‘Trumping’ For Dollars: Moscow Plays Favorites In Payments To Western Creditors

The Center for Security Policy today warned of "sweetheart deals" between the Soviet Union and key Western governments that threaten to breach a cardinal rule of Western business and, particularly, banking practices: "equal treatment" for Western creditors. This is the effect of Moscow’s collusion with Germany and Italy whereby the latter’s companies are moved to the front of the payment line when and if their governments provide large taxpayer-guaranteed credit lines to Moscow.

"Thus far, Western financial aid to Moscow has had little to do with catalyzing genuine economic reform — and everything to do with compensating foreign suppliers who have been encouraged to invest and trade with the Soviet Union," said Frank J. Gaffney, director of the Center.

Last week, Thomas Alibegov, first deputy chairman of the Soviet Bank for Foreign Economic Affairs, said that more than half the West German credit of $3.1 billion extended to the Soviet Union in June had been used to clear sums owed to German firms. According to a 25 July Reuter’s report, Alibegov said: "According to our understanding, it was largely utilized for clearing the unpaid deliveries made by German companies. This was our understanding with West Germany." (Emphasis added.) Moscow’s overdue payments to German companies is but a part of a comprehensive payments crisis involving dozens of Western firms to the tune of an estimated $3-5 billion.

Last Friday, following meetings between Italian Prime Minister Giulio Andreotti and President Gorbachev, the Prime Minister said his government was also favorably considering a Soviet "request" for a $1 billion credit line. Mr. Andreotti told a news conference, "From the Soviet side, there has been a request for credit, also for the delayed payments." According to the Financial Times of 27 July, "Much of the money would presumably be spent on clearing up delayed payments to Italian companies."

Gaffney noted, "Unfortunately, Gorbachev’s latest gambit is not likely to stop with the Germans and Italians. The French are almost certainly close behind. After all, it was the French, together with the Germans, Italians and others in the European Community that pressed relentlessly for immediate Western financial assistance to Gorbachev at the Houston Economic Summit earlier this month."

"Although Kohl, Andreotti, and Mitterand have passionately argued that heavy infusions of Western cash are needed to save perestroika and strengthen the reform process, it is increasingly clear that a much less high-minded and cynical impetus is at work: The actual recipients of the bulk of these taxpayer funds are companies of the re respective lending governments," said Roger W. Robinson, Jr., former senior director for international economic affairs at the National Security Council and member of the Center’s Board of Advisors.

Of course, businessmen should have had fair warning of Gorbachev’s propensity for extortionary tactics — on such elegant display in the course of his recent visit to the United States. For example:

• Within the U.S.-Soviet Trade Agreement completed prior to Gorbachev’s arrival in the United States, Soviet negotiators insisted that repayment of Moscow’s Lend Lease debts to the United States would be contingent on restored Soviet access to U.S. Eximbank credits and loan guarantees.

 

• In Washington, Soviet negotiators made clear that the signing of a long-term U.S.-Soviet grain agreement would be contingent on President Bush’s willingness to sign a U.S.-Soviet Trade Agreementdespite the lack of a codified emigration bill and continued economic repression in Lithuania.

 

• When Gorbachev held court in San Francisco, U.S. business leaders heard the following statement from the Soviet president: "Those who stay on the sidelines, who don’t want to take a risk, who want to wait and see — they will remain spectators for years to come….We will make sure of that."

At the same time that Gorbachev is making Western suppliers "offers they can’t refuse," the West’s bankers should be bracing for a shakedown affecting their equities as well. Heretofore, the vast majority of commercial bank creditors were confident that they would avoid the fate of their corporate counterparts by virtue of having dealt exclusively with the Soviet Bank for Foreign Economic Affairs and other official banking entities (e.g., Gosbank). Now, however, the Soviet president himself has inadvertently signaled that the integrity of loan agreements with the USSR are not necessarily sacrosanct.

During the recent Kohl-Gorbachev meetings in the Caucasus, Gorbachev made a revealing slip of the tongue when he stated that the Soviet Union was seeking "to prolong the repayment of our debts a bit at more suitable conditions." This unmistakable suggestion of an upcoming — albeit "informal" — Soviet debt rescheduling created a ripple effect in sensitive Western credit markets which, according to one senior New York banker, has already resulted in some short-term credit and interbank deposit lines to the Soviet Union being pulled.

In response, Moscow hastily convened a press conference on 18 July to reassure credit markets. Gorbachev’s personal spokesman Arkady Maslennikov obtusely stated, "It is understood that amelioration of the structure of existing indebtedness should be arranged by seeking new credits with longer maturities." His meaning was not lost on the international banking community.

According to Robinson, "The ‘bunching,’ or simultaneous coming-due, of Soviet debt repayments on more than $60 billion of total hard currency indebtedness evidently requires an urgent refinancing effort. It should be understood, however, that there is no real distinction between an involuntary debt refinancing and a publicly announced rescheduling. The only difference — as in the case of Donald Trump — is that it saves embarrassed creditors the loss of face involved when imprudent lending results in an overextended borrower requiring a formal debt rescheduling."

In short, the handwriting is on the wall. The Soviet Union’s serious decline in creditworthiness is prompting Western suppliers and bankers to stampede for the shelter of government guarantees or fully collateralized transactions. To cite but one example, Moscow’s $5 billion diamond agreement with De Beers announced last week requires the shipment of Soviet diamond stockpiles to London to be held as collateral against a $1 billion loan to the Soviet Union, to be repaid over five years. Similarly, Western central banks have made clear their desire to collateralize any short-term liquidity loans to Moscow with Soviet gold held in their vaults.

The Center believes that it is crucial that a new "G-3" must be formed — comprised of the United States, Japan, and the United Kingdom — to stop further erosion of international credit standards stemming from these Soviet practices. At the same time, this G-3 should undertake to prevent Western taxpayers from being saddled with the costs of a wholly unwarranted bail-out of an unreformed Soviet Union.

While disciplined and transparent approaches to such credit transactions are always in order, never are they more required than at present when so great a danger exists that Western economic, financial and technical assistance is being directed toward sustaining the entrenched forces of the Soviet Communist Party — rather than aiding the legitimate, non-communist and reformist opposition in the USSR.

Unfortunately, the Center believes that the Bush Administration’s "go-your-own-way" alliance policy on assisting the Soviet Union, memorialized at the Houston Economic Summit, presages further U.S. acquiescence to the German-Italian-French agenda. The Center expects that, within six months, this will take the form of offering Gorbachev U.S. taxpayer-supported credit lines through the Export-Import Bank and the Commodity Credit Corporation, as well as government-backed insurance coverage through the Overseas Private Investment Corporation. What is more, Soviet access to U.S. funds — via such mechanisms as: multilateral institutions (like the European Bank for Reconstruction and Development and probably the International Monetary Fund and the World Bank); expanded direct food aid; and major U.S. energy-related assistance — could easily generate still greater liabilities for American taxpayers.