The Soviet Union In Crisis: US Interests And Responsibilities

PREPARED REMARKS BY

ROGER W. ROBINSON, JR.

President, RWR, Inc. and

former Senior Director for International Economic Affairs

at the National Security Council (1982-1985)

before the Committee on Foreign Relations

United States Senate

June 19, 1991

Mr. Chairman, it is a privilege to be asked to appear once again before the Committee and to provide testimony on the subject of U.S. responses to the crisis gripping the Soviet Union today. As you may recall, I am currently president of RWR, Inc., a Washington-based consulting firm, and formerly served as Senior Director for International Economic Affairs at the National Security Council from 1982-1985. Prior to my government service, I was a Vice President in the International Department of the Chase Manhattan Bank where I had responsibilities for Chase’s loan portfolio in the USSR, Eastern Europe and Yugoslavia for a five-year period. In that capacity, I was the principal negotiator for Chase Manhattan during the Polish debt-rescheduling in 1981.

G-7 Summits and the Soviet Economic Crisis

On June 15, 1988, the eve of the Toronto Economic Summit, the United States Senate went on record by a vote of 96-0 in support of a resolution sponsored by Senators Bill Bradley and Jim Sasser. It served notice that the industrialized nations faced an emerging challenge concerning the connection between Western security and the West’s financial and trade flows to the Soviet Union. A primary impetus for such a resolution was rapidly increasing Soviet indebtedness at a time when Soviet military spending, client state support and numerous other activities harmful to Western interests were continuing unabated. Brief and to the point, it stated:

It is the sense of the Senate that during the Toronto Economic Summit, the President of the United States should consult with the leaders of allied countries on the impact on Western security of tied and untied loans, trade credits, direct investments, joint ventures, lines of credit and guarantees or other subsidies to the Soviet Union….

 

Regrettably, this sound advice was not heeded. Neither were other, subsequent congressional initiatives along these lines. In part as a result of the studied indifference of the G-7 partners to this looming problem, the implications of the worsening Soviet financial and economic crisis were papered over.

Consequently, it was not until private banks and companies began to abandon the Soviet market en masse — leaving it to governments and taxpayers to cover their losses and assume primary responsibility for propping up an unreformed, militarized Soviet economy — that the alarm bells began to ring. But even now, the G-7 governments with the notable exception of Japan refuse to deal responsibly with the disturbingly high level of Soviet indebtedness.

Today, the Soviet debt problem has assumed crisis proportions, largely due to financial aid being imprudently extended by Germany, Italy, France, and South Korea. Momentous decisions loom concerning Western aid to the Soviet Union. Such decisions will have enormous import for the future pace and direction of reform in the USSR and for American interests.

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. Consider just a few of the sorts of warning indicators for the alliance that are likely to be missed in acting so precipitously:

• The issue of whether to aid the Soviet Union is sharply dividing the G-7 nations, particularly on the questions of the timing, scale and circumstances of Western assistance flows to Moscow. The resulting divisions could weaken alliance cooperation in other areas (such as GATT, EC integration and future security arrangements). Japan and the U.K. (acting as a kind of G-2) generally favor a more cautious, incremental approach to such aid. Germany, Italy, France and Canada, by contrast, basically favor more immediate, large-scale financial, technological and energy-related assistance. They are prepared to extend such aid on the basis of mere promises of reform and for the ostensible purpose of "priming the pump" for structural change. For its part, the United States seems to be straddling the fence — but leaning toward the G-4 as evidenced by the pledge of some $2.8 billion in taxpayer credit guarantees to the USSR with essentially no conditionality attached.

 

• 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. 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; expedite Moscow’s clean-up of its payment arrearages to the region; or compel the Kremlin to honor its defaulted oil delivery contracts to these fledgling democracies.

   

• Since the Malta summit in December 1989, we have witnessed an astonishing series of abandoned Western preconditions ostensibly associated with meaningful Western aid flows. Examples include:
  • the Soviet Union being granted observer status in the International Monetary Fund in the Spring of 1990 without first having to put into place radical structural reforms;

   

  • the reversal of the U.S. position on Soviet membership and borrowing privileges in the new European Bank for Reconstruction and Development also in the Spring of 1990. Parenthetically, if the Bank’s president Jacques Attali has his way, even greater EBRD resources will be dedicated to the USSR at the direct expense of Eastern and Central Europe;

   

  • the signing of a U.S.-Soviet Trade Agreement in June 1990 despite the absence of an enacted emigration bill and continued repression in the Baltic States;

   

  • the abandonment of President Bush’s three preconditions for aid enunciated at the Houston Economic Summit in July 1990 which included sharp reductions in Soviet defense spending as a percentage of Soviet GNP, systemic reforms "in place" and suspension of Soviet economic and military assistance to Cuba;

   

  • the granting of $1.3 billion in U.S. agricultural export credits before the completion of the IMF-led study commissioned by the leaders of the G-7 countries at the Houston Economic Summit and in a manner inconsistent with its findings; and

   

  • the extension of a further $1.5 billion with no conditionality and despite Moscow’s noncreditworthy status.

 

Indeed, 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.

But after Gorbachev caucused with his traditional constituencies — the KGB, the military and the Communist Party — he promptly reneged on his announced intention to implement the 500 day plan and began, instead, what was a seven-month program of recentralization. This program featured: the purging of reformers from key positions and their replacement with orthodox communists; an episodically violent crackdown against those republics making their bid for independence and freedom; and continued pursuit of rapid strategic force modernization. In short, the Soviet economic and political track record between the Houston and London Economic Summits has, by any objective standard, been very discouraging.

Consequently, the burden of proof at this juncture should rest with those who construe the Gorbachev regime as now being committed to fundamental and irreversible structural reform — not the voices of caution and restraint.

Most Promising Direction of Reform

The Pavlov Anti-Crisis program (named for Soviet Prime Minister Valentin Pavlov) and the Harvard "Grand Bargain" plan — insofar as its details are publicly available –seem to have a disturbing similarity in at least one major respect: They both basically represent a "top-down" approach to reform rather than a more promising "bottom-up" strategy.

Clearly, 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.

Such a course is made all the more necessary by the questionable commitment of the central authorities — particularly that of Prime Minister Pavlov — to the creation of such institutions. Whatever President Gorbachev’s true attitude toward the notion of structural reform with or without Western assistance, we have seen in the past the ability of those represented by Pavlov, Shcherbakov, Primakov and their colleagues in the nomenklatura effectively to strangle reformist initiatives in their infancy. This is particularly true of initiatives that threaten their equities directly.

Those anxious to prime the pump for Soviet reform prior to the sort of fundamental structural reform and institution building so vehemently opposed by Pavlov and company also ignore the East European experience. In Poland, Czechoslovakia and Hungary, there was a wholly inadequate capacity to absorb efficiently substantial Western capital infusions prior to the construction of new institutional arrangements. A distinguished international economist, Paul Craig Roberts, recently and vividly described how the same phenomenon was at work in the Soviet Union: "The Soviet Union lacks the institutions to make effective use of Western aid. If it had the institutions, it would not need the aid. If it gets the aid in advance of the institutions, they will be bureaucratized and >stillborn."

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.

The true determinant of whether a "step-by-step" approach to Western aid to the Soviet Union will promote or retard reform is not simply that such assistance is provided in tranches. Rather, the tranches must correspond to identified and fixed milestones and be disbursed in a disciplined, transparent manner. Only with full accountability and disincentives to non-performance can the West have any confidence that taxpayer dollars are not being thrown into the burn barrel. For example, a system of private property and established markets for goods, labor and capital are more likely to be postponed than instituted if we pursue the wrong sequencing and conditioning of assistance flows.

Finally, 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.

To avoid this danger, the present preoccupation of both the Harvard group and even the leaders of the G-7 countries with exclusively economic criteria for reform must be replaced with a far more comprehensive and balanced set of preconditions for sizeable Western assistance. In addition to standard creditworthiness criteria, full economic and financial data disclosure and solid economic conditionality, the following essential political changes should be required if U.S. taxpayer credit guarantees are to be extended to the USSR:

• a massive reduction in Soviet expenditures on the military which currently drain at least 25% of annual GNP, especially in the area most threatening to the United States — the ongoing upgrading of the USSR’s strategic nuclear forces;

 

• the dismantling of the voracious military-industrial complex controlled by the VPK which has, for decades, absconded with the nation’s priority human and natural resources and imported technology (often illegally acquired), thereby blighting the civilian economy;

 

• the immediate termination of billions of dollars annually in military and economic support for bankrupt client states stretching from Havana to Hanoi — including notably the cessation of all Soviet supplies to and financing of the dangerously defective nuclear reactor program underway near Cienfuegos, Cuba;

 

• an end to Soviet technology theft, espionage and disinformation programs aimed at the United States and its allies which also absorb billions of dollars needed for civilian economic revitalization;

 

• the acknowledgement of Baltic States and reformist republics’ unfettered right to secede immediately from the fragmenting USSR on the basis of sensible, internationally supervised arrangements;

 

• an end to Moscow center’s use of its energy supplier position to extract political, strategic or undue economic concessions from would-be secessionist republics and the struggling nations of Eastern and Central Europe;

 

• respect for fundamental human rights including honoring in practice the unconditional right of its people to leave the Soviet Union and to move freely within its borders consistent with international law; and

 

• the institution of genuinely free, fair and open elections at the national level — including for the position of president of the USSR — as well as at all republic and local levels.

In the absence of such essential systemic reform, the notion that a "Grand Bargain" arrangement would be "cheap" for the American people is seriously misleading. It begs the question: "Cheap" relative to what? If, by withholding aid for a sensible period of time and conditioning it in an appropriate fashion on demonstrable progress in both the political and economic spheres, the Soviet central authorities are compelled to divert resources away from the military, the VPK, subversion, etc. — hence dramatically reducing the threat to the United States — the benefit to the American taxpayer could amount to tens of billions in cost-avoidance associated with otherwise necessary U.S. military spending.

Mr. Chairman, in my view, it makes no sense to pay good American money in a manner that ultimately would preserve the Soviet threat. Likewise, we must not be seduced into believing that we somehow "owe" Moscow center billions now because it has cost us trillions to defend against that threat over the past forty-five years.

A "Reform Implementation Period"

What is needed now is not a pell-mell rush to provide undisciplined aid to Moscow but an approach that facilitates real "step-by-step" conditionality for genuine structural reform. Specifically, I recommend that additional taxpayer-subsidized assistance flows — such as credit guarantees, trade insurance coverage and support to the strategic Soviet energy sector — from the United States and other industrialized nations be suspended for a six-to-nine month "Reform Implementation Period." This would not necessarily preclude the provision of purely "technical" Western advice to the Soviet Union; such advice might be useful in advancing and monitoring progress toward key structural reforms like those described above and the building of market-oriented institutions.

Such a period would permit the Soviet commitment to reform to be tested and the reaction of Gorbachev’s traditional constituencies (the KGB, military, and nomenklatura) to be gauged. Importantly, it would permit a basis to be created for the sort of long-term confidence of Western businesses, governments and financial markets that will be essential for genuine integration of the Soviet Union — or hopefully the voluntary confederation of sovereign republics that succeeds it — into the world economy.

This "Reform Implementation Period" will also provide the newly elected President of the Russian Republic, Boris Yeltsin, the opportunity to concentrate on implementing a rapid transition toward democratic and free market structures — without having to align himself with Gorbachev and the central authorities in order to attract Western assistance and support. It is, after all, quite likely that the preelection Yeltsin-Gorbachev entente will be severely tested during the next few months. Disputes over control of hard currency revenue streams and precious resources like oil, gas, gold, diamonds, platinum must be expected.

Similarly, 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 almost 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.

Other, compelling considerations arguing for such a "Reform Implementation Period" include:

• It would permit elections to be held for the presidency of the USSR, the Supreme Soviet and other bodies, thereby creating an opportunity to forge the national consensus required to make the harsh sacrifices attendant to systemic transformation.

 

• It would allow time for the completion of a detailed IMF-study, as well as a formal interagency study under the auspices of the Economic Policy Council (which must include prominent representation from the NSC, the Department of Defense and the CIA). The Administration’s findings should be the subject of congressional hearings to help reduce the sharp division of opinion within the United States reflected in a recent national poll indicating that two-thirds of the American people oppose extending aid to the USSR.

 

• It would permit a reasoned resolution of the serious disconnect that currently exists between most of the G-7 political leaders and their finance ministers, indicated in the statement issued by the latter from the OECD ministerial held earlier this month. The stakes are simply too high and the prospective taxpayer costs too sizeable to allow a closed convocation of the G-7 leaders to construct — without adequate public debate — a massive taxpayer safety net for a beleaguered colleague.

 

• It could reduce the likelihood that U.S. taxpayers once again will be badly burned by the disbursement of premature taxpayer credit guarantees. In the past, $2 billion was lost in Poland during the late 1970s in a failed effort to stabilize the Gierek regime; another $2 billion was lost in the untimely and unsuccessful wooing of Saddam Hussein. The question is: How many expensive false starts and failures should the Congress tolerate?

Mr. Chairman, above and beyond the foregoing, sensible reasons for adopting a "Reform Implementation Period" to increase the prospects for success and reduce the dangers of massive losses, there is one other argument that is particularly persuasive: After we have so recently emerged from seven months of Gorbachev-led Soviet recentralization and repression, it is reasonable to insist upon a period of at least equal duration dedicated to radical systemic change before we bet billions in further taxpayer-guaranteed funds on what some bankers have called ‘The Red Bear S&L.’

Review of Soviet Creditworthiness

The Red Bear S&L is an apt metaphor insofar as virtually all Western trade and financial relations with the Soviet Union have become politicized. Accordingly, in a manner all too reminiscent of the circumstances that led to the U.S. savings and loan crisis, American government loan-guarantees are now, as a practical matter, required to support any private U.S. business and banking transactions with the USSR of any scale.

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, of commercial bank debt.

Unsecured Western suppliers to the USSR have been the first victims of Soviet inability to service its repayment obligations. Today, Moscow owes some $6 billion in serious arrearages to Western companies across the globe — approximately $120 million is owed to American firms. After all, is not the most straight-forward and expeditious means of rescheduling one’s debt to simply stop paying your obligations?

In this connection, the private companies of some nations have been considerably more fortunate than others. For example, the German and Italian governments decided last year to silence the complaints of their nation’s firms over Soviet non-payment by extending taxpayer-subsidized loans to Moscow center for the express purpose of liquidating their nationals’ arrearages. This too can be legitimately seen as yet another form of Soviet debt rescheduling — to say nothing of a violation of the principal of equal treatment of creditors.

Also in 1990, the central authorities privately approached certain G-7 nations concerning a "stretch-out" of maturing loans as a contribution to the success of Gorbachev’s program of perestroika. Just two weeks ago, moreover, the Soviet government signalled that it would be seeking to reschedule some $20 billion owed to official Western credit guarantee agencies as part of its broader effort of "jump-starting" the Soviet economy.

This is only a portion of the present Soviet financial crisis. Most Western estimates of total Soviet hard-currency indebtedness are probably underestimated. Currently, such estimates are in the range of $60-70 billion. They generally fail to include billions of dollars of so-called interbank deposit exposure — that is Western short-term deposits held in Sovietowned institutions, both those located in the USSR and in Western capitals. These deposits should properly be viewed as loans, particularly insofar as interbank deposits were included in previous sovereign debt reschedulings, (e.g., Brazil). In addition, there is surely some unrecorded Soviet debt obligations outstanding to certain Middle East lenders who do not always report their claims to either the Bank for International Settlements or the OECD. For these reasons, Soviet hard-currency indebtedness, in all likelihood, exceeds $70 billion with some $17 billion in debt servicing requirements due and payable this year.

In short, Soviet repayment obligations have become an unsupportable burden, particularly given the anticipated decline in annual Soviet hard-currency income. Typically, such income amounts to a mere $32-37 billion per year. What is more, the most dramatic blow to the USSR’s anticipated hard-currency earnings structure has yet to be fully felt: the impact of a continuing decline in Soviet oil production. Another major source of hard-currency income, gold sales, is likely to be more constrained in the future as a result of the Soviet leadership’s practice in recent years of siphoning off strategic gold reserves to meet short-term liquidity requirements.

Mr. Chairman, 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 corruption and distortion of the intricate network of austerity programs demanded of others in exchange for Western assistance, a disciplined strategy that has undergirded our efforts to manage the international debt crisis over the past decade.

The danger of one more financial crisis spawned by ill-advised government guarantees which the American people ultimately must absorb in the form of losses argues powerfully for an early effort to protect the taxpayer. Accordingly, in addition to exercising the sort of caution, restraint, discipline and conditionality I have recommended above, something more is required: Collateral.

In my view, all future U.S. taxpayer exposure in the Soviet Union should be collateralized to cover the total liability of new credits, with the Federal Reserve or Treasury Department taking possession of Soviet gold bullion (or some other hard-currency equivalents). 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.

Conclusion

Mr. Chairman, 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 those who intend to exercise such enlightened control — namely the resort to 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 govemments 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.

It is opportune that, even as I speak, President-elect Yeltsin is on Capitol Hill seeking guidance and exchanging views with congressional leaders. Hopefully, he will communicate with characteristically direct language his intention not to be party to any future efforts on the part of Mikhail Gorbachev to preserve and make more efficient the present Soviet political and economic systems in the guise of "structural reform." His visit also provides an unparalleled opportunity for you and your colleagues to assay his true commitment to the genuine, rapid and wholesale transformation of the Russian Republic into a sovereign, democratic and free market state.

Toward this end, I would respectfully suggest that the following pointed questions be put to Mr. Yeltsin in the course of his visit here:

• Will Yeltsin meaningfully differentiate himself from Gorbachev and the Soviet central authorities as they approach the G-7 leaders for substantial financial, technological and energy-related assistance from the West? Or will he stand shoulderto-shoulder with Gorbachev in seeking support for a joint "Russ/Sov" "reform" program?

 

• Will Yeltsin commit himself to the expeditious dismantling of the voracious military-industrial complex, a drastic reduction in annual Soviet defense spending, an end to client state support and the prompt phasing out of thousands of nuclear weapons on Russian soil targeted against the United States and its allies?

 

• Will Yeltsin immediately: institutionalize the right to private property; engage in sweeping price liberatization; undertake massive privatization of state-owned enterprises; overhaul tax, monetary and banking systems; eliminate all-Union style ministries; and institute the iron-clad right of emigration?

 

• Will Yeltsin stand by the Baltic States and other republics making their own desperate bids for freedom and independence, while aggressively undertaking such exercises of sovereign power for the Russian Republic — including the forging of trade and financial agreements with G-7 and other nations?

I appreciate very much the opportunity to contribute to the Committee’s deliberations on these important matters and hope that these remarks will do so.