The Soviet Union In Crisis: Us Interests And Responsibilities

Excerpts from Testimony by

Roger W. Robinson, Jr.

Member of the Center for Security Policy’s

Board of Advisors

before

the U.S. Senate

Committee on Foreign Relations

19 June 1991

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The question with which we must urgently grapple is: Will premature, large-scale financial assistance to the Soviet Union merely perpetuate the central authorities’ hold on power, thereby increasing the prospect of substantial Western taxpayer losses while leaving essentially unaltered the abiding Soviet threat to the West’s vital security interests? Or will the G-7 governments exercise the kind of discipline and strict conditionality which would contribute to the genuine transformation of Soviet political and economic structures — a transformation that would sharply reduce, if not eliminate, the threat posed by the Kremlin to the American people and those of allied nations?

Given the stakes involved in such decisions, it is particularly troublesome that we find ourselves in largely self-imposed time compression, an arrangement inconsistent with the requirement for thorough policy deliberation, to say nothing of the development of the sort of consensus — both nationally and internationally — that is in order before any further taxpayer resources are committed.

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Western assistance to consolidate democracy and free enterprise in Central and Eastern Europe is in danger of being shunted aside in favor of the Soviet Union. It is no wonder that the leadership of Poland, Czechoslovakia and Hungary have already expressed alarm at the impact of American and other Western subsidized grain sales to Moscow because such sales have depressed their own agricultural exports to the Soviet market — a source of vitally needed revenue for their fragile economies. The democratizing nations of the region also fear that unconditional Western assistance flows to the USSR do nothing to bolster Soviet purchases of East European goods and services, to expedite Moscow’s clean-up of its payment arrearages to the region or to compel the Kremlin to honor its defaulted oil delivery contracts to these fledgling democracies.

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…It is important to recall that we found ourselves in October 1990 sitting at much the same crossroads we are said to be at today. Then as now, most of the G-7 nations — including the Bush Administration — were confident that President

Gorbachev would follow through with the Shatalin-Yavlinsky plan for a 500 day transformation of the USSR, including a major devolution of political and economic decision-making power from the center to the individual republics.

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…What is required is a wholly different concept — one built upon directly aiding those at the republic level who have demonstrated the greatest commitment to and made the most tangible progress toward free markets and democratization, as opposed to the central authorities. Accordingly, the Baltic States and reformist republics should be directly offered membership in international economic and financial organizations and bilateral trade and financial agreements with G-7 countries. A joint assessment by the IMF and OECD would be useful in disciplining and determining the pace of such staggered incentive arrangements. By rewarding republics for becoming engines of reform, the West could positively seed the Soviet political and economic landscape with the democratic and free market institutions the rest of the Soviet Union must in turn adopt if it is to recover from the depredations of communism.

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In the absence of market-oriented institutions and front-loaded structural changes, it would be simply irresponsible to provide the Soviet central authorities with large additional sums of untied financial assistance. That is precisely what would be involved in an internationally syndicated fund to backstop ruble convertibility or to meet balance of payments requirements such as providing a cushion for increased Soviet unemployment and a food-import scheme. It appears that just such initiatives are envisioned as early components of the "Grand Bargain" proposal.

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…Let us be clear on one crucial point: Even a perfectly configured economic reform plan that succeeded in revitalizing the moribund Soviet system would not be in our interest in the absence of dramatic changes in the political structure and foreign and defense policies of the Soviet Union. The idea that we might help the USSR become as some have put it "a full-service superpower" would be tantamount to dedicating U.S. taxpayer funds to enable Moscow center to pose an even more formidable threat to this country and its vital interests.

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…The institution of private property — particularly the massive, confiscated assets of the communist party — and the ability of republics to secede provided they can settle their accounts with Moscow in hard currency are sure to become flashpoints. Moreover, Western private sector demands will create additional pressures on the system when they require, for example, a clear determination whether the individual republics, like Russia, will be willing to accept responsibility for a crushing level of Soviet hard currency indebtedness, indebtedness that they had no direct involvement in creating and from which they derived little, if any, benefit.

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The underlying problem — over and above the unnervingly high degree of political volatility that tends to scare off bankers and businessmen when their depositors and shareholders’ money is on the line — is the continued downward spiral of Soviet creditworthiness. In my appearance before this Committee on March 1, 1990, I offered over a dozen reasons why Soviet creditworthiness was rapidly deteriorating and predicted that Moscow would be compelled to reschedule its debt at the $60-70 billion level. I stand by those statements today; indeed, the USSR is, as a practical matter, already in a piecemeal debt rescheduling that will inevitably be a precursor to a more formal and large-scale rescheduling of Western government and, later, commercial bank debt.

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As a result of these conditions, we stand at the precipice of a yawning Soviet version of our domestic savings and loan crisis, where the high risk of doing business in the Soviet Union is transferred — through a slight of hand called "government guarantees" — from private entrepreneurs, shareholders and depositors (where it properly belongs) onto the shoulders of the beleaguered American taxpayer. It is already beginning to feature, as vividly evidenced by the $1.5 billion in agricultural credit guarantees unconditionally extended to Moscow last week by the Bush Administration, the establishment of harmful new precedents and preferential treatment not accorded other struggling debtor nations around the world. The result inevitably must be the corruption and distortion of the intricate network of austerity programs demanded of others in exchange for Western assistance that has undergirded our efforts to manage the international debt crisis over the past decade.

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In my view, all future U.S. taxpayer exposure in the Soviet Union should be collateralized by the Federal Reserve or Treasury taking possession of Soviet gold bullion (or some other hard-currency equivalents) to cover the total liability of new credits. This approach has been routinely taken by some Swiss banks for years; more recently, it was utilized by the diamond conglomerate DeBeers — which collateralized a $1 billion loan to Moscow by taking possession in London of some $5 billion in diamonds. In the absence of such protection, elected officials in this country may find it difficult to explain to their constituents why they failed to take reasonable steps like these to protect the American taxpayer in these perilous circumstances.

In conclusion, I strongly recommend that you and your colleagues demand nothing less than genuine political conditionality and targeted, disciplined economic reform as prerequisite to any further taxpayer underwritten aid to the Soviet Union. Alternatives being recommended – notably that labeled the "Grand Bargain" — that appear to entail a "top-down" strategy for systemic change in the USSR run the serious risk of evolving into a kind of enlightened central control. Such a development would be neither in the interests of the Soviet people nor compatible with vital Western security concerns.

Unease on this score can only be intensified by the behavior of the preferred candidates for such enlightened control, namely the fearmongering and hints of "nuclear blackmail" by Mikhail Gorbachev and his cadre of supporters. The willingness of the Bush Administration and several other G-7 governments to accept and propagate this heavy-handed attempt to justify Moscow’s effort to muscle to the front of the West’s assistance line is as shameful as it is ill-advised. After all, such fearmongering is more often than not the last bastion of those who have lost the factual arguments.