Western Aid To What Used To Be The Soviet Union? Guidelines On What, When And How

(Washington, D.C.): The break-up of the Soviet empire is giving rise to a circumstance that bears directly on the feasibility and utility of Western aid to the former subjects of the Soviet empire — a circumstance clearly not present eleven days ago. Today, in sharp contrast to the practice observed under Mikhail Gorbachev’s regime, the central institutions opposed to genuine democratic and free market reform are being dismantled and replaced with republic-level institutions committed to the aggressive pursuit of such reform.

This development clearly demonstrates the folly of pre-coup recommendations by many in the West — notably the German government, proponents of the so-called "Grand Bargain," officials at the European Bank for Reconstruction and Development (EBRD) and business leaders like Dwayne Andreas of Archer-Daniels-Midland — for providing massive aid to the ancien regime. Now, the validity of the Center for Security Policy’s long-held position against premature aid is incontrovertible: The extension of large quantities of undisciplined Western assistance to the unreformed Gorbachev government would simply have had the effect of perpetuating the central authorities’ hold on power and enhancing their ability to resist needed structural changes.

Today, many of these discredited advocates for Soviet aid can be heard arguing anew that immense quantities of taxpayer resources and other support must at once be directed toward the Soviet Union. Democratic leaders like House Majority Leader Richard Gephardt, Rep. Les Aspin and Senator Joseph Biden — demonstrating the insouciance concerning national security that has done much to deny their party the White House for over a decade — have called for diverting billions from U.S. defense spending for this purpose. Others are content to dip into the taxpayer’s wallet through government-funded multilateral organizations like the IMF, the World Bank, EBRD, and the Asian Development Bank.

The Center continues to believe that only disciplined, transparent, monitorable aid to republics practicing democratic pluralism and free market economics is justified and in the West’s interest. It offers the following guidelines for judging the circumstances under which Western assistance should be provided:

WHAT: U.S. and allied decision-makers must carefully differentiate between economic, financial and technological assistance and humanitarian aid. The former lends itself to substantial abuse if in the wrong hands; the latter (consisting, for example, of food and medical supplies) can be squandered and misallocated but is unlikely actually to add materially to the center’s hold on power.

As a practical matter, neither kind of help from Western governments will determine the future economic prospects of Moscow center’s former subjects. Extrapolating from the costs experienced in the course of revitalizing Eastern Germany gives rise to a conservative estimate of $500 billion for the far larger, far more despoiled USSR. Such a sum clearly surpasses the available resources of the West. The only real hope, therefore, for growth and prosperity in the erstwhile Soviet Union lies with the creation of a climate compatible with free enterprise and foreign investment.

WHEN: Humanitarian aid can and should be provided immediately — provided it can be determined that such assistance is needed and if arrangements can be established which maximize the chances of that aid actually being received by those genuinely in need. The latter criterion is especially important: It makes no sense to have a repeat of last winter’s food aid fiasco in which, for example, 20,000 containers and 300 freight cars filled with food were discovered spoiling weeks after they had arrived in a Moscow rail yard.

By contrast, other forms of Western assistance intended to affect the prospects for long-term economic viability in the former USSR must be strictly conditioned on systemic reform. Such reform would appear to be far easier to enact now that the principal impediment — Gorbachev’s government and the institutions with which it was associated (the Communist Party, the KGB and the military-industrial complex) — is in extremis. Moreover, as the previous experience with Western efforts to bail out the Gorbachev regime should demonstrate, nothing will do more to promote the prospects for such radical economic changes than the U.S. and its allies withholding assistance until those changes are in place.

Accordingly, Western economic, financial and technological assistance should only be provided to those former republics of the Soviet Union that institutionalize through democratic processes the following structural reforms:

• privatization of state enterprises, including those in the strategic energy sector;

 

• codification of comprehensive private property rights;

 

• adoption of antitrust laws;

 

• enactment of taxation policies conducive to profit-making by individuals and corporations;

 

• creation of transparency regarding all economic and financial data (for example, strategic gold and other hard currency reserves, Soviet deposits in Western banks);

 

• institution of free trade practices (notably, through the reduction of import and export barriers);

 

• overhaul of the monetary and banking systems; and

 

• repayment of arrearages owed Western firms.

In addition, such republics must take steps to reduce the size of any military establishment on their soil and to decrease radically the priority accorded to defense expenditures. They must terminate the practice of assisting "fraternal socialist regimes" elsewhere around the world (notably, Cuba, Afghanistan, Vietnam and North Korea). And they must refrain from engaging at the republic level in aggressive and/or repressive activities previously associated with the Union’s Defense, KGB and Interior ministries.

HOW: Emergency humanitarian assistance should not be funded out of the U.S. defense budget. Events of the past fortnight — indeed of the past year — have dramatically underscored the Center’s view that the world remains entirely too dangerous a place for the sorts of draconian cuts contemplated by the President’s budget, to say nothing of what is likely to emerge from the Congress. It is simply premature to begin further, radical reductions in the United States’ military preparedness as contemplated by Reps. Aspin and Gephardt and Senator Biden.

Ironically, the right place to look for additional funds to help jump-start the economies of the emerging democratic republics is not the U.S. military; it is by applying monies freed up through the republics’ radically reduced support of the Soviet military and the central government. By redirecting such resources, there should be ample sums available to meet the costs associated with urgent humanitarian needs. If, however, that should not prove to be the case, the United States should consider making grants of humanitarian aid pursuant to the emergency funding provisions of the 1990 budget agreement and in accordance with the aforementioned caveats concerning need and useability of this assistance.

Longer-Term Aid: With respect to other forms of assistance geared to the longer-term, the Center believes that it is imperative that any and all Western aid flows be extended in a disciplined, transparent way. In the United States, rigorous tests of creditworthiness must be established legislatively to govern the future lending activities of the Commodity Credit Corporation and the U.S. Export-Import Bank. If otherwise deserving republics are unable to meet rigorous creditworthiness criteria, then a formal process should be created whereby the application of a creditworthiness test could be selectively and temporarily waived or amended.

Such an approach could require taking physical possession of such republic’s collateral in order to receive U.S. credit guarantees and would certainly involve working with the individual republics in question to bring them up to established credit standards as soon as possible. It would also avoid any further distortion or bastardization of the sound concept of creditworthiness perpetrated by the Bush Administration in recent months in its past lending to the USSR.

In a similar vein, Western lending agencies and private banks should establish performance targets which need to be met for the disbursement of approved credits. Traditional lending techniques like restricted draw-downs, collateralized accounts and the periodic on-site inspection of projects by Western experts should be required in this new political environment.

No Bail-Out For Those Who Propped Up Moscow Center: Moreover, future Western government and private-sector credits and loan guarantees to the post-coup confederation of republics should be substantially differentiated from the USSR’s current foreign debt of some $75 billion (including interbank deposit exposure). As formal debt rescheduling for Moscow center is now inevitable, that complicated and detailed process in the Paris Club and among Western banks should be used as the mechanism to separate pre-coup and post-coup Soviet and republic debt.

The general principle to be employed here should be that those profligate Western governments and banks (e.g., in Germany, Italy and France) which showered credit guarantees and direct loans on the now-discredited central authorities in the Kremlin must shoulder most — if not all — of the burden and costs of Soviet debt rescheduling and forgiveness. Conversely, those governments and banks that demonstrated commercial and political restraint in lending to an unreformed, militarized Soviet economy should be rewarded with far more favorable terms and conditions for future lending arrangements. Otherwise, irresponsible Western profit-seekers and political appeasement artists who previously supported the bankrupt Soviet leadership may realize a wholly undeserved windfall: massive "new money" from the West, including from multilateral lending institutions. This windfall could ultimately make them whole on loan repayments and cleaned up arrearages that otherwise will have to be partially, if not totally, written off.