Soviets Ask U.S. To Stick It To American Taxpayers As Banks Won’t Take Any Exposure On Loans To Moscow

(Washington, D.C.): This week, on the eve of the Moscow summit, Soviet officials requested that the Commodity Credit Corporation (CCC) — a lending agency of the U.S. Department of Agriculture — dispense with prudent banking practices in order to provide more attractive credit packages for the Soviet Union. Because U.S. commercial banks were unwilling to absorb the marginal risk involved in lending to the USSR under present CCC procedures, Soviet officials apparently have had to turn to European banks to garner the $600 million in CCC credits offered to Moscow center by President Bush on 11 June 1991.

In a move predicted last month by the Center for Security Policy,(1) Vadim Korolev, vice president of the New York office of the USSR’s Bank for Foreign Economic Affairs stated Monday that the CCC should provide a government guarantee for 100 percent of all future agriculture loans to the USSR. Obviously, Moscow is desperate to broaden its access to hard currency resources and is frustrated by the refusal of U.S. money center banks and other commercial lenders to assume any new risk in doing so.

This Soviet request that the CCC effectively set aside its fiduciary responsibilities to the U.S. taxpayer comes as what should be a particularly inopportune time for the organization. After all, the CCC is reeling from still-unfolding revelations that over $900 million of its funds were diverted by the Banco Nazionale del Lavorno (BNL) and used by Iraq to buy arms.

Still, given President Bush’s latest, rhapsodic embrace of Gorbachev at the Moscow summit — and his apparent desire to offer further assistance to the latter’s increasingly discredited regime, it seems likely that CCC will be directed to cast caution to the wind. Doing so would require it to dispense with the practice currently observed in transactions with the Soviet Union, namely providing a loan guarantee for no more than 98 percent of the principal and 4.5 percent of the interest rate. Under this arrangement, the balance must be covered by the commercial bank or other lending institution extending credit to the USSR. Banks normally turn to the actual borrower to provide the two percent differential; in this case, the Soviets decline to do so, consequently, the commercial lenders must either assume the liability themselves — or pass the risk exposure back to the U.S. taxpayer.

It is important to bear in mind that CCC’s 98 percent formula is already substantially more generous than the rate at which other U.S. government guarantees are given to sovereign borrowers. For example, loans and guarantees from the U.S. Export-Import Bank — the government’s lending arm for trade in manufactured goods — generally cover "only" 85 percent of the principal.

"Given the economic condition of the Soviet Union, there is no excuse for the CCC to put the taxpayer in harm’s way by extending a 100% government guarantee on agricultural sales to the Kremlin," said Frank J. Gaffney, director of the Center. "If anything, the Soviet Union should be required to put down a higher percentage of their own funds as something of a disincentive to a predictable default on repayment. At least that is the way it works when an ordinary citizen judged to be a bad credit risk seeks a loan."

The Center for Security Policy calls upon the Commodity Credit Corporation to refrain from any action that would raise further questions about its management of taxpayer resources within its purview. It also urges the Congress to monitor carefully the CCC’s lending practices, particularly as they relate to the Soviet Union, in order to minimize the chances of any further, serious losses for the U.S. Treasury like those arising from the BNL scandal.

Under no circumstances should the Kremlin be allowed to borrow under conditions that are, for the Soviet central authorities at least, risk-free. In this connection, the Center also reiterates its recommendation that the Soviet Union be required to transfer collateral (such as gold or diamonds) to the U.S. government to protect against future defaults on government guaranteed transactions.

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1. President’s Certification of Soviet Creditworthiness Blown Away by Private U.S. and Western Credit Markets (No. 91-P 57, 28 June 1991). See also, AGSCAM Redux: Will CCC Be Allowed to Waste More Taxpayer Dollars Propping Up Tyranny? (No. 91-P 32, 23 April 1991).