The Brody Confirmation: Will Eximbank Be Allowed To Go The Way Of A Scandal-Ridden CCC?

Tomorrow is "C-Day" for Kenneth Brody — the former limited partner at Goldman, Sachs & Co. who is President Clinton’s nominee for the post of Chairman of the U.S. Export-Import Bank (Eximbank). His confirmation hearing before the Senate Banking Committee represents a singular opportunity for responsible lawmakers to challenge the direction Mr. Brody seems intent on taking Eximbank: into the same quagmire of making taxpayer-underwritten loans to non-creditworthy sovereign borrowers that has destroyed the reputation of another federal lending agency, the Agriculture Department’s Commodity Credit Corporation (CCC).

Subsequent to Mr. Brody’s nomination in February, Eximbank has committed — but not yet disbursed — a substantial portion of its financial resources to underwrite a series of lending arrangements for Russian energy development. These commitments include: an $86.2 million direct loan to Russia in support of a gas pipeline-related tractor deal; a $44 million loan guarantee for U.S. oil field equipment to the Chernogorskoye Joint Venture; and a memorandum of understanding leading to an Eximbank oil and gas "framework agreement" from which will flow loan guarantees expected to total $2-5 billion.

The Center for Security Policy believes that each of these commitments — and the policies from which they stem — must be considered as part of any serious review of Mr. Brody’s candidacy to lead as important an institution as the U.S. Export-Import Bank. It calls upon members of the Senate Banking Committee to pose and obtain full and satisfactory answers to the following questions prior to voting on this sensitive nomination:

Caterpillar Tractors for Russia

Background

On 25 February 1993, Eximbank approved a direct loan to Russia worth $86.2 million. It did so even though Russia was at that time some $359 million(1) in arrears in its payments due the Commodity Credit Corporation — a sister U.S. government agency which finances the purchases of American agricultural exports. The loan, which was the largest ever provided to Russia by Eximbank, will finance the sale of 295 Caterpillar tractors for a natural gas pipeline project in the Siberian arctic.

Among the features of this loan transaction are the following:

• The borrower is one of the last bastions of Russia’s centrally-planned economy — the state-owned gas monopoly, Gazprom, which controls some 40 percent of the world’s natural gas production and maintains 125,000 miles of pipeline.

 

• Gazprom was until December headed by now-Prime Minister Victor Chernomydrin — a man whose true colors were on display in a recent statement where he suggested that Russia’s privatization process was akin to the Stalin’s brutal program of forced agricultural collectivization.

   

• This natural gas pipeline project will connect the Yamal Peninsula with Gazprom’s pipeline network at Torzhok, enabling the Yamal fields to flow into the West’s pipeline grid.

 

• Gazprom will reportedly pay $14.5 million up front in cash for the Caterpillar tractors, financing the $86.2 million balance with the Eximbank loan over five years at an enviable fixed interest rate of just 5.93 percent;

 

• The Russian government’s Bank for Foreign Trade (Rosvneshtorgbank) is providing the guarantee for Gazprom — making the transaction a clear-cut "sovereign risk."

This "sweetheart" deal for Caterpillar demands close congressional scrutiny. After all, it was finalized at the very moment Eximbank was contending publicly that, under present circumstances, the Bank felt compelled to insist upon collateralized arrangements for its lending to Russia. In particular, Bank officials were anxious to impress upon all who would listen(2) that it was insisting upon such fiduciarily responsible terms in the $2-5 billion framework agreement then under negotiation with Moscow for U.S. oil and gas equipment deliveries to Russia.

In fact, virtually none of these financially prudent, project-lending techniques were incorporated into the Caterpillar deal. Instead, Eximbank seems to be whistling past this graveyard by simply relying upon the assertion that Gazprom possesses a positive hard currency cash flow that can be accessed. The explanation for this turnabout may lie with rank political pressure: Reportedly Rep. Bob Michel (R-IL) and Senator Paul Simon (D-IL) — both of whom claim Caterpillar as a constituent — sought to obtain fast-track Eximbank approval for this deal with Sen. Simon going so far as to seek the personal intervention toward this end of Treasury Secretary Lloyd Bentsen.

Questions

• Why is Eximbank relying on the Russian government to back up a multi-million dollar project at a time when that nation is openly ignoring its financial obligations to the Commodity Credit Corporation and is in default to all Western creditors on debt totalling in excess of $80 billion?

 

As House Banking Committee Chairman Henry Gonzalez (D-TX) asked Eximbank’s Acting Chairman Rita Rodriguez in a strongly worded letter concerning the Caterpillar deal dated 4 March 1993:

 

"I would like to know how the Bank can justify the issuance of more loans to a nation which is refusing to meet its obligations to a sister agency. This loan is questionable for another reason. By law, Eximbank cannot issue loans unless its Board of Directors determines that there is a reasonable assurance of repayment. How can anyone believe that there is a reasonable assurance that Russia will repay the debt when it is so clearly demonstrating its inability to do so with CCC?"

 

• How is the Eximbank meeting its statutory requirement to find that "a reasonable assurance of repayment" exists — especially given the fact that even President Bush acknowledged in a January 1993 phone conversation to President Yeltsin that he was unable to conclude further credit arrangements with Russia because of congressionally imposed requirements to find the country creditworthy?

 

• It has been reported that Eximbank assumes that some 27% of the Caterpillar loan would not be recovered and has put aside reserves for that eventuality. Isn’t that tantamount to putting the taxpayer deliberately in harm’s way?

 

• According to Caterpillar’s Group President Glenn Barton, the project received the active support from its congressional delegation on Capitol Hill: "Congressman Michel and Senator Simon actively pursued our interests with Exim to get this loan approved."(3) What specific actions did these legislators take — and with whom — to influence the outcome of this deal to a non-creditworthy sovereign borrower?

 

• Is this energy project in Siberia environmentally sound? What assurances does the Eximbank have that it will not be supporting a project with untoward environmental repercussions?

 

• Did Chairman-designate Brody review and approve — or otherwise have foreknowledge of — the Caterpillar loan?

Eximbank Financing for Russian Oilfield Joint Venture

Background

On 15 April 1993 — by which time Russia’s defaults in payments to the Commodity Credit Corporation had jumped to over $715 million — Eximbank approved yet another $44 million in loan guarantees to Russia. This transaction would support the sale of U.S. oil field equipment to the Chernogorskoye Joint Venture, ostensibly a private sector project, in order to develop a new oil field in Western Siberia.

Questions

• According to the Eximbank, "Sufficient revenues from the exports of oil generated will be placed in an offshore escrow account to secure repayment of the debt….Repayment of the financing depends on the cash flows of the project (limited recourse project financing) rather than on the guarantees of other parties." At what point is this project expected to generate exports? What are considered "sufficient revenues?"

 

• Eximbank has stipulated that this project financing will only go forward after the conclusion of a "Project Incentive Agreement" with Russia. What is to be contained in such an agreement?

 

• Did Chairman-designate Brody review and approve — or otherwise have foreknowledge of — the Chernogorskoye loan?

Proposed $2-5 Billion Eximbank Oil and Gas "Framework Agreement" on Lending to Russia

Background

On the same day the Export-Import Bank approved the Chernogorskoye loan, it signed a memorandum of understanding with Russia to secure a "framework agreement" for oil and gas-related lending to that country. This agreement could entail lending for transactions totalling some $2-5 billion over the next few years.

Apparently, Eximbank is seeking to create "special purpose entities" in the Russian oil and gas sector to serve as obligors for these credits. The plan evidently is to construe these entities as somehow separate from and outside of Russian government control or "sovereign" risk.

The Center for Security Policy has long been suspicious of such artificial constructs which appear to be an effort to create Russian "private sector" oil and gas enterprises on paper only — particularly given that fledgling privatization efforts in this strategic sector have either stalled or actually been reversed. Similarly, the proposition that Eximbank has obtained genuinely dedicated income streams to amortize the loans through escrow account arrangements does not measure up to standard commercial banking standards and practices.

Questions

• On what basis is the Eximbank able to classify Russian oil and gas enterprises that are earmarked to receive these credits as "non-sovereign" borrowers — when they appear to remain state-owned enterprises?

 

• Will lending transactions pursuant to this framework agreement be genuinely collateralized? In other words, will Russian assets physically be under the control of U.S. creditors at the onset of loan disbursements?

 

• What institution will play the role of the third party "trustee bank" under this framework agreement? Will either the International Moscow Bank or Moscow Narodny Bank — neither of which can be legitimately viewed as independent, secure entities for this purpose — play a role in these transactions?

 

• What have been the reactions of private and official creditors holding defaulted loans to Russia to the "preferred lender" arrangement contemplated in this framework agreement? Is the World Bank satisfied that its "negative pledge" concerns have been met?

 

• Isn’t it true that some exporters are opposed to this framework agreement? For example, the American Association of Importers and Exporters is said to be upset because its members — who are also waiting to be paid by Russia for goods already delivered — will take a back-seat to Eximbank in this repayment scheme?

   

• What is Eximbank’s assessment of the actual ability to isolate the revenues generated by the incremental Russian oil and gas production that are supposed to be earmarked for repayment of Eximbank-guaranteed loans?

 

• Would Mr. Brody be inclined to continue to provide oil and gas-related loans to Russia if communist/nationalist hardliners were to return to power (e.g., Civic Union)?

 

• What arrangements are in place that would assure these loans would not go forward under such circumstances?

   

• To what extent does Russia’s strategic oil and gas sector continue to provide the bulk of hard currency and other funding for Russia’s military-industrial complex?

 

• Did Chairman-designate Brody review and approve — or otherwise have foreknowledge of — the memorandum of understanding concerning the framework agreement?

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1. It was, moreover, clear that Moscow would fall even further in arrears in the future. As of today, Russia has missed a total of $797 million in payments to the Commodity Credit Corporation, obliging CCC to pay out $389 million to nine European-owned banks and two U.S. banks (First National Bank of Chicago and National Bank for Cooperatives) under the terms of its guarantees.

2. See for example, an article in the Journal of Commerce on 8 February 1993 entitled, "Eximbank Nominee May Face Russian Loan Fight at Hearings."

3. PR Newswire, 25 February 1993.