SPEAKING OF COVER-UPS: WESTERN EFFORT TO CONCEAL SOVIET INSOLVENCY WHILE GIVING NEW AID IS A REAL SCANDAL

(Washington, D.C.): It is striking
that, at the very moment Washington is
seized with a series of allegations about
official efforts to conceal from the
public certain unsavory (if not downright
illegal), politically motivated
financial transactions, one such
cover-up — with vastly larger
taxpayer liabilities at stake

appears to be happening virtually
unremarked
right under the noses of
Congress, the media and the electorate
!

Allegations of scandalous behavior by
the Bank of Credit and Commerce
International, the Banca Nazionale del
Lavoro, the CIA, the Treasury Department,
the Agriculture Department’s Commodity
Credit Corporation and others dominate
the headlines and stimulate congressional
investigations. Perhaps preoccupation
with such allegations explains the
inattention paid to date by elected and
self-appointed watchdogs of the public
interest to a far more sinister travesty:
the evident, purposeful
dissembling by the Bush Administration —
and most of its G-7 partners — about
Moscow’s creditworthiness at a time when
additional billions in new
taxpayer-underwritten credit and
investment guarantees for the USSR are in
the works
.

Collusion by the U.S. and other
Western governments in such a cover-up is
suggested by recent reports in the Wall
Street Journal
and Financial
Times
. In articles appearing on 7
August, senior Soviet financial
authorities confirmed that Moscow
center is so broke that it will shortly
be compelled to reschedule all
of its foreign debt
— now
acknowledged even by the Soviets to total
at least $62 billion. href=”#N_1_”>(1)

Speaking bluntly (if unduly
optimistically), the chairman of the
USSR’s State Bank (Gosbank), Viktor
Gerashchenko, told the Financial
Times
on 8 August that the USSR
would be able to honor its $20 billion in
debt repayments due this year “at
least until December.”

What is so appalling, however, is that
U.S. officials evidently have
been aware of the Soviet central
authorities’ intent to postpone payment
on foreign debts for some time
.
Should that prove to be the case, a spate
of recent presidential decisions and
official comments would seem to be, at
the very least, seriously misleading —
if not evidence of financial malfeasance.

For example, according to the 7 August
editions of the Wall Street Journal,
Oleg Mozhaishov, chief of Gosbank’s
foreign currency and economic department,
admitted that “The need to
reschedule [Moscow’s foreign debt]
exists.” What is more, Ivan Ivanov,
a consultant to the Soviet Parliament’s
International Relations Committee,
disclosed that: “Our specialists
have prepared a package that will allow
us to reschedule our debt….We didn’t
offer it to the G-7 [in London] because
we didn’t want to focus on financial
help.” Ivanov did acknowledge,
however, that a proposal to enter
into debt rescheduling was included in
Gorbachev’s 23-page pre-Summit letter to
the G-7 leaders.

These admissions raise a number of
important questions for American
policy-makers:

  • In preparation for the London
    Summit, the G-7
    “sherpas” — those
    senior representatives of the
    industrialized democracies who do
    the preponderance of policy
    planning and logistics for the
    economic summits — reportedly
    were given an extraordinary
    opportunity to help in
    drafting the 23-page Gorbachev
    missive to Summit leaders
    .
    As a result, woefully
    inadequate though it was, the
    document that emerged was
    actually the product of prior
    review and critiquing by G-7
    governments.
    While the
    sherpas may have prevailed on the
    Soviets not to make the awkward
    move of formally tabling a
    rescheduling package in London, the
    Western leaders clearly had been
    put squarely on notice well
    before the Summit that Moscow
    intended to cross such a
    threshold on its foreign debt.
  • Consequently, it seems incredible
    that President Bush could
    possibly have been ignorant of
    the true, sorry state of Soviet
    finances in the weeks leading up
    to the London Economic Summit.

    Yet, on 11 June 1991, scarcely a
    month before the meeting, he
    nonetheless certified (in the
    words of his spokesman) that:
    “[The Soviets] do meet
    the test of creditworthiness

    and…they can and will repay the
    [$1.5 billion in agricultural
    credits extended to Moscow that
    day by Washington].” It must
    be asked: What did the President
    know and when did he know it?
  • Treasury Secretary Nicholas Brady
    was palpably uneasy about the
    political and economic
    implications of a formal Soviet
    debt rescheduling at the hands of
    the Paris Club when, on 15 July,
    he said:
  • “When you place
    yourself in the hands of
    the Paris Club, you do so
    with the idea that you
    may have an impending
    problem which will not
    allow you to address and
    make timely payments. And
    I don’t think that
    the Soviet Union is
    necessarily in that
    category right now
    ,
    and I’m not sure that it
    is a wise thing for them
    to do so.” (Emphasis
    added.)

  • Was this mere wishful thinking —
    or a deliberate attempt to
    misrepresent facts likely to bear
    directly upon the political
    viability of additional
    government-guaranteed aid to the
    USSR, aid in the offing in the
    wake of the London and Moscow
    Summits?

  • In a similar vein, Under
    Secretary of the Treasury David
    Mulford downplayed Moscow’s
    credit crisis by contending in a
    press conference in London on 16
    July that “Soviet
    indebtedness today in relation to
    the total size of the economy is not
    particularly large
    .”
    Was he deliberately
    “low-balling” the
    problem or simply hoping to
    discourage the Soviets from
    taking the rescheduling action
    they clearly had in mind?
  • In any event, President Bush certainly
    knew the facts about Moscow’s
    incipient rescheduling before he
    stated his intention in Moscow on
    30 July 1991 to seek the repeal
    of two statutes which limit U.S.
    taxpayers’ risk exposure
    associated with
    government-guaranteed exports to
    the USSR. Currently, the
    Stevenson and Byrd amendments
    impose significant constraints on
    such exposure; they respectively
    place a $300 million ceiling on
    Eximbank loans or loan guarantees
    to the Soviet Union and restrict
    loans connected with research or
    exploration of fossil fuel energy
    sources to a total of just $40
    million.
  • Is the President’s announcement
    concerning the Stevenson and Byrd
    amendments supposed to signal
    once again that all is well on
    the Soviet creditworthiness
    front? Or does the Bush
    Administration intend to argue to
    the Congress and the American
    public that, despite the present
    and prospective condition of the
    Soviet economy, these statutes
    protecting the U.S. taxpayer on
    assistance to Moscow center are
    no longer needed?

The Center for Security Policy believes
that sufficient evidence is now available
to support the conclusion that the
Bush Administration has simply found the
truth about Moscow center’s utter
insolvency too inconvenient to discuss
publicly and forthrightly
.
Concealing or otherwise ignoring this
reality is, as a practical matter, the
Administration’s only hope for
what it apparently has in mind: blowing
past Congress — and the American people
— new, multi-billion dollar
taxpayer-underwritten credit guarantees
which the President and his G-7
colleagues intend to provide the USSR. This
is especially true of the executive
branch’s determination to secure
congressional approval of the U.S.
taxpayers’ share of a fifty percent
quota increase
in resources for the
International Monetary Fund.
A
significant portion of such an increase
will almost surely go to Moscow once the
USSR obtains full membership status at or
in connection with the Munich Economic
Summit.

The strategic and political
risks associated with this Bush
Administration policy — not to mention
the huge losses likely to accrue to
American taxpayers as a result — require
nothing less than complete candor on the
part of the Bush Administration and an
opportunity for open and informed public
debate over such a course of action. The
Center for Security Policy calls on the President
to make a full disclosure of his
Administration’s assessment of actual and
projected Soviet creditworthiness
.
He should also reveal the extent
to which various commitments for
economic, financial and energy-related
assistance, notably through the device of
government-guarantees for U.S. exports,
will expose the American taxpayer to new
contingent liabilities
.

Should the Bush Administration not be
immediately forthcoming, the Center
believes that it is the duty of
Congress and the media to press for a
thorough investigation of these and
related issues
. It goes without
saying that until such an
investigation is completed, no
consideration should be given to
extending additional
taxpayer-underwritten assistance to
Moscow center unless it is on a fully
collateralized basis
. Importantly, Gerashchenko
himself invited the Administration to
take just such an approach when he
offered on 8 August to provide
collateral, stating “We could
probably just sell the gold, or pledge
gold not just with central banks, but
with private institutions
.”
Naturally, no thought should be given to
liberalization or repeal of existing
statutes (like the Stevenson and Byrd
amendments) that usefully limit the
taxpayer losses in this area.

– 30 –

1. The
Center for Security Policy believes the
actual extent of Soviet hard currency
indebtedness to be roughly $75 billion.
Whether one chooses to accept the
characteristically understated Soviet
figure or not, a prediction made eighteen
months ago by Roger W. Robinson, Jr., a
Center Board member and former chief
economist at the National Security
Council, is worth noting. On 30 January
1990, he told the House Ways and Means
Committee: “Should Soviet
indebtedness continue to rise at the
present rate and hard currency earnings
remain depressed, the need for either
formal or informal debt rescheduling
arrangements could materialize when the
gross debt level reaches $60-70
billion.”

Indeed, it seems obvious to the Center
that the Soviet Union has de facto
been in a piecemeal debt
rescheduling since last year — as
evidenced by persistent multi-billion
dollar arrearages to Western suppliers
and the conclusion of quiet “debt
refinancings” with Germany, Italy
and probably other Western nations.

Center for Security Policy

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