US Senators Cautious on Aid to Former Soviets

UNITED States senators are sharpening their focus on the ex-Soviet republics' debts as they examine President Bush's proposal to help fund the $24 billion international aid package for the beleaguered new states.

The lawmakers are concerned that the republics' heavy burden to repay foreign governments, suppliers, and especially commercial banks will absorb international funds intended to shore up economic reforms. They worry that the cash crisis will prolong the former republics' reliance on military exports for hard-currency earnings.

The $24 billion aid package "will be wasted unless there is a simultaneous resolution of the debt problem," says Karin Lissakers, director of international and banking studies at Columbia University's School of International and Public Affairs. She says that Russian representatives submitted documentation to commercial creditors in March that their debt burden is $2 billion a month. Other banking sources say the number is grossly inflated. Whatever the amount, Ms. Lissakers's concerns are shared by Demo crats and Republicans on Capitol Hill.

The "top economic priority" of the former republics "should be to ... modernize the economy and to halt the plunge in living standards that is stirring social unrest and undermining popular support for democratic reforms," says Lissakers. But the republics are "under heavy pressure from the West" to meet debt payments in order to keep credit lines open. "The desperate payment situation ... has had a chilling effect on foreign investment and on the new private sector," she says.

US Sen. Bill Bradley (D) of New Jersey, chairman of the Senate Finance Subcommittee on Deficits, Debt Management, and International Debt, supports the $24 billion package, but only after the former Soviets are substantially relieved of their debt obligations. "The infusion of fresh capital cannot be allowed to be recycled to international bankers," he says.

The breakdown of the $65.3 billion debt, a difficult task given poor Soviet records, has been laboriously documented by the Advisory Committee of Banks for the Management of Commercial Debt for the Former Soviet Union. Foreign governments hold $22 billion; commercial banks - led by Germany, then Italy, Japan, France, and Austria - hold $24 billion. US banks have minimal exposure. Foreign suppliers, such as trading houses, hold up to $4.5 billion; the rest is a mixture of bonds, letters of credit, and oth er short-term credits.

Roger Robinson, a former Chase Manhattan banker who is now a private consultant, contends that German sovereign and commercial lenders, by far the largest national group of creditors, should reschedule some debts over the long term and forgive others. German refusal to offer debt relief would turn the $24 billion aid package into a debt-service fund, he says.

"Contracts have to be honored," says Helmut Hartmann, spokesman for Germany's largest commercial concern, Deutsche Bank. The ex-Soviets "are earning foreign exchange, and they should use it to pay back foreign debts. In order to earn that money, they have to suffer through reforms, and that's where the $24 billion comes in." It would provide aid and balance-of-payments support for hard-currency imports.

An informed source puts Russia's current foreign debt payments at roughly $270 million a month, and disparages "grossly exaggerated estimates."

According to Russian and International Monetary Fund estimates, the republic's hard-currency earnings should total roughly $27 billion annually. With the current 40 percent government tax on hard-currency earnings (for a debt-service fund), even half the IMF/Russian estimates would provide ample financing for the debt, the source says.

A European banker says that because Russia no longer offers generous subsidies to other republics for raw materials and it commands world-market prices for commodities such as oil, gas, wood, and metals, "inter-republic trade is declining steeply. Russia will, instead, have $50 billion in raw materials for export to the West."

While 90 percent of the former Soviet empire's hard-currency earnings has come from oil, gas, gold, and arms sales, that scenario has changed says Robinson, who served as senior director for International Economic Affairs at the National Security Council during the Reagan administration.

"Let's be clear about their current sources of foreign exchange," he says. "Oil production is in decline, exports have fallen dramatically, gold reserves have evaporated, and arms exports are the only way to make up the hard-currency cash-flow slack. Debt relief for the former Soviets feeds directly into a safer world."

To US Sen. Richard Lugar (R) of Indiana the "proliferation problem is very, very substantial," with "a quarter of all the people in the former Soviet Union involved in the defense process."

He says Russia's conversion minister told him in March that without adequate resources to convert military plants into civil production lines, "they will continue to produce arms for the next four years at least and ship them all over the world."

The US share of the $24 billion package is $1 billion for the international financial institutions, $1.5 billion for the ruble stabilization fund, and up to $2.5 billion in bilateral assistance credits (including food credits and other forms of balance-of-payment support). The US already has supplied $3.75 billion in Commodity Credit Corporation credits.