Red Ink Rising: Congress Needs To Take A Hard Look At New Loans To Defaulting Moscow

U.S. taxpayers are facing a rapidly-rising pool of red ink marring the books of two U.S. government lending agencies — USDA’s scandal-ridden Commodity Credit Corporation (CCC) and the U.S. Export-Import Bank (Eximbank) — which together have extended close to $6 billion to Russia over the last 24 months.

In late November, participating banks began notifying CCC (which has extended taxpayer loan guarantees for agricultural sales to Russia) that several million dollars in payments due from Russia were more than 90 days late and hence required CCC reimbursement under the guarantees. Since then, notices have been streaming into CCC on an increasingly faster pace. For example, on 8 January, CCC announced that Russia was $147.5 million in arrears. By 11 January, that amount jumped to $160 million and by the 14th, a USDA spokesman reported that Russia has fallen $192.5 million behind in payments. While these amounts may appear relatively small, they betoken a serious problem: in all likelihood this red ink will continue to rise dramatically, alternatively it will be cleared up with new Russian borrowings from another source. Russian government officials have already admitted that they will be unable to pay more than $2.5 billion on their combined obligations to Western creditors this year. To put this Russian statement in context, close to $2 billion in payments are due from Moscow over the next 12 months to CCC alone.

Throwing More Good Money After Bad

Despite these mounting arrearages, U.S. government officials appear eager to heap billions more in taxpayer-guaranteed loans to a noncreditworthy Russia. Officials are reportedly working feverishly to implement some sort of "Chinese clean-up"(1) scheme with CCC and Eximbank to clear the way for new cash infusions.

Of particular concern is a proposed $2 billion loan guarantee program now under consideration by the U.S. Export-Import Bank aimed at assisting the former Soviet Union’s strategic oil and gas industries.(2)

If approved in its current form, this transaction could provide important new revenue streams for the ascendent Old Guard in Russia without creating the genuinely collateralized funding arrangement needed to ensure that American taxpayers avoid picking up the tab — beyond the current $6 billion — in connection with further Russian debt on which default is virtually assured.

Aside from the myriad of problems earlier identified by the Center with this set of loan guarantees, the Center also questions the wisdom of providing such assistance at a time when capital flight from Russia is only likely to increase in the months ahead as the pace of reform slows to a crawl. According to the 13 January 1993 edition of the Journal of Commerce (see attached), Russia "lost more than $10 billion to illegal capital flight abroad last year, prompting some analysts to wonder whether the West is wasting much of the money it’s spending helping the country." Hard currency hemorrhaging overseas — largely from Russian companies stashing export earnings in foreign bank accounts — led one leading monetary expert to opine in the Journal of Commerce article that, "It seems useless to put additional money into this economy."

Congress Must Engage Now

Congress has an important responsibility to ensure that such outcomes are avoided by the Clinton Administration. Toward this end, the Center urges that both houses of Congress initiate as soon as possible hearings designed to examine the former and incoming Administration’s premises and plans for further "secured" lending to the former USSR.

Such hearings should, at a minimum, be convened promptly by the Senate Finance Subcommittee on International Debt. Under its chairman, Senator Bill Bradley (D-NJ), the subcommittee has been a past champion of greater discipline, transparency and conditionality in lending to the Soviet Union and its successor states — as well as preeminate advocate of carefully crafted debt relief for reforming Soviet successor states. On the House side, similar hearings should be held under the leadership of Chairman Henry Gonzalez (D-TX) and Rep. Charles Schumer (D-NY) of the House Banking Committee.

Among the issues that such congressional committees should consider are the following:

• Is it prudent policy to extend an additional $2 billion or more in new debt obligations — as proposed by the recently departed Acting Chairman of the Export-Import Bank — to Russia, a country which has already conceded that it that it cannot come close to meeting its current debt servicing obligations on some $80 billion in external debt?

 

• Is it prudent policy to allow one U.S. government lending agency (Eximbank) to incur additional credit exposure with Russia when that country is today more than $200 million in default to another U.S. government lending institution (i.e., Commodity Credit Corporation)?

 

• In structuring "trustee" or agent arrangements for such loans, should Eximbank be primarily concerned with the unworkable task of preserving Russia’s financial reputation (through unwarranted and irresponsible concessions on collaterization) or its fiduciary responsibility to its shareholders, the American people?

 

• Is not the integrity of a third-party "trustee" undermined when it is not only located within the borders of the borrower, but also owned by or otherwise subject to the dictates of that borrower?

 

• Is not the integrity of International Moscow Bank (currently under consideration as an agent bank) additionally compromised as a disinterested third party, given that it is staffed primarily by Russian nationals, including its CEO position?

 

• What is the probability that new U.S. taxpayer loan guarantees of such magnitude will be repaid in full and on time, given the sharp deterioration in financial and political conditions in Russia?

 

• Would it not be prudent for the United States to await the outcome of the planned Russian referendum in April before proceeding with such a strategically sensitive undertaking as new money into the energy sector? Would the United States continue to support the project in the event that President Yeltsin is removed from office or his reform efforts are even further emasculated by hardline forces?

 

• Is the GAO accurate in its assessment that CCC lending has not resulted in additional U.S exports of agricultural commodities — but has merely redirected existing trade flows?

A New Team B

The Center for Security Policy believes that in answering such questions, the Congress — like the executive branch — could benefit substantially from a comprehensive review of developments within the former Soviet Union. Such a comprehensive study should be aimed at assessing whether structural reform along democratic and free market lines is still being meaningful pursued — and, if not, whether even secured lending arrangements would simply wind up aiding and abetting the adversaries of such reform.

Similarly, the Congress should strongly encourage the new Administration to obtain, in addition to the judgments of the intelligence community and the relevant policy agencies, a second-opinion. Given the enormous uncertainty about the true state of affairs in the former USSR and the immense risks that might be associated with misreading the situation and adopting inappropriate policies, the new Administration should commission a new "Team B" — a group of distinguished outside experts and former policy-practitioners capable of rendering a sound, informed and independent analysis.

In 1975-1976, such a "Team B" effort proved invaluable in helping recalibrate U.S. official assessments of Soviet foreign and security policy. A recalibration is no less needed today in order to ensure that new American financial, technological, energy-related and other assistance does not serve once again to support potential adversaries in the former USSR. An important test of the caliber of President Clinton’s intelligence choices — CIA Director designate James Woolsey and the Chairman-designate of the President’s Foreign Intelligence Advisory Board Adm. William Crowe — will be whether they support such a dual-track approach to evaluating Russia’s present and future course.

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1. A term informally used in banking circles to describe the situation when a borrower uses one line of credit or credit card to make payments on another line of credit or credit card.

2. In two separate papers, the Center for Security Policy has recently raised serious concerns about the timing, structure and strategic and financial implications of large new taxpayer-underwritten loan guarantees the U.S. government is actively considering extending to Russia. See "Revolving Doors: Eximbank Official’s Scandalous Self-Dealing is a Blow to U.S. Taxpayers, ‘Red Carpet’ for Returning Russian Hardliners — and Their American Friends," (No. 92-D 148, 22 December 1992) and "How Not to Lend to a Bankrupt Russia: Eximbank Energy Deal Should be Iced, Reworked," (No. 93-D 3, 11 January 1993)