TRANSFORMATION WATCH #4: BUSH’S MIXED SIGNALS ON SOVIET AID PUT U.S. TAXPAYERS IN HARM’S WAY

(Washington, D.C.): In his 24
September meeting in New York with Soviet
Foreign Minister Boris Pankin, President
Bush reportedly discouraged his
interlocutor from expecting large-scale
American aid to the former Soviet Union
in the absence of structural reform
there. At the same moment, however, his
Administration was sending the most
recent in a series of contradictory
signals to the Kremlin and to its Western
commercial lenders. Unfortunately, the
U.S. taxpayer is likely to be the
ultimate victim of the difference between
what — to use Mr. Bush’s terminology —
his “lips” are saying and what
his “hips” are doing.

The Washington Post reported
Wednesday that Mr. Bush used his meeting
with Pankin to convey the message that
“further help depends on the pace of
economic reform in the central government
and republics.” On the same day,
however, the New York Times
disclosed that Secretary of Agriculture
Edward Madigan was increasing the
taxpayer-underwritten guarantees on $211
million worth of agricultural export
credits to 100 percent of
principal and the full value of the
prevailing rate of interest for
52-week Treasury bills (about 5.2%). This
step — which the Center for Security
Policy has warned for several months was
in the offing — replaces the previous,
already inordinately generous terms for
such guarantees (98 percent of principal
and the first 4.5 percentage points of
interest on the covered principal).

Under this new arrangement, the
U.S. taxpayer will be assuming virtually
the full risk associated with such
dubious credit transactions.
Incredibly, this is being done at the
very moment that the prospects for
repayment — which have been declining
sharply in recent months — have
virtually vaporized. Indeed, the only
reason for this change in Administration
policy is that commercial lenders were
simply refusing to absorb any additional
credit exposure in the former Soviet
Union.

The extent of Moscow’s insolvency was
vividly portrayed in the comments of top
Soviet and European officials in Jim
Hoagland’s column in the Washington
Post today. For example, a European
cabinet minister confided, “They
[the Soviets] are broke, dead broke, and
in private they say so.” Hoagland
went on to say:

“The central authorities in
Moscow have run out of foreign
currency. A senior Moscow
official made the embarrassing
admission to a Western leader
recently that his government will
be unable to make foreign loan
payments, purchase imports or
meet its payrolls abroad without
an immediate cash infusion of $1
billion from the West in the next
few weeks.”

According to a senior official at an
American commercial bank quoted on
background by the New York Times,
now that banks’ depositors and
shareholders will not be liable for any
losses when Moscow center defaults on or
reschedules its debts (as it is expected
to do imminently), “the expanded
guarantees should be more than sufficient
to insure that they are used.”
Today’s Times confirms that
Soviet authorities have been
“flooded” with offers to lend
money. After all, as Senator Bill Bradley
(D-NJ) put it, “It’s a no-lose deal
for the banks and a bad deal for the
taxpayers.”

Unfortunately, this
is but the most recent in a series of
initiatives embraced by the Bush
Administration which offers the
reconfigured — but as yet essentially
unreformed — Soviet center greatly
expanded access to U.S. taxpayer
resources. Leading Soviet advocates of
systemic economic reform just today
underscored the frightening
extent to which so little has changed in
the post-coup period. Konstantin
Borovoi, the head of the new Russian
stock exchange, was quoted in the Washington
Post today as saying:

“I’ll tell you what happened
during the coup. Communists
defeated Communists. They may
call themselves democrats, but
they are still Communists. Their
methods are the same. We are
again building communism. It’s
the same old centralized methods
and the same old people. It’s
terrible.”

Vladimir Tikhonov, one of the
leading Soviet economists, whose
commitment to real reform led him to
break with Mikhail Gorbachev last year,
added:

“The inertia of the old
state apparatus is
enormous….for all the changes
that have taken place over the
last few weeks, the system is
basically the same. In this
country, the provisional has a
tendency of becoming the
permanent. There is no guarantee
that things are going to be any
better tomorrow. The more we
resort to temporary measures, the
more obstacles we create to real
economic reform.”

Despite this deplorable reality, the Bush
Administration has — in addition to its
offer of liberalized agricultural credit
guarantees — taken the following steps:

• On 10 September, Secretary of
  State James Baker disclosed that
  — as far as the Bush
  Administration is concerned —
  all that a reconfigured Soviet
  center need do now to gain access
  to Western economic assistance
  would be to express “a
  commitment to true free market
  economic policies” and to
  have “some sort of
  plan.” As he put it,
  “If they can take those
  steps, we will be there. They
  don’t have to take the steps
  first, but commit to taking the
  steps.”
• The Administration decided last
  month to accelerate
  Moscow center’s access to the
  taxpayer credit guarantees
  affected by Secretary Madigan’s
  action. In a decision taken in
  June 1991 — which effectively
  waived the statuary requirement
  that recipients of such credits
  be creditworthy — Mr.
  Bush announced a distribution of
  $1.5 billion in credit guarantees
  to occur in three tranches. The
  first $600 million was released
  immediately; the second $500
  million was not supposed to be
  released until October; the last
  remaining $400 million was to
  wait until February 1992.
• In the wake of the August coup,
  however, the President acted to
  speed up ditribution of $315
  million from the second tranche
  — releasing $116 million
  immediately. The newly sweetened
  guarantee terms will apply to
  $211 million dollars worth of
  credits out of that $315 million
  package. It will almost
  certainly apply to the remaining
  $585 million now due to be made
  available to Moscow starting in
  October as well as all such
  credit guarantees in the
  foreseeable future.

• According to press reports, the
  Administration is now willing to
  support immediate Soviet entry
  into the International Monetary
  Fund and World Bank as a full
  member. Such a step
  would confer borrowing privileges
  on Moscow center, allowing it
  near-term access to billions in
  Western and other taxpayers’
  funds. Scarcely three months ago,
  senior Administration officials
  like Treasury Secretary Nicholas
  Brady and Under Secretary David
  Mulford were defending the U.S.
  insistence that Moscow obtain
  nothing more than “associate
  membership” status until
  such time as the Soviet Union had
  undergone wholesale structural
  economic transformation.
• The Administration has also
  insisted on pressing for
  prompt congressional approval of
  the U.S.-Soviet Trade Agreement
  signed last year. This
  accord — made with an entity
  that no longer exists — would
  serve as the basis for other
  agreements and credit
  arrangements that will have the
  effect of aiding and
  strengthening the reconfigured
  Soviet center. For example, one
  of the side letters accompanying
  the Trade Agreement states that
  upon the extension of MFN to the
  Soviet Union, the USSR will begin
  to repay the $674 million owed to
  the United States through the
  Lend Lease program — payments
  which were suspended in 1974.
• Under the terms of this side
  letter, however, the
  United States agrees not to
  collect on the Lend-Lease debt
  until the U.S. government makes
  available to the Soviet Union
  export credits, guarantees and
  insurance through the U.S.
  Export-Import Bank and other
  government credit facilities.
  This amounts to American taxpayer
  bribes used to induce the new
  Moscow center to honor its past
  debt obligations to the United
  States government.

• President Bush has also
  asked Congress immediately to
  repeal the Stevenson and Byrd
  amendments, legislation
  that currently limits Soviet
  access to U.S. Treasury resources
  supplied through the
  Export-Import Bank. Such a step
  would open up to the reconfigured
  Moscow center — and American
  companies in the strategic energy
  and other sectors wishing to do
  business with it — vast new
  opportunities to lay off onto the
  U.S. taxpayer the associated
  business risk.

The Center for Security Policy
believes that it is unacceptable to
expose the U.S. taxpayer to the sorts of
losses sure to accrue from expanded
guarantees and other borrowing capacity
now being granted by the Bush
Administration to Moscow center. It
agrees wholeheartedly with an observation
made by the Financial Times of
London 24 September:

“The Administration could
create problems for itself,
however, by changing the terms of
the credit guarantees for the
Soviets. These could be
the first in a long series of
such guarantees and a precedent
that lets the banks off the hook
for virtually all risk my not be
considered the best course of
action. Other countries could
demand similar terms, further
undermining the shared risk
concept on which the guarantee
program was built.”

The Center calls on the Bush
Administration and the Congress to
reconsider immediately this irresponsible
course of action before real damage
is done to U.S. taxpayer equities. The
fact that such assistance will almost
certainly retard rather than
catalyze necessary reforms in the former
USSR is a further, compelling reason for adopting
a more — rather than
less — disciplined policy toward lending
to the reconfigured Soviet central
authorities.