WHEN DEUTSCHE BANK TALKS SOVIET DEBT DEFAULT, THE BUSH ADMINISTRATION SHOULD LISTEN

(Washington, D.C.): Western creditors
have effectively been put on official
notice: The Soviet government will be
defaulting on at least some debt
repayments momentarily. That word came
this week from no less than Hilmar
Kopper, the chief executive of Deutsche
Bank, a man who ought to know; his
institution has played a central role in
organizing and underwriting Soviet
sovereign borrowing for decades.

Deutsche Bank’s Inside Dope

The Financial Times of London
reported on 11 November 1991 that Kopper
made the following points in a Munich
meeting with economic journalists:

“‘[Moscow center’s]
liquidity crisis is extremely
acute.’ Claiming an exact
knowledge of the Soviet
foreign currency figures, he said
that ‘until early Monday morning
[11 November], nothing will
happen…from Monday on, anything
is possible.’

“It [is] now probably too
late [to erect a safety net of
$4-5 billion to tide the former
Soviet Union over its immediate
balance of payments crisis.] The
Deutsche Bank chief said he
was afraid the West had ‘talked
for too long over the patient’s
bed, and now he is already
dead.'”
(Emphasis added.)

Kopper’s comments seemed as much as
anything designed to allay the concerns
of Deutsche Bank shareholders and
depositors. In stark contrast to the
fear-mongering about the adverse
consequences of a possible Soviet debt
default which have featured prominently
in German demands over the past three
months for Western infusions of new money
into the USSR, he strove to downplay the
risk to his and other banks in Germany
should Moscow center welsh on its
outstanding debt. The FT
reported that Kopper believes that
“there should be no German banking
crisis, because 1991 had been a good year
for the system in other respects, and much
Soviet bad debt had already been allowed
for.”

‘Rounding
Error’ — Acknowledged Soviet Debt Grows
Dramatically

Interestingly, on Monday November
11th, Ivan Silayev — the head of the
reconfigured Moscow center
Inter-Republican Economic Committee —
confirmed the Center for Security
Policy’s longstanding contention that
Soviet foreign debt was considerably
higher than had been previously
acknowledged. Reports from Tass
and the independent Interfax
news agency recounted in yesterday’s Wall
Street Journal revealed that the
Silayev committee now assessed Soviet foreign
debt to Western nations to stand at $81
billion at the official exchange rate.
This contrasts with official estimates of
just $65 to 68 billion issued as recently
as last week. According to Interfax,
“most of the debt had accumulated
since President Mikhail Gorbachev assumed
power in 1985.”

In addition, Silayev disclosed that
the Soviet Union owes formerly socialist
nations of Eastern Europe roughly $31
billion. While this and other foreign
debt is nominally more than
offset by some $160 billion carried on
Soviet books as hard currency owed Moscow
center by its allies for the purchase of
Soviet arms, oil and other products, in
reality that “asset” is, for
the most part, wholly uncollectible
from such bankrupt clients as Cuba,
Nicaragua, Vietnam and Iraq.

Silayev made his announcement as part
of a plea for a rescheduling of Soviet
debt payments in the run-up to a 17
November meeting in Moscow with G-7
representatives. It seems clear that the
Soviet central authorities hope not only
for such relief; they also want Western
creditors — in the words of the Journal
— to continue to demand that “the
republics deal with the debt collectively
and [to indicate] that they won’t grant
new credits if the republics insist on
acting separately.” In other words, Moscow
center is desperately trying to translate
its current financial liability into a
potent political asset by enlisting the
West in its struggle to maintain some
vestiges of central control.

For their part, the republics of the
former Soviet Union are sensibly
demanding to know exactly where this
staggering foreign debt came from — and,
even more importantly, how such
credits were used (read, squandered).
The Wall Street Journal notes
that:

“[The republics] have been
resisting turning over hard
currency to the central bank, and
have been slow to implement a
memorandum signed last month that
pledges collective responsibility
for the foreign debt. In
some republics, such as Russia
and the Ukraine, strong voices
are calling for dividing the
Soviet Union’s hard currency and
gold reserves as well as its
debt, and paying back the debt individually.”

Bush Administration Determined
to Throw Good Money After Bad?

Against this grim backdrop, the
Bush Administration is plowing ahead with
new initiatives which would significantly
expand U.S. taxpayer-underwritten credits
and investment insurance to the Soviet
Union. Yesterday, the New
York Times reported that the
Overseas Private Investment Corporation
(OPIC) was prepared to “provide
partial insurance against expropriation,
political violence and currency
convertability problems” for an
American investment fund interested in
buying shares in newly formed companies
being established by the Soviet
military-industrial complex. (One such
company continues to manufacture
precision lenses for the military while
offering microscopes and medical devices
for sale to other users.)

OPIC is allocating $100 million for
this purpose. As the Times
quaintly put it, that money would only
become a taxpayer liability in the event
“claims are filed [by the insured
fund] and OPIC cannot collect from Soviet
or republic authorities.” Chances of
such a situation arising would appear at
present to be ludicrously high.

The OPIC action is of a piece
with an initiative expected to be
announced by President Bush today at a
speech in Kansas City, Missouri — one
that will have the effect, however, of
exposing U.S. taxpayers to far larger
liabilities. Agriculture
Secretary Edward Madigan and other senior
Administration officials have been
signalling for several weeks that at
least an additional $1 billion in
Commodity Credit Corporation (CCC)
credits will shortly be extended to
Moscow. Such a transaction would
come on the heels of $2.5 billion in such
agricultural export credits granted
within the past 11 months, and an
additional $300 million from the U.S.
Export-Import Bank.

In authorizing the preponderance of
that amount ($1.5 billion) last June,
President Bush was obliged by statute to
certify that the recipient was
creditworthy. At the time, despite
overwhelming evidence to the contrary, he
blithely averred that the USSR was indeed
creditworthy and that the loans would be
repaid. Because the market believed
otherwise, none of these
credits could find commercial
underwriters until the U.S. government
agreed to up its guarantees from 98% to
100% of principal and to cover the bulk
of the interest.

Of course, no such subterfuge is
possible under present circumstances. The
Soviet Union simply cannot meet
the test required by the Agriculture Act
of 1990; “credits” extended
today must be publicly recognized for
what they are — U.S. taxpayer grants — since
no detailed mechanism yet exists between
the republics and the center for the
effective use or repayment of any new
U.S. loan guarantees.

Conclusion and
Recommendations

The Center for Security Policy
strongly believes that — if a
case can be made for supplying U.S.
agricultural exports to the former Soviet
Union on humanitarian grounds — then
such aid should be submitted to the
Congress in the form of grants
and defended accordingly. Where that is
the case, the United States must insist
on a high degree of transparency,
discipline, accountability and
monitorability sufficient to ensure, to
the maximum extent possible, that the
foodstuffs in question are properly
distributed to truly needy individuals
and communities, not diverted for less
pressing or legitimate purposes. In any
event, in making such assistance
available due consideration should be
given to the impact that exports of free
U.S. grain and other commodities will
have on food prices in the United
States and on the economies of
struggling democracies in Eastern and
Central Europe which rely on the revenues
associated with their grain exports to
the former USSR.

On the other hand, if humanitarian
considerations do not justify
making U.S. agricultural exports
available to the people of the former
USSR on a grant basis, it is
irresponsible — and probably
illegal — to offer this
assistance in the form of taxpayer credit
guarantees. It is, after all, palpably
obvious that the chances of full
repayment by the reconfigured Soviet
central authorities are virtually nil and
— in the absence of clear-cut and
reliable undertakings on the part of
alternative borrowers at the republic
level, ideally collateralized by gold,
diamonds or other commodities in U.S.
hands — any such assistance is simply
money taken from priority domestic
programs or other more deserving
recipients across the globe.

If the Bush Administration is in any
doubt on this score, it would do well to
draw the correct and larger lesson from
the evident unwillingness of Congress to
shift $1 billion from the U.S. defense
budget for such ill-defined purposes as
retraining Soviet military officers,
cleaning up Soviet environmental
disasters and retooling Soviet defense
plants. In short, the jig is up
on indiscriminate, multi-billion dollar
U.S. taxpayer-underwritten bail-outs for
Moscow center.