The Future of U.S.-Soviet Relations: Economic Relations and Human Rights

Testimony of

ROGER W. ROBINSON, JR.
President, RWR Inc.
Former Senior Director for International Economic Affairs
at the National Security Council (1982-1985)

Before the
SENATE COMMITTEE ON FOREIGN RELATIONS

May 3, 1989

Mr. Chairman, I am grateful for the opportunity to appear
before the Senate Foreign Relations Committee on the subject of
U.S.-Soviet relations. As you are aware, East-West economic and
financial relations are the object of considerable attention
these days at the highest levels of the Soviet as well as
Alliance governments. Accordingly, this series of hearings held
by the committee are especially timely and important in eliciting
different perspectives on what is occurring within the USSR and
how the U.S. should best respond.

Kremlin leaders today often comment on the importance of
bolstering trade and financial ties with the West. The
traditional Soviet slogan of “peaceful coexistence”
with adversaries has given way to the goals of “economic
interdependence” and “global problem solving.” On
the surface, this potentially represents the greatest shift in
Soviet foreign policy since the end of World War II — one that
some believe may presage the end of the Cold War largely through
greater East-West economic and financial “integration.”

Gorbachev has launched his ambitious list of international
economic initiatives in tandem with an activist Soviet agenda on
arms control and regional disputes. The NATO Alliance, already in
significant disarray, is undergoing a profound period of
soul-searching on how to respond. President Bush is under growing
pressure to somehow compete with Mr. Gorbachev and come up with
his own ground-breaking initiatives.

While the Bush Administration has yet to announce the results
of its national security reviews, there has been considerable
speculation in the press that the major “new ideal”
will be a substantial liberalization of U.S. trade and financial
policy towards the East Bloc, beginning with Poland and Hungary
and extending to the USSR and Bulgaria (East Germany, Romania and
Czechoslovakia appear not to qualify for the new U.S. policy
approach at this time). If these reports are correct, the
Administration may be embarking on a course which could cause
incalculable harm to US national security and Alliance relations,
and whose potential commercial benefits would likely be modest at
best.

Gorbachev’s Economic Proposals: Old Soviet Wine in
New Bottles

At the outset, it is important to establish that the Soviet
strategy of creating East-West economic interdependence as a
basis for ending the Cold War is not new. Throughout the late
1960’s and 1970’s Premier Alexi Kosygin, Vladimir Alkhimov (then
Chairman of the Soviet Bank For Foreign Trade and later the State
Bank) and other Soviet officials vigorously courted Western
nations in search of large syndicated credits, joint ventures and
other long term trade, technical and financial agreements. Not
surprisingly, many of Moscow’s recent trade and financial
overtures toward the West are lifted directly from the Kosygin
playbook.

During the 1970’s the U.S. Congress remained skeptical about
the wisdom of accepting the Soviet offers. Dissatisfied with
Soviet human rights performance and concerned over Moscow’s
military build-up and expanding adventurism in the Third World,
the Congress passed a series of measures that moderated the
growth of economic and financial relations with the USSR until
these sources of bilateral tension could be substantially reduced
or removed altogether.

Then as now, the Soviets enjoyed their greatest success in
gaining converts in the Federal Republic of Germany, particularly
Chancellor Willy Brandt and the left-wing members of the Social
Democratic Party. The FRG, unlike the U.S., is not burdened with
the responsibility of containing Soviet global aggression outside
NATO and also tends to focus its human rights concerns more
narrowly. Further, Chancellors Brandt, Schmidt and now Kohl all
appear to view East-West economic and financial relations as the
linchpin of Germany’s Ostpolitik policy which centers on the
convergence of German and Soviet goals in Eastern Europe.

It is therefore not unusual that the FRG, of all West European
countries, responded most eagerly to Soviet economic initiatives,
as demonstrated by Bonn’s enthusiastic support for construction
of the huge Siberian gas pipeline project during the martial law
crackdown in Poland. The series of FRG export control violations
in chemical weapons, nuclear materials, and ballistic missile
technology sales to Libya, Iran, Iraq, Pakistan, India, and
Argentina which are currently embarrassing Bonn, are also
symptomatic of how independently the FRG perceives its national
interests. Increasingly, these interests fundamentally differ
with those of the United States and other NATO members.

The FRG also has the dubious distinction of being the largest
source of diverted militarily-relevant Western technology to
Warsaw Pact countries. In retrospect, this record of FRG
carelessness toward national security export controls was one of
the principal reasons why the Reagan Administration feared soviet
domination of West German natural gas markets that would have
created substantial new FRG vulnerabilities to Soviet political
and economic leverage.

The rise in influence of the Green environmentalist party and
nationalist Republicans may further advance prospects for
Ostpolitik and East-West economic interdependence on Soviet
terms. The emergence of a tacit “Red-Green-Brown”
anti-NATO coalition, which could dominate West Germany’s defense
and foreign policy decision-making, is now a real possibility.
Neutralist and anti-nuclear sentiments are clearly on the rise
among broad segments of the West German population — ironically
intensified by the recent INF agreement.

Against this backdrop, FRG Foreign Minister Hans-Dietrich
Genscher is urging the Bush Administration to follow the FRG lead
on East-West economic and financial policies. President Bush is
also being advised by some in the Administration to basically go
along with Bonn in the interest of “helping” Chancellor
Kohl revive his sagging domestic political fortunes.

As Chancellor Kohl goes about coopting the neutralist agenda
of his opponents, it would be unwise for the US to insert itself
into fluid FRG domestic politics by taking actions contrary to US
long-term security interests. It is equally unwise to try to play
to domestic political developments inside the Soviet Union by
trying to “help” Gorbachev. As Deputy National Security
Adviser, Robert Gates correctly states in a recent article in the
Washington Post:

“Gorbachev is challenging some aspects of this
[Soviet] system, but even he acknowledges he has not yet
significantly changed it. We cannot ignore the cyclical turn
to reform, detente, and foreign assistance each time the
system has faced catastrophe. For 70 years we have watched
the Soviets proclaim reform and turn to the West for help,
while at the end of the day the essential features of their
system remain unchanged.”

In this connection, the FRG has a regrettable tendency to
pocket U.S. concessions in East-West relations, then to ignore
the agreement involved and insist on further concessions. The
most vivid recent example is the compromise agreement reached at
a meeting of NATO Defense ministers in Brussels on April 20. The
agreement specified that the U.S. would back away from insisting
on an immediate decision by Bonn to modernize the aging Lance
short-range nuclear missiles in exchange for the FRG dropping its
request for speedy negotiations with Moscow on short-range
nuclear weapons and nuclear artillery. Approximately one day
after completion of this NATO agreement, Chancellor Kohl, spurred
on by Foreign Minister Genscher, publicly demanded early
short-range nuclear missile negotiations with Moscow and
dispatched Mr. Genscher and Defense Minister Stoltenberg to
Washington to press for U.S. acceptance of the “new”
German position. Unfortunately, this is precisely the kind of
scenario that is likely to unfold should the U.S. go down the
slippery slope of de facto support or silence concerning the
FRG’s current economic and financial agenda toward the Soviet
Union, Eastern Europe and Soviet client states — crafted by Mr.
Genscher.

A “Marshall Plan” for Eastern Europe

Ostpolitik has clearly produced significant gains for the FRG.
Through generous credit flows, Bonn has been able to repatriate
tens of thousands of ethnic Germans from Soviet Bloc countries.
The Bonn government has also been able to obtain a significant
relaxation of restrictions on cross border visits to East Germany
and to secure the release of numerous East German political
prisoners. In recognition of West Germany’s forward leaning
posture on arms control, Bonn is — as in the past — being
singled out for special attention by Moscow, which adds to the
FRG’s already substantial influence within NATO and the EC.
Finally, many West German firms find markets in the East Bloc for
exports that are not competitive in the West — making expanded
East-West trade a kind of government-sponsored employment
program.

It is therefore tempting to conclude that what has worked so
well for the FRG can also work for other NATO members, including
the United States. Under FRG prodding, the Alliance has
inadvertently created what amounts to a kind of “Marshall
Plan” for the East Bloc which is the envy of many developing
countries, given the lack of economic conditionality associated
with new credits.

The elements include:

• Large-scale Western government support for East-West
  trade through multi-billion dollar subsidy programs, loan
  and credit line guarantees, and long-term bilateral
  agreements which amount to “managed trade”
  (especially prevalent in East-West agricultural trade);
• Tolerance of large gaps in required data disclosure by
  Soviet Bloc borrowers and in Western reporting of
  financial transactions (e.g., the continued secrecy of
  inter-German financial flows, the omission of the
  indebtedness of Soviet-owned banks located in the West in
  calculations of overall Soviet indebtedness etc.);
• Ad hoc emergency credit support so that formal debt
  reschedulings and the discipline of IMF/Paris Club
  economic programs can be avoided (e.g., Hungary in
  1987-88);
• Tolerance of substantial arrearages to Western creditors,
  ostensibly to assist the borrower’s self-initiated
  “reforms”;
• Significant debt relief for Soviet Bloc borrowers once a
  rescheduling is no longer avoidable, particularly in
  foregoing interest payments due to Western governments
  and taxpayers while commercial banks continue to receive
  substantial interest payments (e.g., in Poland);
• Undue policy flexibility on the part of the IMF and the
  World Bank so that funds are, at times, released in
  the absence of fundamental economic reforms;
• Easy access to billions of dollars of Western untied
  credits (i.e., no questions asked about where the money
  is going or how it is being used) which has constituted
  the majority of new credits to Soviet Bloc borrowers in
  the 1980’s; and
• Proposed eligibility for trade assistance programs
  originally intended for the developing countries such as
  investment guarantees and lower tariffs under the
  Generalized System of Preferences (GSP).

Western subsidies for East-West trade became so excessive by
the early 1980’s that a public clamor arose for their removal.
(Many Western trade unions were concerned that the subsidies were
financing the transfer of industries and jobs to communist
countries, where the labor force was under tight government
control and wages could be held down). As part of the allied
sanctions in response to Soviet-sponsored repression in Poland in
1981-82, the OECD began the process of raising the USSR to
Category I (developed country) status, which forced the Soviets
to pay market rates on government-backed credits. Despite this
progress, Bulgaria, Poland, Romania and Cuba still qualify for
potentially generous subsidies under OECD guidelines.

One of the cumulative effects of this Western government
support over the years was to boost significantly the credit
ratings of many Soviet Bloc nations, even in the wake of the
region’s deteriorating economic condition in the 1980’s. Members
of Congress became alarmed at the ready availability of
undisciplined Western credits at low interest rates to Soviet
Bloc borrowers as well as to Cuba, Nicaragua, Libya and Vietnam.
The U.S. Senate in 1988 passed two strong resolutions calling on
the Reagan Administration to engage in immediate high-level
consultations with the allies on the national security dimensions
of Western credit flows. Notwithstanding Secretary of State
Baker’s assertions that such policy discussions took place at the
Toronto Economic Summit in June 1988, no meaningful Alliance
consultations have yet occurred.

The Treasury Department did prepare a study on East-West
credit flows in November 1988 which, although inattentive to
national security concerns, highlights the preferential treatment
received by Soviet Bloc borrowers. According to the study:

• Rates charged to Soviet bloc borrowers have often been
  lower than rates charged developing countries or even
  OECD borrowers (OECD data show an average margin of
  24 basis points — one quarter of one percent — over the
  London Interbank offered Rate for syndicated credits to
  the Soviet Bloc in 1987, compared to 69 basis points for
  developing countries and 34 basis points for the OECD
  area).
• Average spreads on bank loans to the Soviet Bloc have
  declined rapidly in recent years despite the USSR’s
  own hard currency crunch and the debt crisis in Eastern
  Europe (the average spread on loans to the East Bloc
  dropped from 118 basis points in 1983 to 24 basis points
  in 1987).
• By way of comparison, although most Latin American
  sovereign borrowers have been forced out of the voluntary
  syndicated loan market, largely noncreditworthy
  countries like Hungary and Bulgaria can still obtain
  loans with relative ease, due to Western government
  support.
• Whereas most credits provided to developing countries
  are tightly tied to specific purposes or conditions,
  credits provided the USSR have been largely untied,
  meaning that the loan proceeds can be more flexibly
  diverted by Moscow to finance activities harmful to U.S.
  national security interests (Between 1983 and 1987,
  untied credits averaged about 80% of the total volume of
  Western lending to the USSR).

Unfortunately the lack of meaningful Alliance-wide
consultations on East-West financial relations has left the Bush
Administration at a serious disadvantage in responding
effectively to FRG and Soviet initiatives as well as meeting the
challenges of developments in Poland and Hungary.

National Security and East-West Finance

There is no longer any doubt that, with the exceptions of
Czechoslovakia and the German Democratic Republic, the entire
Soviet empire is caught in the throes of an economic and
financial crisis. The reaction of East European governments has
been to assemble an eclectic mix of economic and political
reforms. Not having experienced free markets or capitalism in
decades, it is likely that most of these Stalinist command
economies will continue to find systemic reforms beyond their
reach.

The Soviet Union’s imposition of its failed centrally
controlled economic system on the countries of Eastern Europe is
the single most important cause of the region’s economic and
financial woes. It is ironic, however, that the West’s own
undisciplined largess bears a substantial share of the blame for
the debt overhang which inhibits economic recovery in Poland and
Hungary. As I have described, for more than twenty years Western
banks and governments have treated Soviet Bloc borrowers with
relative leniency. Regrettably, the wreckage of past economic
reform programs in Yugoslavia, Poland, Hungary, Romania and Cuba
represents a sad tribute to the misguided idealism of past
Western financial and trade policies.

Concern over continued undisciplined Western credit flows to
Soviet Bloc countries has prompted Senators like Bill Bradley,
James Sasser, Dennis DeConcini, Malcolm Wallop, Connie Mack,
Jesse Helms and others to ask the Administration not to finance
perestroika unconditionally. I share their concern, particularly
when evaluating the issue of how the Alliance can best assist the
people of Eastern Europe in a manner consistent with our national
security and human rights objectives. There appears to be an
emerging consensus in the U.S. that continuing the West’s
unconditional, untied lending policies will merely reduce the
pressure on the Soviets for fundamental reforms and allow them to
avoid or defer tough resource allocation decisions, including
reductions in Soviet defense spending and global adventurism.

Poland presents a particularly complex opportunity for Western
policymakers. The Alliance is inclined to respond positively to
the encouraging Roundtable Accords in Poland. After many years of
stalemate, General Jaruzelski has finally agreed to give the
democratic opposition a meaningful role in Polish politics.
However, he is now seeking Western financial support for an
undefined set of economic half-steps that will probably fail
under present circumstances.

This is a precarious moment for the Bush Administration, as
miscalculation on the proper elements and structure of a rescue
package for Poland will likely have severe long-term consequences
for the Polish people and for East-West relations in general. If
the Polish economy does not begin to show results soon, the
streets will again be filled with protesters and the government
will probably feel compelled to crack down, yet again, to
preserve its authority. Should this happen, Western interest in
Poland would likely dwindle, and Poland’s economy could remain in
a condition of stagnation into the next century.

Soviet “Burden-Sharing” in Poland

It is neither in the interest of the West nor the Soviet Union
to see this happen. Stability in Central Europe is of great
importance to both sides. There would be no winners should Poland
erupt into renewed turmoil. For this reason it is only sensible
that the Soviet Union share the burden of any Western rescue
package for Poland with substantial hard currency credits and
trade relief which should exceed, or at least match, those
resources offered by the West. By doing so, the Soviets would,
for the first time, demonstrate their tangible support for Polish
reforms and for the efforts of the IMF and the World Bank.
Barring major Soviet financial contributions, Poland will
probably fall far short of the estimated $25 billion in hard
currency credits and debt relief required over the next several
years to restart its economy.

Specifically, the USSR should be persuaded by Alliance members
to:

• Sign a new treaty with Warsaw pledging that under no
  circumstances will Soviet troops intervene in Poland,
  thus assuring Western companies and banks of a secure and
  predictable investment climate.
• Provide $5-10 billion dollars in immediate hard currency
  loans and guaranteed credit lines which would enable
  Poland to finance new industrial imports and help service
  its external debt.
• Establish a multibillion dollar collateralized account
  (eg. funded by pledged oil and gold-generated hard
  currency earnings) to cover a substantial portion of new
  Western credit exposure in the event of future Polish
  arrearages;
• Announce publicly its support for free market reforms and
  large-scale privatization of key industries under
  IMF/world Bank auspices;
• Urge Poland to dismantle its bloated government
  bureaucracy which still administers thousands of
  enterprises and basic industries;
• Permit Poland to cut by at least fifty percent its
  defense budget (estimated at $14 billion in 1986) and
  free up Polish industries and infrastructure which today
  are dedicated to producing components for Soviet weapons
  systems;
• Offer Poland substantial trade relief by reducing the
  prices charged Poland for Soviet oil and stepping up the
  volume of oil deliveries;
• Allow Poland to sell in Western markets many of the high
  quality manufactured goods now being shipped to Soviet
  enterprises;
• Request Poland’s trading partners in Eastern Europe to
  run multi-year trade deficits with Warsaw as a way of
  contributing to Polish economic recovery, particularly
  the GDR, Czechoslovakia, and Bulgaria; and
• Allow the Polish government to gradually withdraw from
  the Council for Mutual Economic Assistance, and resist
  the claims on Polish resources for wasteful joint CMEA
  projects, particularly in the energy cooperation and high
  technology areas.

The Soviets certainly have the creditworthiness, excess
borrowing capacity, and reserves sufficient to set up a sizeable
collateralized hard currency account. Soviet credit guarantees
which, in effect, would allow Moscow to borrow on Poland’s behalf
in international financial markets, can easily be established if
Gorbachev’s “new thinking” prevails. The Soviets can
obtain additional resources for Poland by trimming back their
expensive foreign aid programs to communist countries in the
Third World, and by using some of the savings from anticipated
defense cutbacks. An added benefit of insisting an this Soviet
“burden-sharing” policy in Poland and Hungary is that
it might make Moscow more flexible in arms control negotiations
and regional disputes in view of Soviet budget constraints.

Conclusion

Hopefully, the Alliance will recognize the unpredictability of
what Robert Gates terms “the cycles of Kremlin reform”
which have periodically unfolded over the past seventy years —
particularly the disappointing, and even dangerous outcomes for
the West. Secretary of Defense Cheney should be commended for his
candor and realism in recently responding to a central question
which is surely on the minds of most high-level Western
policy-makers — namely will Gorbachev’s perestroika succeed in
modernizing the Soviet command economy?⁽¹⁾

Secretary Cheney’s pessimistic prediction is at least as
likely to be realized as those by observers who say that
Gorbachev’s perestroika is not a “temporary aberration”
but an enduring, fundamental reordering of traditional Soviet
priorities. Even if Gorbachev were to score successes with
perestroika, the West confronts a second equally important
uncertainty — whether this will result in a more inward-looking
and peaceful Soviet Union, or an economically stronger and more
dynamic adversary.

Given the major security implications of these questions — to
which no one has an answer and probably will not for some years
to come — it would be short-sighted for the Administration, the
Congress, the UK, France, Japan and other interested parties to
engage in a “riverboat gamble” concerning the direction
of perestroika. Specifically, this means resisting the apparent
Moscow-Bonn agenda of relaxed controls on militarily-useful
Western technology, continued and even expanded undisciplined,
taxpayer guaranteed Soviet Bloc borrowing, and the breaching of
allied energy security agreements which limit Soviet natural gas
deliveries to Western Europe to a prudent level.

There is also an urgent need, in the interests of Alliance
unity, to establish a new consensus on the financial relations of
NATO coutries with the USSR and its allies. Fortunately, Japan —
even prior to its present domestic political upheaval — has
quietly adopted a considerably more cautious approach to its
credit flows to Soviet Bloc countries (with the exception of an
inordinate share of untied lending to Hungary) than has its West
European partners. If continued, this development should be
viewed by the Congress as a major Japanese contribution to
Alliance defense burden-sharing.

Concerning Eastern Europe, the methodology for advancing the
encouraging political and economic developments in Poland and
Hungary needs to be reevaluated and coordinated at the highest
levels of the Alliance. I have outlined the direction such a
coordinated Alliance strategy could take in a Wall Street
Journal article (4/21/89), which is being submitted, along
with a more comprehensive paper of the Washington-based Center
for Security Policy, for the record of these hearings. It is
important that the Congress focus on the issue of major Soviet
trade and financial burden-sharing in Poland as a means of
limiting the open-ended Administration commitment of new U.S.
taxpayer credit exposure to Warsaw, and freeing up finite
resources of the IMF, the World Bank, and the Paris club for the
pressing requirements of numerous developing countries.

Finally, the appropriate fora for meaningful Alliance
consultations on these issues — as well as long-overdue
discussions and policy agreements on the security dimensions of
Western financial flows to Warsaw Pact borrowers and Soviet
client states — are the NATO Summit at the end of this month and
the Paris Economic Summit on July 14. If these crucial East-West
economic and financial security issues are to receive the agenda
prominence which they require, Alliance working groups need to be
established immediately at the Ministerial level.

1. Secretary Cheney stated,
“If I had to guess today, I would guess he [Gorbachev] would
ultimately fail. That is to say that he will not be able to
reform the Soviet economy to turn it into an efficient modern
society.” Cheney went on to say “And when that happens
he’s likely to be replaced by someone who will be far more
hostile than he has been in terms of his attitude towards the
West.” Cable News Network, Evans and Novak Report, April 29,
1989.