Soviets Mustn’t Get Better Loan Terms Than Americans

Soviet doktora vercheniya (spin doctors), trying to woo decadent celebrity-crazed capitalists, posed Mikhail Gorbachev on Wall Street during his visit to New York last month. The photo opportunity was part of Gorbachev’s campaign to increase the flow of hard currency to the Soviet Union, largely in the form of untied, low-interest loans to the Kremlin by private U.S. banks. Such loans would have dangerous consequences, not only for our national security, but also for our financial security.

If the Soviets are given loans untied to any specific purpose--buying American grain, for example--they can use the money for supporting terrorist client states like Libya, purchasing arms for their Cuban surrogate army, illegally buying Western technology and funding KGB espionage around the world.

But even when loans are tied to explicit purposes, there are no guarantees. One of the best examples is the Kama River truck project. American banks helped finance its construction. The factory was supposed to produce light trucks and passenger vehicles for civilian use. But a large number of the trucks were used to transport troops and materiel in the Red Army’s brutal invasion of Afghanistan. The plant also built armored vehicles used there.

Even if we could count on the Kremlin to put American depositors’ money to legitimate purposes, can we afford the chance that the Soviet Union will default, becoming the Third World debt crisis of the 1990s?

While the Soviet Union’s past record of repayment is excellent, its collapsing socialist economy worsens daily and the economic engine of perestroika has yet to engage. Indeed, it may never. The Soviet Union could one day join the ranks of its notoriously uncreditworthy East Bloc puppets--Poland, Czechoslovakia and Hungary--which have defaulted on loans totaling about $50 billion. What’s worse is that in those cases there was no collateral security to offset the losses.

American taxpayers would be forced to subsidize these bad loans. The reserves of the Federal Deposit Insurance Corp. and Securities Investor Protection Corp. couldn’t cover a major default by the Soviets. If Soviet Bloc loans threatened the stability of the American banking system, the federal government would have no alternative but to step in and make good on the loans--this at a time when American banks are already threatened by the mountain of uncollectible Third World debts and hundreds of big thrifts are collapsing under the weight of bad loans made when oil prices were high.

What might be the most galling to American farmers who are going belly-up at high rate, or to small-business owners struggling to get by, is that U.S. banks offer our Soviet adversaries better rates.

How can we aid Soviet reforms and protect our security and financial interests, too? The American Foundation for Resistance International recently proposed “responsible lending standards” for Soviet Bloc countries: that U.S. taxpayer-guaranteed institutions shall not grant new funding, grants, loans or debt facilities, including syndicate participation, to the government of any nation or private institution in such nation that is a member of an adversary military alliance such as the Warsaw Pact:

-- at rates or terms that are more favorable than those generally available to U.S. taxpayers,

-- if there is a less repossessable or foreclosable security than is generally demanded of other international borrowers,

-- without fully and publicly disclosing the rates and terms and conditions of all such loans and exposures at the time of each funding,

-- which are not earmarked for specific import purposes and are not capable of being monitored to ensure against diversion to other non-approved purposes,

-- unless the borrower nation complies with the reporting standards set by the International Monetary Fund, World Bank and Bank for International Settlements, of internal financial and production statistics, and on all other financial arrangements with non-Soviet Bloc institutions, and agrees to submit to the jurisdiction of the courts in the lender’s country.

If we want Mr. Gorbachev to produce butter rather than guns, we must not give him the means to forestall that choice. Lending rules like these would help him while protecting American interests.