The Ex-Im Bank’s Russian Disaster

By DAVID J. KRAMER AND HEIDI KROLL
The Wall Street Journal, 21 MARCH 1996

The federal government’s Export-Import
Bank helps finance the export of American
goods and services around the world,
often in the form of loans at
below-market rates. The bank is touted as
a tireless promoter of American values
abroad. In the former Soviet Union,
however, the Ex-Im Bank’s impact has been
extremely negative both for U.S. business
interests and for U.S. efforts to promote
reform in the region.

Since 1992, the centerpiece of the
U.S. assistance program for Russia has
been support for mass privatization of
Russian enterprises. This effort
successfully helped transfer more than
100,000 Russian state enterprises to the
private sector. But the Ex-Im Bank’s
activities–through lending support to
Russian state-owned
enterprises–seriously contradict and
undermine the privatization push. Ex-Im
Bank loans to these Russian enterprises
are supposed to increase the enterprises’
efficiency and productivity; in reality
they prop up inefficient state
enterprises and hurt foreign investment.

Two recent examples of Ex-Im Bank
decisions illustrate its ill-conceived
trade promotion policy. On Jan. 30, the
second day of meetings between Vice
President Al Gore and Russian Prime
Minister Viktor Chernomyrdin, the U.S.
announced preliminary approval of an
Ex-Im Bank loan of $1 billion to
Aeroflot-Russian International Airline to
build a fleet of 350-seat jetliners. The
loan will finance Aeroflot’s purchase of
Pratt & Whitney engines, which will
be incorporated into Russian-made
aircraft. (To put the Aeroflot deal in
perspective, the $1 billion loan is 33%
more than the total U.S. budget for
direct aid to all the post-Soviet
states.)

Still a behemoth even after the
breakup of the Soviet Union, Aeroflot is
the last airline in Russia that needs, or
should receive, Ex-Im Bank support. The
Russian aircraft industry should be
revitalized through private-sector-led
investment and restructuring, not through
subsidized loans from U.S. lending
agencies.

Boeing Co. and McDonnell Douglas Corp.
were especially mad about the loan,
arguing that it would subsidize a
potential competitor. They also
complained about barriers to entering
Russia’s aerospace market, where 30%
tariffs on imported jetliners limit sales
opportunities. Boeing unwisely softened
its objection to the proposed loan when
Russian officials agreed to suspend the
tariffs and open their market to
American-produced aircraft. (Another
factor at play may have been Boeing’s
own, rather sizable, stake in Ex-Im Bank
loans for sales to China.)

The alleged new Russian openness to
American imports was stressed by Ex-Im
Bank’s acting chairman, Martin Kamarck,
when he announced the loan. “Over
the next several years,” he said,
“Russian airlines–both private and
public–will need to purchase or lease
significant numbers of Western aircraft
and related equipment, and there is no
doubt of their preference for American
equipment.” Mr. Kamarck’s confidence
is completely unfounded.

Amid a growing protectionist mood in
Russia–witness the recent uproar over
imports of American poultry
products–senior Aeroflot and government
officials have publicly pledged to
support the rebirth of Russia’s aircraft
construction industry. Already, Perm
Motors has protested Aeroflot’s plan to
purchase American-made engines rather
than engines from Perm. Such protests are
unlikely to translate into greater
Aeroflot demand for American products.
U.S. aircraft exports to Russia plummeted
46% to $186 million in 1995 from $343
million a year earlier.

The Gore-Chernomyrdin meeting produced
another clear example of how Ex-Im Bank
policy toward Russia does much more harm
than good. Ex-Im Bank’s Mr. Kamarck and
Miron Tatsun, chairman of

the Russian State Timber Industry Co.,
known as Roslesprom, signed a memorandum
of understanding on Jan. 30 to support
projects in the Russian forest products
industry. According to the memo, Ex-Im
Bank assistance to Roslesprom will
“Increase the efficiency and
productivity of the forest products
industry in the Russian federation.”
Such an objective should make American
forestry companies very uneasy.

“The thought that U.S. taxpayers
are subsidizing a foreign competitor in
our industry is unbelievable,” the
president of Federal Paper Board Co.
wrote to Sen. Jesse Helms (R-N.C.). In a
letter to the Ex-Im Bank, the American
Forest & Paper Association asked the
bank to consider whether the extension of
loans to Roslesprom “is likely to
cause substantial or direct injury to
U.S. Industry, including its potential
impact on production and
employment.” Both letters were
written in November; the Ex-Im
Bank-Roslesprom announcement came two
months later, suggesting that the bank is
indifferent to the American paper
industry’s concerns.

Ex-Im Bank’s agreement with Roslesprom
is especially troubling given that the
forest products industry in Russia is one
sector that has already attracted
considerable interest from foreign
Investors. These investors–without Ex-Im
Bank loans–have even turned around
decrepit, privatized Russian lumber and
paper mills. Meanwhile, according to a
March 2 article in the Moscow Times,
Roslesprom recently has been trying to
introduce protective trade
measures–timber export quotas and
certification standards–in an attempt to
smother competition from smaller domestic
companies and recipients of foreign
investment.

These measures, although unlikely to
be implemented, show that Roslesprom is
an enemy of the fledging private sector
and of foreign investors. By propping up
Roslesprom, Ex-Im Bank once again
confounds the Russian privatization
program and undermines restructuring
efforts by the private sector.

It is not too late to rethink Ex-Im
Bank’s proposed loans to both Aeroflot
and Roslesprom. Canceling the deals might
lead to short-term embarrassment, but
that would be less costly than allowing
the loans to go forward. Beyond these two
deals, Congress should review the Ex-Im
Bank’s other activities in the former
Soviet Union. The bank’s support for
Russia’s state-owned oil and gas
enterprises, for example, undercuts
efforts to promote much-needed
privatization in that sector. If the
Ex-Im Bank doesn’t know what it’s doing
in Russia or with whom it’s dealing, it’s
time for the bank to get out of the
country.