Western Financial Policy Toward The Former USSR: Debt Rescheduling Support For Decentralization Or Recentralization?

25 October 1991

EXCERPTS OF TESTIMONY 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 Finance

United States Senate

October 21, 1991

I propose to focus on some of the origins of the current Soviet financial crisis. I will also comment on the controversy surrounding the true value of Soviet strategic gold reserves. In addition, I intend to explore how current G-7 policies — particularly those of Germany — are inordinately jeopardizing the equities of Western taxpayers and risk undermining the near-term restoration of Soviet and republic creditworthiness in private financial markets. The role of multilateral institutions in managing Moscow’s misfortunes also will be discussed briefly. Finally, I will offer some thoughts on differentiating clearly between pre-coup communist debt and post-coup new money flows to those republics which qualify for such assistance and react to several G-7 proposals and other developments currently unfolding….

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In 1985, total Soviet indebtedness was estimated to be only about $30 billion — primarily a product of a legacy of caution with respect to foreign borrowing. Today, by contrast, total Soviet hard currency indebtedness is estimated to be in the range of $70-75 billion….In fact, nobodytrue level of Soviet indebtedness…. in the West has any definitive information concerning the

Can the Soviets manage this large hard currency indebtedness in view of a total annual hard currency income typically in the range of only $32-37 billion — and falling? In the past, this question has generally been answered affirmatively, thanks, in part, to a presumption that the Soviet Union had large strategic gold reserves….Today, of course, such confidence has been sharply eroded by recent, often conflicting Soviet statements to the effect that their gold reserves are a trivial fraction of what conventional wisdom held they were just a few months ago….

Yavlinsky stunned a Moscow television audience by estimating reserves to be only about 242 metric tons (worth only $2.6 billion at current prices)….Not everyone was caught as flat-footed as the White House by Yavlinsky’s claims. As you may recall, I have contended for over two years — in the face of considerable skepticism — that Moscow had been routinely dipping into its strategic reserves since 1987 to meet short-term liquidity requirements and that this practice had intensified considerably over the past two years. Indeed, as the New York Times reported on 19 August 1991, I estimated the value of Soviet gold reserves to be as low as $12 billion — or approximately half the figure generally accepted in the West….

My basic view of this debate is that for several years the Soviet Union was content to inflate artificially its gold reserves by nodding in the affirmative toward Western estimates in the $25-32 billion range. For reasons like those mentioned above, I believe some All-Union Soviet leaders — possibly Gorbachev himself — encouraged Yavlinsky to go public with an artificially low gold reserve figure — hence the huge disparity in estimates which emerged virtually overnight. Based on an historical analysis of unexplained Soviet hard currency funding gaps and admittedly incomplete market information concerning Soviet gold sales, it is my belief that Soviet reserves probably remain in the range of $6-12 billion (some 520-1040 metric tons)….

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This Committee should be both amazed and deeply disturbed that the leaders of the industrialized nations are now engaged — under these circumstances — in financial decision-making likely to involve the disbursement of billions of dollars in U.S. taxpayer funds to Moscow center between now and the Munich Economic Summit next July….

During the recent IMF-World Bank annual meetings in Bangkok, the G-7 nations publicly feigned consensus on providing emergency financial aid to the former USSR to help avoid a foreign debt payments crisis. In fact, sharp divisions have emerged on the specific question of what form such emergency aid should take. Soviet hard currency shortfalls for the last four months of this year were calculated by the G-7 to be more than $7 billion….

Among the ingredients of a financial rescue package for Moscow currently contemplated by the G-7 are the following:

• A bridge-loan to Moscow from the Bank for International Settlements (BIS) in Basel, Switzerland…

 

• The "temporary" deferral of Soviet debt repayments …

 

• Accelerated bilateral loans and credit guarantees by G-7 countries…

 

• The establishment of a financial "safety net" (also through the BIS) for Soviet-owned subsidiary banks located in the West. This initiative would require that taxpayers in G-7 nations bail out institutions like Moscow Narodny Bank in London even though such enterprises have long abused the hospitality of their Western hosts by engaging in an array of dubious — if not downright insidious — activities on the Kremlin’s behalf, some of which are reminiscent of those coming to light in the BCCI scandal.

 

• Active consideration of a Soviet request in Bangkok for the establishment of a $20 billion fund to backstop ruble convertibility…

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The G-7 appear to have agreed to play the role urged upon them by the Soviet central authorities, namely that of the enforcer of Moscow’s demands that the republics continue to provide the center with sufficient hard currency remittances to permit it to meet, among other things, the former USSR’s past and future foreign debt obligations.

In other words, this mission is designed — as it is likely subsequent G-7 efforts will be — to preserve the facade of Soviet creditworthiness at least until statutes in countries like the United States, Japan and Canada, which make a favorable credit rating a precondition for sovereign borrowing, can be waived or eliminated….

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Not surprisingly, Germany has taken the lead among European countries in strongly opposing U.S. intentions to go public with a specific debt deferral plan for the former Soviet Union. After all, Germany has a radically different interpretation of allied financial burden-sharing in the context of the Soviet financial crisis than that of Washington.

It is not difficult to assay Bonn’s motivations in this area. All one need do is to glance at the estimated respective shares of Soviet debt held by its G-7 creditors. [Germany-36%; France-9%; Italy-7%; Japan-7%; UK-5%; U.S.-1%] According to the Financial Times of 16 October, combined German government and commercial bank credit exposure in the former Soviet Union increased from DM 19 billion ($11 billion) at the end of last year to some DM 35 billion ($20 billion) just six months later….

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The G-7 partners have already begun to recognize that it would only be a matter of time before the U.S. Congress and other nations’ legislative bodies awaken to the German gambit. Once they do, such parliaments are most unlikely to agree to allow Moscow to use their taxpayers’ money to pay off profligate European lenders — lenders who had chosen in the pre-coup period to extend credit to a Soviet regime which remained committed to the preservation of a fundamentally unreformed, militarized Soviet economy and costly global empire.

For the moment, the Bush Administration is exhibiting a virtually unprecedented — and refreshing — degree of prudence in its handling of this potentially explosive issue. In contrast to a generally poor track record concerning financial, trade, energy and technology transfer aspects of U.S.-Soviet relations, the Administration appears for the moment determined to resist the gratuitous creation of additional Soviet indebtedness.

Fresh financial flows from the West will only deepen Moscow’s debt crisis and hobble further the prospects for the genuine transformation of the Soviet economy. To put it bluntly, the "bridge-loan" (BIS originated or otherwise) envisioned by most G-7 partners, would represent a bridge to nowhere under current circumstances.

Instead, what is needed is a Western policy of clear-cut differentiation between pre-coup communist debt and post-coup new money flows to those republics which qualify for such assistance. The bottom line is that the Soviet Union should reschedule its debt now, rather than have such a rescheduling artificially staved-off at the expense of Western taxpayers. This is particularly the case when the only certain beneficiaries of such a postponement are European banks and governments — not the beleaguered Soviet economy and those of the republics….

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In calling the IMF’s role in reforming the Soviet economy "the toughest task in its 47-year history," the Wall Street Journal on 15 October accurately described the problem. The Journal went on to describe the IMF’s capabilities to undertake this monumental task as comparable to "asking a doctor experienced in setting broken bones to perform a heart transplant on a cancer patient."…

Having said this, the Congress should expect to witness substantial enthusiasm on the part of the Bush Administration and other G-7 leaders to off-load this emerging financial nightmare from bilateral arrangements onto the shoulders of multilateral financial institutions such as the IMF, the World Bank, the European Bank for Reconstruction and Development (EBRD), the BIS and even the Asian Development Bank. Such a strategy would have two major objectives:

First, it would reduce the potential for damaging political blow-back which would almost certainly attend any U.S. effort to lead a bail-out of the new Union with American taxpayer funds. To be sure, any lending by institutions like the IMF would also involve taxpayer funds; such lending, however, can be performed in a more politically palatable — or at least less visible way if the Fund (or some other organization) serves as a cutout.

Second, Western leaders — including President Bush — are becoming increasingly and properly nervous that a potential collapse of the Soviet economy and debt servicing capability could be tied to them personally. This frightening scenario could be substantially blurred by the central involvement of faceless multilateral institutions.

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It seems clear from the G-7 meetings in Bangkok that there remains a fundamental misunderstanding of the nature and likely duration of the Soviet financial crisis. In a way similar to the Latin American debt crisis in the early 1980s, we are now hearing the Soviet situation characterized as a "short-term liquidity problem" rather than a more serious longer-term structural crisis. In addition, Mr. Yavlinsky attempted to sell the argument that the coup attempt in August was primarily responsible for the current Soviet financial crisis — a good public relations ploy, but not grounded in reality….

The scale of Western financial assistance required by the end of this decade to improve materially the Soviet standard of living on a sustainable basis may well be on the order of $500 billion. Clearly, to achieve anywhere near this level of total Western credit, investment and trade flows into the former USSR will necessitate a major commitment by the world’s private sector on its own risk. Unfortunately, the steps needed to promote a climate conducive to such entrepreneurial hard currency infusions are being overlooked in the rush to advance taxpayer-underwritten loans, credit guarantees and trade insurance.

Mr. Chairman, you have been a leading protector of U.S. taxpayer interests with regard to U.S. financial and trade policies toward the former Soviet Union. I am confident, therefore, that you recognize the inadvisability of open-ended, multi-billion dollar transfers of business and credit risk onto the shoulders of the American people through a sleight of hand called "government guarantees". It has been painful enough to witness the relentless escalation of taxpayer costs associated with the Savings and Loan debacle and the international debt crisis….

Unfortunately, the G-7 nations still appear wedded to the notion that "one-stop shopping" — namely a central coordinating point for Western aid and debt relief — is the only way to assure future stability and growth. Ironically, this G-7 strategy is at cross-purposes with developments on the ground in the former Soviet Union, namely the intention of key reformist republics to steer clear of the dubious policies of even a newly configured central government….

In the way of reaction to a number of G-7 proposals and other developments currently unfolding, I would also offer the following summary recommendations: [Eleven policy recommendations listed.]

Finally, the coming crescendo of the Soviet financial crisis presents at least one major policy opportunity for the West which should not be missed. If an inevitable Soviet debt rescheduling is undertaken now, we can clear the decks — albeit with substantial pain — of pre-coup communist debt and get to the task of working closely with the most reformist republics to bring them into the Western economic and financial community.

A Soviet debt rescheduling which is specifically crafted to help catalyze systemic transformation of qualifying republics can serve as a cathartic, positive process. If, however, we continue down the present road of permitting Moscow to use Western financial assistance, including debt relief, as a kind of club to bludgeon independent, democratic-minded republics into submitting to the discredited policies of a new Moscow center we will have misjudged, at a critical juncture in history, the merits of decentralization and the abiding dangers of recentralization.