularly absurd when compared to the roughly 100 million the Bank has disbursed in loans to eastern Europe and the former Soviet Union. It can only be hoped that the Bank’s shareholders will demand that "heads roll" — starting with Monsieur Attali’s — when the annual shareholders meeting is held in London this coming week-end.

Bottom Line: As the EBRD is expected to play a central role in multilateral lending to Russia and other Soviet successor states and Eastern Europe, it is essential that Congress open its own inquiry and hearings into what the Center for Security Policy has long predicted would be yet another self-aggrandizing and bloated new international bureaucracy, in part funded by the U.S. taxpayer.

ITEM: Removing COCOM Restrictions

At the 3-4 April Vancouver Summit, President Clinton assured President Yeltsin that he would reexamine existing export restrictions on Russia, with a view toward sharply reducing — if not eliminating — the present regime. At this juncture, Russia has only a skeletal export control regime in place, manned by some 15 apparatchiks, many of whom undoubtedly would be ready (for a price) to make available to exporters (and re-exporters) whatever licenses are necessary to transfer sensitive technology. Fundamentally, Russia’s military remains anxious to obtain and incorporate Western technologies into its weapons systems. What is more, Russia has yet to demonstrate that it has either the capacity or the political will rigorously to restrict the export or re-export of dual-use technologies instrumental in the development of weapons of mass destruction. Only last week, Ukrainian customs officials seized a Russian cargo ship bound for Libya and carrying a multilaterally-controlled chemical used in the production of rocket fuel.

Bottom Line: Congress should resist any efforts to change the few remaining safeguards on the export of militarily-critical dual-use technologies to Russia until there is a very high degree of confidence that an effective Russian export control regime is in place and that Russia’s government has largely reformed. As it is today, U.S. export controls already fall short of covering the full range of technologies which can be used to manufacture weapons of mass destruction. In its four years in office, the Bush Administration effectively emasculated the list of controlled technologies leaving safeguards on only a limited number of highly sophisticated technologies. The fact that this issue figured so prominently on Yeltsin’s wish-list should raise eyebrows among those fully aware of the role that COCOM plays in stemming proliferation activities.

ITEM: Old Wine in New Bottles

When examined closely, Clinton’s $1.6 billion Vancouver aid package looks very much like the ineffective, if not counterproductive, aid packages promoted by his predecessor. Once again, the preponderance of U.S. aid to Russia consists of subsidized agricultural loan guarantees for the sale primarily of livestock feedgrains. Such "assistance" has primarily benefitted only a small segment of the U.S. agribusiness. It has done little to tackle the rudimentary problem in Russia’s agricultural sector — namely the absence of institutionalized ownership of land — and has likely retarded the privatization process.

A secondary emphasis has been to focus on reinvigorating Russia’s oil and gas sector through Eximbank, OPIC and multilateral project lending. This aid will undoubtedly benefit another small group of interested parties — namely the U.S. oil and gas equipment manufacturing sector — but in so doing could also provide state-owned Russian oil and gas companies with the capacity to generate hard currency revenues, monies which in the past have largely gone to enhance military-industrial activities.

Both of these efforts — loan guarantees for agricultural and oil and gas equipment sales — have little to do with impelling democratization or free market reforms. What is more, little, if any, of this sort of aid directly benefits average Russian citizens.

Bottom Line: Congress should insist that new taxpayer funds be specifically earmarked to advance the privatization of Russia’s huge agricultural sector — primarily with the use of "decommissioned" Russian military equipment, personnel and logistic support. Continued reform-retarding grain sales only frustrates the vital process of breaching the cycle of Russian dependency on Western agricultural subsidies.

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1. See: How Not to Lend to a Bankrupt Russia: Eximbank Energy Deal Should be Iced, Reworked (11 January 1993, No. 93-D3) and Red Ink Rising: Congress Needs to Take a Hard Look at New Loans to Defaulting Moscow (21 January 1993, No. 93-D9).