Russian Bonds Rocked By Second Senate Hearing In A Week Focusing On Undesirable Foreign Penetration Of U.S. Markets

(Washington, D.C.): The attention the U.S. Senate started in recent days to give to the danger
posed by potential adversaries — or those who aid and abet them — raising funds in American
bond and equities markets has arguably yielded its first returns: According to the 7 November
editions of the Wall Street Journal, the costs of Russian borrowing have increased by as much
as three fold, leading to the postponement of as many as fifteen bond offerings scheduled
for issuance this month.

‘Red Alert’

The following highlights of the Journal article are especially noteworthy:

• “The benchmark $2.4 billion, 10-year global Russian government Eurobond, which had
  been yielding 2.8 percentage points above the comparable U.S. Treasuries three weeks ago,
  briefly yielded 9.3 percentage points over Treasuries, then quickly contracted to about
  4.5 percentage points.”
• “Corporate debt was even harder hit. A three year bond for Uneximbank, one of Russia’s top-rated banks, had been yielding one-half spread is now 1.5 percentage points. Few companies
  are willing or able to handle the extra millions of dollars that entering the market today
  would cost them, according to Vladimir Kuznetsov of Solomon Brothers in Moscow.”

‘No Accident, Comrade’

Although the Journal attributed these developments to the market turmoil stemming from the
“Asian contagion” volatility of the past few weeks, another influential factor doubtless was the
impact of two, groundbreaking congressional hearings: the first convened on 30 October by the
full Senate Banking Committee⁽¹⁾ and the second on 5 November by its Subcommittee on
Financial Institutions. The common denominator of these sessions, which likely sent powerful
shock waves through the Russian apparatus responsible for tapping foreign private sector capital
markets, was the expressed determination of both leading Republicans and Democrats that
on-going national security-minded surveillance of such offerings was in order.

This was especially true of the second hearing which directly dealt with the perils associated with
the penetration of U.S. markets by both China and Russia. Under the leadership of its chairman,
Senator Lauch Faircloth (R-NC), the Subcommittee took testimony concerning his recently
introduced legislation, S. 1315, entitled “The Markets Security Act of 1997.” As the Financial
Times of London reported the day after the hearing in an article headlined, “Move to Curb China
Access to Capital”:

• “Republican legislators yesterday mounted a broad political offensive aimed at forcing
  the Administration to take a tougher line with Russia and China, and make it harder for
  those countries to tap U.S. capital markets.”
• “Partly for tactical reasons, the campaign by some Republicans to restrict Chinese access
  to the securities market has broadened its focus in recent days to include Russian
  borrowing. Concern about Russia is high on Capitol Hill because of the belief that Iran is
  using Russian technology to develop medium-range ballistic missiles.”
• William J. Casey Chair Roger W. Robinson, Jr. who the Financial Times recognized as “one
  of the architects of the Reagan Administration’s external economic policy” was also cited with
  respect to the “growing recognition [by the Congress] of the ‘serious national security
  dimensions’ of the Russian and Chinese bond offerings and equity issues.”

What’s At Stake

In his opening remarks, Sen. Faircloth set the tone for the entire hearing. Citing the increased
presence in the U.S. bond and equities markets of certain government-controlled entities intent on
using American funds to finance activities potentially inimical to U.S. security interests — or
corruption and capital flight in the case of equity issues — Chairman Faircloth said: “My chief
concern is that U.S. investors could unknowingly be financing [for example] the Chinese
Army. I have to ask do we really want our mutual funds and pension funds investing in
building the military capabilities of the Chinese Army?“

The lead witness in the 5 November hearing was the sponsor of S. 1315 in the House — the
influential chairman of its Rules Committee, Rep. Gerald Solomon (R-NY). A New York
investment banker prior to his election to Congress two decades ago, Rep. Solomon’s testimony
was informed by both personal experience in the market and a principled commitment to the
national security. The following were among its highlights:

“I’m most concerned about protecting the access of the investor to the most accurate, fair,
and sound information pertaining to stock listings so they can make educated, informed
choices.

“The Communist Government in China is in the midst of offering a whole string of their
controlled business on the Hong Kong markets with the intent of listing them on the New
York Stock Exchange. What’s most disconcerting about that is the Communist Chinese ongoing
commitment to Marxist/Leninism and a command economy. We all know that their economy is
policy-driven and despite overtures from the PRC, including from President Jiang, the fact
remains they are committed to an economic policy of Communist government control.

“A Bloomberg wire story…describes [PRC Minister of Post and Communications] Wu Jichuan’s
statement that the PRC would ease accounting rules to boost company profits. That’s just
cynical, manipulative and direct evidence of fraud. The highest priority of American
securities laws is to provide accurate information to the American investor, and the PRC’s
actions flout that objective.

“[These activities] effectively demonstrate the sort of concerns that should raise an alarm with
all of us in Congress and drive home the need for an overseeing authority to examine the
prospects of having the fate of American capital and investors tied to Communist
government controlled stock. And that, in a nutshell, is the motivation for this bill….It is
about safeguarding the hopes and dreams of Americans whose pension funds and financial
security depend on the sanctity of our free market system.”

Further Expert Opinion

The other witnesses at the Faircloth hearing were Casey Chair Roger Robinson, who formerly
served as the Senior Director of International Economic Affairs at the Reagan National Security
Council and as a vice president at Chase Manhattan Bank; Randolf Quon, an investment banker
and consultant who formerly worked with Hong Kong-based Chinese banks and mainland
government entities (including the Bank of China) and who now is a Fellow at the Potomac
Foundation and consultant with the Free Congress Foundation; and Rick Fisher, Senior Policy
Analyst on Asia at the Heritage Foundation, who specializes in monitoring the Chinese military
build-up.

The witnesses discussed myriad examples of actual or suspected abuses — ranging from the
proliferation activities of Russia and China to the modernization plans of China’s People’s
Liberation Army. They agreed that the development of a non-disruptive, security-minded
surveillance mechanism within the SEC (as outlined in the bill) could be, in Mr. Robinson’s
words, “The most significant global financial security⁽²⁾ issue area of the balance of this decade
and well into the 21st century.” Mr. Robinson added, “Regrettably, the prospect of potentially
devastating consequences stemming from largely unchecked foreign government access to our
markets will only expand from here — barring the passage of S.1315 or a similar bill which
institutes security-minded disclosure and transparency to inform and benefit U.S. investors,
particularly those not on Wall Street.“

The witnesses emphasized that S. 1315 contemplated simply additional reporting requirements, so
as to avoid creating unwarranted impediments to the free flow of capital into and out of the
United States. Rep. Solomon nonetheless concluded that “This Office of National Security
within the SEC is an absolute must! We need a special watchdog agency specifically
committed to making sure no entity can engineer fluctuations that could bring the market
down.”

The Bottom Line

The Center for Security Policy commends Senator Faircloth and Rep. Solomon and those like
Senators Alfonse D’Amato (R-NY), Sam Brownback (R-KS), Jon Kyl (R-AZ), Mitch
McConnell (R-KY), Connie Mack (R-FL), Robert Bennett (R-UT) and Christopher Dodd
(D-CT) who have expressed similar concerns in other venues. With such leadership, there is
reason to hope that the salutary impact on prospective Russian bond offerings witnessed over the
last few days will prove to be neither unique nor ephemeral. Instead, it should become the
beginning of the end for the dangerous practice of certain foreign government-related fund-raisers
seeking to underwrite activities harmful to U.S. security interests with the unwitting assistance of
the American people.

Two pages of excerpts of Mr. Robinson’s testimony before the Faircloth subcommittee are
attached. His complete testimony may be obtained by contacting the Center.

– 30 –

1. For a detailed discussion of this hearing, see the Casey Institute’s Perspective entitled Sen.
D’Amato’s Committee Serves Notice On Those Who Aid And Abet U.S. Adversaries: No
Fund-Raising On American Markets (No. 97-C 161, 30 October 1997).

2. “Financial security” in this context is defined as the nexus between traditional national security
concerns and global financial flows.