The Debate Begins Over Russia’s Financial ‘Break-out’;
Where Will it End for U.S. Taxpayers, Interests?

(Washington, D.C.): News is
reverberating in Moscow and the
international business community that
Paul E. Tatum — a prominent American
entrepreneur in the Russian marketplace
— was gunned down after publicly
decrying the corruption and intimidation
that have become rife in Moscow’s
business circles. Just as Mr. Tatum took
several rounds from a Kalashnikov, there
is increasing reason to believe that
unsuspecting Western investors are
likewise being set up to take some slugs
of a different — but perhaps no less financially
debilitating — kind.

In the latter regard, the Boston
Globe recently put a spotlight on a
major public policy issue that has been
ignored by virtually every other
newspaper in the United States: the
ominous financial, political and
strategic implications of Moscow’s
incipient bid to market bonds on the
Eurodollar market. The attached
article, which appeared on the Globe‘s
front page on Saturday, 2 November,
offers insights into the potential of
such an initiative — and its likely
successor, a U.S. bond issue to
be offered as soon as next year —
presented by critics, notably Roger W.
Robinson, Jr., the Casey Chair of the
William J. Casey Institute, and by
unnamed Clinton Administration officials
inclined to applaud what amounts to a financial
breakout for the Kremlin.

In a Perspective published
on 17 October 1996, the Casey Institute
provided details of Moscow’s coming
forays into the international bond
markets:

“…Russia is in a position
to secure a $500 million bond
issue with a five-year maturity
(vice three) following what money
managers almost universally
judged to be an unexpectedly high
(read, unwarranted) set of credit
ratings. As soon as November
1996, Moscow plans to go to
market with an initial Eurobond
offering and expects to receive
an interest rate of only 300-350
basis points (3-3.5%) above
comparable U.S. Treasury bonds.
Prior to this surprise rating,
Russia could not have expected a
rate less than 400-450 basis
points. According to
Russia’s draft 1997 budget, the
Kremlin is planning to raise at
least $1.3 billion in Eurobonds
next year alone.“ href=”96-C110.html#N_1_”>⁽¹⁾

The Critics’ Concerns

As the Globe report
indicates, by penetrating private
portfolios and Western financial
institutions in this way, Russia
is hoping to tap into the equivalent of
what has lately come to be vilified in
U.S. political circles as “soft
money” — essentially unconditioned,
undisciplined and largely non-transparent
sources of cash. Such
funds can be used for virtually any
purpose from relatively benign
ones — like meeting back-pay obligations
— to more sinister ones, notably
financing strategic modernization,
proliferation activities, intelligence
operations and other conduct inimical to
allied interests.

Worse yet, by their nature, these
bond sales have the potential to create
vast new constituencies in the West with
an interest in ensuring that Moscow is
able to honor its debts. This
can easily translate into a new source of
leverage for the Kremlin. Pressure
from those whose pension funds, mutual
funds, insurance portfolios, etc. wind up
holding Russian paper can be counted on
to seek bailouts from the U.S. and other
governments if the investments go sour,
and to object to any economic sanctions
or other American official policies that
might precipitate such an outcome.

The Advocates’ Claims

The rationalizations offered up by the
Globe‘s unnamed sources at the
Clinton State and Treasury Departments
are instructive:

• ‘The markets will
  discipline the Russians’:
  Unfortunately, a key reason why
  the Kremlin’s bond issues in the
  West are of such concern is the
  fact that — when it
  comes to Russia these days —
  international market forces are
  not making the key financial
  decisions. They
  are, instead, being principally
  shaped by political factors.
  Witness the International
  Monetary Fund’s agreement earlier
  this year to lend a further $10.3
  billion to the Yeltsin
  government, despite its failure
  to meet stipulated economic
  reform milestones. This action
  occurred thanks to a manifestly
  politicized effort by the Clinton
  Administration and other Western
  governments to aid Boris
  Yeltsin’s re-election bid.

Ditto decisions about Overseas
Private Investment Corporation
political risk insurance
underwriting, notwithstanding
Russia’s escalating instability.
Or consider, most recently, the
astoundingly high credit rating
given to Russian bonds by
European and American rating
agencies — despite Moscow’s
not-yet-completed rescheduling of
over $100 billion total
indebtedness to Western private
sector and government lenders.

• ‘The amount is so small,
  it won’t matter if it proves to
  be a bad investment’:
  This is, of course, the classic
  “camel’s nose under the
  tent” phenomenon. The
  upcoming $500 million Eurobond
  offering is sufficiently small to
  minimize objections; once it has
  been placed, however, the
  precedent will be cited to shunt
  aside criticisms of more frequent
  and far larger
  offerings.
• ‘An unstable Russia is
  more of a problem than bad
  bonds’: This is the
  intimidating logic of protection
  racketeers — pay me now because,
  if you don’t, something bad might
  happen to your children. There is
  no assurance that even
  large-scale bond offerings which
  net billions for Moscow will
  prevent instability in and/or
  aggressive behavior on the part
  of Russia. Arguably, the last
  thing one wishes to do in the
  face of one or the other of these
  prospects is to provide
  substantial, unmonitorable and
  undisciplined revenue streams
  (i.e. with no precise idea of
  where the money is going and for
  what it is being used).
  Western interests will likely not
  be served should such funds wind
  up underwriting one Kremlin
  faction or another, hemorrhaging
  to foreign bank accounts or
  subsidizing force modernization,
  civil wars or technology
  diversions. Neither will the
  West’s interests be advanced if,
  along the way, American and
  allied citizenries can be
  effectively blackmailed into
  supporting — or not objecting to
  — Moscow’s policies.

The Bottom Line

The William J. Casey Institute of the
Center for Security Policy reiterates its
call for subjecting Moscow’s stealthy
financial breakout to urgent and close
scrutiny. As it noted on 17 October:

“…The stakes are such that
the Senate and House
Banking and Commerce Committees,
House National Security and
International Relations
Committees, Senate Armed Services
and Foreign Relations Committees
and the respective bodies’
Intelligence Committees
should elicit as much information
as possible from relevant
executive branch and independent
agencies.

“The latter
should include: the Treasury
and State Departments, the
Federal Reserve, the Securities
and Exchange Commission, the CIA
and FBI. Formal hearings
should then be held promptly next
year upon the convening of the
new Congress as the horse will
already be out of the barn in
Europe and at least some U.S.
fund managers will probably have
begun taking Russian paper into
their international
portfolios.”

– 30 –

1. See If
You Liked the Rigging of the Lebed
Dismissal, You’ll Love the Rigging of the
Global Credit and Securities Markets
(No. 96-C 100,
17 October 1996).