Read The President’s Lips: ‘No U.S. Taxpayer Aid To Gorbachev’

Introduction

It was ironic — if entirely appropriate — that the 29 June presidential press conference dominated by questions about George Bush’s decision to abandon his 1988 campaign pledge not to raise taxes had one other, major focus: the prospect of imminent and enormous Western financial aid to the Soviet Union. After all, the common denominator between the two issues is the prospect of new U.S. taxpayer liabilities.

Indeed, come this fall if President Bush has his way, he will make available to the Soviet Union at a minimum restored access to government guaranteed credits and investment insurance coverage. The simple fact is that, in the face of sharply declining Soviet creditworthiness, this action exposes the U.S. taxpayer to sizeable new losses. In short, just as the White House greatly underestimated congressional and public reaction to the form and substance of its broken no-new-taxes pledge, the Bush Administration is probably seriously miscalculating the furor that will greet its creation of still more taxpayer burdens on behalf of bailing out the still menacing Soviet economic and political systems.

Watch What He Does, Not What He Says

When asked at that press conference about the prospect of U.S. aid to the Soviet Union, President Bush responded sensibly. He said, "…There has got to be economic reform [in the Soviet Union], market reform and all kinds of changes that I believe Mr. Gorbachev wants to see take place. But they have to be in place for the United States to go forward….Why put X billions of dollars of money into the Soviet economy when it’s not reformed, when they’re spending 18 percent of their GNP on military, and when they’re spending an estimated $5 billion on Cuba." (Emphasis added.)

What is more, in a 17 March 1990 interview with National Public Radio, the President said, "This concept that we ought to go loaning money, or giving money to the Soviet Union now, I don’t accept that….I don’t think that’s in America’s interest, and I don’t think it’s needed to encourage reform and perestroika and glasnost in the Soviet Union….[The Soviet Union] has a long way to go before sound loans can be made there."

Before that, in rejecting House Majority Leader Richard Gephardt’s proposal to provide outright U.S. aid to the Soviet Union, President Bush said on 14 March, "Do I think it’s a good idea to loan money to the Soviet Union today? No." Senate Minority Leader Robert Dole was characteristically somewhat more acerbic, observing "I know that the Democrats’ knee-jerk response to any situation is throwing taxpayers’ dollars at it, but this is going pretty far — even for a Democrat."

Changed Circumstances?

On 19 June 1990, the West German government announced that it was making a new subsidized credit available to the USSR worth nearly $3 billion. The next day, Radio Free Europe reported that Mr. Shevardnadze had denied that Moscow had solicited this generous assistance, that Bonn had, nonetheless, offered it.

Whether one believes this Soviet disclaimer or not, the reality is that the Germans have become the aggressive syndicators of a Soviet debt bail-out scheme drawing on other Western governments and financial institutions. Indeed, Chancellor Helmut Kohl and Foreign Minister Hans Dietrich Genscher are evidently pulling out all the stops in their effort to secure widespread allied participation in the Soviet bail-out program, evidently claiming that failure to do so will endanger the prospects for German reunification and the "stability" of Moscow.

Despite the implausibility of this contention, the Germans have had considerable success in enlisting other sovereign lenders in this ill-considered proposition. At last week’s European Community (EC) meeting in Dublin, the member nations agreed in principle to effect loans worth roughly $15-20 billion or more over the next 1-2 years.

Such an eventuality is all the more unfortunate given the fact that the Soviets make no pretense about using the proceeds of this fund-raising campaign to correct the structural problems inherent in the Soviet system. On 26 June 1990, for example, Soviet Foreign Ministry spokesman Gennadi Gerasimov said that if the USSR gets financial assistance from the European Community, it will use the aid to pay off chronic Soviet foreign payment arrearages. According to Gerasimov, the Soviet Union has a current account deficit of $2 billion and its previously "immaculate record on the external market of always paying our debts is now under question."

Naturally, heavy Soviet borrowing for this purpose appeals to commercial interests keen on doing business with the USSR — provided they run no risk and incur no losses from doing so. It does nothing to promote genuine, systemic reform in the Soviet Union, however. And yet, such borrowing by Moscow almost certainly will cost Western taxpayers dearly, either directly or indirectly, in the forms of subsidized, below-market credits, bad debts ultimately written off, and higher defense spending to counter the harmful consequences of perpetuating the militarized Soviet economy.

The NATO and Houston Economic Summits

Given the intensive German pressure and the resultant Dublin accord on bailing out the USSR, the new EC proposal is going to be a centerpiece of the agenda of the upcoming meeting of the NATO summiteers in London and that of the major Western industrial nations at the Houston Economic Summit.

While President Bush has, thus far, been reluctant to embrace the plan publicly, he has given the green light for the European allies to proceed with a Soviet financial rescue package of their own. In sharp contrast to his earlier, categorical rejection of the idea, President Bush replied when asked about it on 29 June, "I don’t think we should tell Mr. Kohl what his lending policy or finance policy should be. It’s understandable. He’s a neighbor. They’ve got quite different problems with the Soviet Union than we do."

To be sure, Moscow is banking (literally) on the prospect that the recent $3 billion West German government credit will attract billions of dollars in similar bilateral transactions with other allied countries over and above multilateral initiatives like that under study in the European community. But the Soviet Union is looking to the United States to do more: Moscow expects nothing less than a U.S. "seal of approval" for financial assistance to the Soviet Union.

In other words, it is not enough that the United States is already largely committed to putting American taxpayers at risk in the context of restored access to Export-Import Bank credits in the event that a Soviet emigration bill is passed, pressures on the Baltic nations are eased, and a U.S.-Soviet trade agreement is approved by the Congress. Gorbachev wants the Bush Administration in addition to support the following at the two meetings of Western heads of state and beyond:

• Acceleration of the study commissioned at the EC meeting to determine how Western assistance flows can best be utilized by Moscow;

 

• De facto endorsement of the misguided Dutch proposal to construct a Soviet oil and gas purchase program for Western Europe which would contravene the intent, if not the letter, of the 1983 International Energy Agency (IEA) Agreement limiting Western dependency on Moscow’s natural gas supplies;

 

• Promotion of a menu of "technical assistance" measures including those relevant for the strategic Soviet energy sector;

 

• A further paring back of export controls on strategic goods and technology for the Soviet Union by the fall; and

 

• Private assurances to the allies of a further, as yet unannounced and multifaceted U.S. contribution to the Soviet economy scheduled for implementation between September and December 1990.

If all else fails, the Soviet Union expects that it will at least obtain relief from security-minded impediments to its economic agenda toward the West achieved during the first term of the Reagan Administration: (1) The IEA Agreement of May 1983 which committed the Western allies to limiting Soviet natural gas deliveries to the European continent to a maximum of 30 percent of total West European gas supplies; and (2) the OECD Agreement reached in July 1982 which moved the Soviet Union to a so-called Category I country, thereby curtailing subsidized interest rates on official credits to the USSR. The West should be under no illusion: These concessions, if granted to Moscow, would represent enormous victories for the Soviet Union which has long sought to have these crucial alliance agreements overturned.

Presidential Conditions for U.S. Aid to USSR

While the Bush Administration evidently is disposed to accommodate the Soviet Union on most, if not all, of these items, it is going to great lengths at the moment to appear hard to get. Notably, recent statements by President Bush, Secretary of State James Baker, Secretary of the Treasury Nicholas Brady, and Under Secretary of Treasury David Mulford together with press reports from unnamed "senior Administration officials" depict a U.S. government determined to tie American participation in a multilateral aid package for the Soviet Union at this time to three ostensibly stringent conditions. The United States now says that it cannot contemplate U.S. taxpayer financial involvement unless and until: (1) market reforms are put into place; (2) military spending declines appreciably from what President Bush has said is its present level of 18 percent (but in reality is at least 25%) of GNP; and (3) Soviet aid to Cuba, now an estimated $5 billion annually, must be curtailed.

Given the track-record on past Administration pledges in the area of East-West economic relations, there is every reason to believe that President Bush’s pledge at his 29 June press conference concerning the indispensability of these three conditions will be abandoned. Consider the following, partial listing:

Item: Soviet Observer Status at GATT

In the White House March 1990 Report on The National Security Strategy of the United States, President Bush stated that, "We have offered to support observer status for the Soviet Union in the structures created by the General Agreement on Tariffs and Trade (GATT) after the Uruguay Round of Multilateral Trade Negotiations is completed, and I personally urged Chairman Gorbachev to use the intervening time to move more rapidly towards market practices in the Soviet economy."

In fact, President Bush supported the Soviet Union’s receipt of GATT observer status on 16 May 1990 even though the Uruguay Round will not be completed until December 1990 and no meaningful progress has been made by Moscow on systemic economic reform.

Item: Soviet Membership and Borrowing Privileges in the European Bank for Reconstruction and Development (EBRD)

The United States originally firmly opposed both Soviet membership and borrowing privileges in the newly-created EBRD. Then, on 9 April 1990, under European pressure, the U.S. position collapsed and full Soviet membership was secured. A limit on Soviet borrowing during the first three years of the Bank’s operations was negotiated, but serious doubts continue on this point as well. For example, in his press conference of 29 June, President Bush actually pointed approvingly to the EBRD as a lending facility for the Soviet Union.

Item: Military Technology Decontrolled for Soviet Union

On 19 October 1989, Secretary of Commerce Robert Mosbacher said, "The export controls which we and our allies have in place for reasons of security will remain in place. And our determination on this point is even stronger in light of the fact that the Soviet military build-up has been continuing — despite glasnost, despite perestroika." And yet, on 2 May 1990, the United States initiated a slew of proposals which cut by one-third the number of categories of strategic goods and militarily-relevant technologies that COCOM controls.

Item: Assistance to Cuba and other Soviet Client-States

The President has pointed directly at the estimated $5 billion in annual Soviet payments to Cuba as one of the principal reasons the United States would be reluctant to extend aid to the Soviet Union at this time. On 27 May 1990, National Security Adviser Brent Scowcroft has put a $15 billion price-tag on the estimated amount of Soviet financial outlays per year which support its external client state commitments.

The President’s open support for government-guaranteed, untied lending by the West German government to the Soviet Union is utterly inconsistent, however, with the rhetorical U.S. position that such aid invariably could end up supporting Cuba and other activities inimical to Western security interests.

Item: Signing of a U.S.-Soviet Trade Agreement

Prior to the recent Washington summit, President Bush repeatedly made clear that it would be virtually impossible to sign a U.S.-Soviet Trade Agreement prior to Soviet codification of emigration laws and until Moscow’s economic warfare against Lithuania was terminated.

In fact, when Gorbachev personally and insistently pressed the President to initial the new trade pact, Mr. Bush threw both of these preconditions over the side.

Conclusions and Recommendations

It appears increasingly clear that the Congress will need to intervene forcefully if U.S. taxpayer liabilities associated with propping up the current Soviet political and economic systems are to be avoided. In this regard, the Center for Security Policy is greatly encouraged by the strong bipartisan opposition to such aid expressed in a letter by eighteen Senators delivered to President Bush on 2 July 1990. (A copy of this letter is attached.)

At the very least, the Center believes that hearings by the appropriate committees of the Senate and House should be urgently convened on U.S. global assistance and financial priorities. The following should be among the questions considered by such hearings:

• How is any U.S. taxpayer credit and commercial exposure to the USSR justified, given the urgent capital and trade requirements of South and Central America, Africa, Eastern Europe and other countries — many of which have already made the transition to democracy and market oriented economies? What are the priorities attached to foreign country access to U.S. taxpayer assistance and export-support programs?

 

• How does the Soviet Union rank as a recipient of limited U.S. Eximbank, CCC and OPIC resources and which specific country allocations would have to be curtailed to make room for the USSR?

 

• What is the estimated amount of total sovereign claims world-wide on various U.S. assistance programs, particularly export-support programs and the estimated ability of the United States to meet those country requests already received by the Administration?

 

• How does the Bush Administration plan to justify any direct or contingent U.S. taxpayer risk exposure to the USSR when Moscow is currently in a severe payments crisis to Western suppliers, has not embarked on serious economic reform and refuses to disclose fundamental economic and financial data?

The Center believes that the executive branch, for its part, must undertake to redirect U.S. and allied policies toward economic and financial relations with the Soviet Union along highly disciplined and more transparent lines. Starting with the NATO and Houston summits, these policies should include the following:

• To advance the demilitarization of the Soviet Union’s economy, all Western assistance flows and credits should be channeled to individual, reform-minded Soviet republics and the Baltic nations calculated to accelerate the de facto decentralization process already underway within the USSR.

 

• To ensure that such aid as is provided on a decentralized basis helps stimulate radical, systemic reforms along democratic and free-market lines, the following further real conditions on financial assistance to the Soviet Union should be adopted:
  • Full financial and economic data disclosure including: the amount and location of Soviet gold reserves; a breakdown of Moscow’s estimated $135 billion Third World loan portfolio; a detailed account of all military spending (including support systems); hard currency outlays to finance overseas commitments; and asset holdings of the Soviet Communist Party, etc.

   

  • The percentage of Soviet GNP dedicated to defense spending should be below 10% within the next 12-24 months.

   

  • Soviet client state support stretching from Havana to Hanoi should be reduced from an estimated $15 billion annually to less than $5 billion within 12 months.

   

  • Moscow’s multi-billion dollar, escalating program of technology theft and espionage in Western countries should be terminated immediately.

   

  • The elimination of all Soviet payment arrearages to Western suppliers and an accompanying report from the executive branch within 60 days that provides all financial data relevant to a thorough Western analysis of Soviet creditworthiness.

   

  • As is now the case with Hungary, the Soviet Union should be compelled to earmark substantial portions of all Western government credit flows for anti-pollution and other environmental clean-up projects.

 

The Center believes that current ill-considered alliance policies in this area can be successfully turned around, but to do so will require concerted efforts by the United States, Japan and the United Kingdom. Japan, in particular, has shown itself in recent months to be disposed to such a cautious and responsible approach to Western assistance flows to Moscow — especially those of the taxpayer-guaranteed variety. The United States and Great Britain can afford to do no less.