THE CUBAN DEBT PROPOSAL: THE SOVIET ANGLE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T01058R000608070002-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 13
• Document Creation Date: December 22, 2016
• Document Release Date: January 7, 2011
• Sequence Number: 2
• Publication Date: November 8, 1985
• Content Type: MEMO

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Central Intelligence Agency
DIRECTORATE OF INTELLIGENCE
8 November 1985
The Cuban Debt Proposal: The Soviet Angle
Summary
Over the last six months Cuban leader Fidel Castro has
intensified his longstanding campaign to encourage Third World
leaders to cancel their foreign debts to Western lenders.
Although the campaign has yet to catch fire and seems unlikely to
win over many LDCs, Castro almost certainly will continue to
pursue it to further his own and Soviet goals. Castro's effort
offers some opportunities to the USSR, and the Kremlin has
provided-modest rhetorical support. The Soviets almost certainly
welcome the building up of resentment in LDCs against Western
lenders. Such resentment might generally shore up Moscow's
position as a Third World benefactor and, in individual
countries, the USSR may be able to capitalize on the political
instability that may result. At the same time, we believe the
Cuban leader has been acting on his own initiative, despite some
allegations that the USSR has pushed Castro to trigger the
renewed rhetoric. While Havana and Moscow have mutual interests
and goals in the campaign, the Soviets probably do not want it to
actually succeed for fear that a massive debt cancellation
throughout Latin America could disrupt the global markets on
which they and their East European allies depend, provide an
This memorandum was prepared byl Ithe Third
World Activities Division, Office of Soviet Analysis.
Information available as of 22 October 1985 has been used in its
preparation. Questions and comments are welcome and may be
addressed to the Chief, Third World Activities
SOV M 85-10197X
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unwelcome example to the destitute Marxist clients that owe them
money, and affect their own profitable dealings with LDCs.
Tactically, the Soviets have been embarrassed by Castro's rivalry
over leadership on the debt issue with the new Peruvian
President, Alan Garcia, whom they have been courting. Over the
next few months, the USSR probably will continue to press for
global talks on the debt crisis so that it can push its own anti-
Western views, but will probably continue to avoid embracing
Castro's specific proposal.
The Castro Proposal
1. Over the last six months, Cuban leader Fidel Castro has
intensified his longstanding campaign to encourage Third World
leaders to repudiate the debts they owe to Western lenders. At
times he has called for a moratorium; more frequently he has
advocated permanent cancellation. He initially focused on the
debts owed by Latin American countries, but judging from his
recent speeches and Cuba's focus on the topic at the September
1985 Non-Aligned Movement (NAM) ministerial meeting he is seeking
to broaden the campaign to all less developed countries (LDCs).
Castro has lambasted the International Monetary Fund (describing
it as a "new form of economic colonialism"), US-based
multinational banks, and the US and other Western governments.
From 30 July to 4 August Castro presided over a "Latin American
and Caribbean Meeting on the Foreign Debt" in Havana, and he has
peddled his line to smaller Latin American conferences as well.
By involving various groups--including the media, labor and
political leaders, and students--Castro hopes to create a series
of broadly-based fronts that will persuade each Latin American
government to re udiate its debt
Moscow and Havana's Parallel Interests
2. Several factors suggest that the Cubans and Soviets are
working together to exploit the debt question. The USSR
generally tries to gain maximum payoff from its support for Third
World economic grievances, usually by contrasting the
"pernicious" behavior of Western-based multinational corporations
with the Soviet Bloc's "disinterested" support for LDC demands
such as those for a "New International Economic Order" (NIEO).
Articles by specialists and in the press show that the Soviets
recognize the large reservoir of Latin American resentment
against US banks, the IMF, and other Western creditors that
existed well before Castro embarked on his campaign; Moscow
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undoubtedly sees the LDC debt issue as a lucrative area to
exploit. Both Moscow and Havana have portrayed the debt as a
political (not economic) issue requiring a political solution--
either outright cancellation or a debt moratorium.
3. The USSR has demonstrated its common interests with Cuba
on the debt issue in other ways:
-- Soviet academics seem to have stepped up their study of
the LDC debt issue, presumably at the leadershi 's
encouragement.
The head
of the USSR's Latin American Institute publicly claimed
in May that his organization's top research topic was
Latin American debt.
-- The Soviets have flourished before LDC debtors the
agreement allowing Peru to repay its debt to the USSR
with commodities, contrasting this with the "callousness"
of the IMF and Western governments.
by
allowing Peru to repay its debt with goods rather than
cash, the Soviets have gained a tremendous amount of good
will that they expect will spill over into political
relations. Moscow may consider similar arrangements with
other Latin American countries and expects this
flexibility to garner good will for the USSR in other
geographic regions.
4. The USSR arguably has a strong incentive to use Cuba as
a surrogate rather than directly attack Western banks and
governments. Moscow's longstanding support for the economic
demands of the more radical members of the Non-Aligned Movement
has not generated wide support in the Third World. Since the
1976 UN Conference on Trade and Development UNCTAD), LDCs
generally have become more aware of the Kremlin's paltry economic
aid and they have put the USSR in the same category as the West--
attacking both as part of the "industrialized North." Thus, the
Soviets probably believe that Castro has more credibility in the
Third World, particularly in Latin America, than they. The USSR
may have a special incentive to let Castro take the lead in the
period leading up to Gorbachev's meeting with President Reagan in
order to avoid offending the US. Moscow also would want to avoid
giving Western Europe the impression that it is a force for
economic chaos since that region is crucial to Soviet interests
for both commercial and political reasons.
5. Castro's speeches on the debt
proposal illustrate the degree to which Cuban and Soviet
interests dovetail. In speeches on Latin America's debt, he has
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been careful to protect his benefactor's interests. During the
Havana conference the Cuban leader differentiated the USSR from
Western creditors, making clear he regarded the latter as the
sole cause of the LDC crisis. Cuban officials at the conference
characterized the debt issue as a Third World problem and noted
that the USSR--a "Second World" power--bears no responsibility
for the crisis. Castro also has said that any agreement reached
by debtor nations in Latin America must have "the support of the
USSR and other socialist countries,"
Castro has challenged the US to pay off Latin
America's debt by reducing its military expenditures by 12
percent--not surprisingly, he does not mention Soviet military
spending--and his definition of certain debts as "illegal"
protects Soviet interests. In an interview with a Brazilian
newspaper last June, he declared:
"An illegal debt is made up of usurious interest rates,
which does not mean that we believe in the Moslem concept
that no interest should be charged. In our opinion,
interest rates higher than 8 percent a year (for)
contracts signed at the time when the market was
satisfied with just 6 percent constitute a . . . clearly
usurious rate, considering that the economies of the
creditors have to deal with inflation rates of less than
4 percent."
Since the USSR charges some interest for its loans--but well
below the rate charged by Western creditors and almost always
under 8 percent--Castro seems to absolve Moscow of responsibility
for the debt crisis.
Divergencies Between Moscow and Havana on the Debt Issue
7. Although Soviet and Cuban interests on LDC debt closely
coincide, several differences in approach and emphasis have
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emerged over the course of this past summer. These differences
probably reflect, in large part, Moscow's unease over the
consequences that a large-scale LDC debt annulment would have on
its own economic interests.
8. Soviet rhetorical support for the Cuban initiative has
been surprisingly lukewarm, as exemplified by an Izvestiya
article by Aleksandr Bovin, an authoritative commentator, in
early July. Beyond claiming that Castro has "elicited a great
response in Latin America," the closest Bovin comes to endorsing
the Cuban proposal is to say "it can be seen as the only
realistic one." Moreover, he concludes his commentary with a
call to "avert a catastrophe which could cause international
economic confusion" and with the pale observation that "the
crisis continues. Another TASS report on a meeting of
journalists in Havana merely quotes Castro about the need for a
debt moratorium and also fails to explicitly endorse it. In his
statement on 24 September to the UN General Assembly, Soviet
Foreign Minister Shevardnadze described the proposal blandly
without embracing it: "Cuba and some other member states of the
United Nations propose ways of solving the problem of financial
indebtedness."
9. Although the Soviets have not completely backed the
Cuban proposal, they have given full support to the Third World's
"struggle" against the "unjust" capitalistic economic system. In
late October, the Warsaw Pact states declared:
"There is an urgent need for the settlement of the
problem of the developing countries' external debt,
which is one of the burdensome consequences of
colonialism . . . The socialist states advocate . . .
the speediest start of specific businesslike negotiations
within the UN framework and with the participation of all
states with a view to the global and just settlement of
the most important international economic problems
including . . . external indebtedness."
Moscow's implicit message seems to be that it would like to
capitalize on any momentum the Cuban President may have created
on the debt-issue, but only through global talks that would
include the Soviet Bloc rather than through unilateral Third
World action--and not necessarily for the purpose of achieving
Castro's stated goal, large-scale debt repudiation.
10. The USSR's mildness on the issue--compared to Castro's
inflammatory rhetoric--may reflect not so much a lack of
enthusiasm as a desire to have Castro out on front on the issue
and to obscure its own connection with the campaign. Moreover,
the Soviets almost certainly recognize that their record on
economic development issues puts them in no position to take the
lead on Third World issues.' Moscow's pragmatism also is in line
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with its cautious overall approach to the Third World's other
economic demands (see Appendix). 25X1
11. In contrast to Moscow's reserved and belated reaction
to the possibility of LDC debt repudiation, Castro's campaign has
much deeper roots. The Cuban leader has a long history as a
vocal supporter for Third World causes, particularly LDC demands
that the "North" redistribute massive economic resources to the
"South." His rhetoric on the debt issue goes back at least to a
1979 speech at the UN General Assembly. The present debt
campaign is an expression of his self-portrayal as the Third
World's most important spokesman against Western economic
"imperialism"--as exemplified during his chairmanship of the NAM
from 1979-82. It is also a natural continuation of his decades-
old vendetta against the United States. Castro's outspokenness 25X1
on the debt issue may even increase if he decides, as rumored, to
cede some of his day-to-da overnmental responsibilities to his
brother Raul.
12. The tarnishing of Castro's image in recent years as the
"natural leader" of all LDCs probably has prompted the Cuban
President to try to regain the initiative. He almost certainly
is eager to demonstrate that he can still exert considerable
influence on the international stage despite the overthrow of the
pro-Cuban regime in Grenada and the setbacks of the Central
American insurgents. He probably is also trying to erase his
image as a slavish Soviet mouthpiece. Thus, Castro probably sees
the debt issue as a key to winning renewed recognition and
acceptability in the Third World and ending his diplomatic
isolation in the hemisphere.
13. Castro also may be'trying to use the debt campaign to
distract the Cuban population's attention from economic problems
at home and its resentment of the costs of Third World
involvement. Focusing on Latin America's financial bind allows
Castro to deflect some domestic criticism of Cuba's own economic
ills. (At the same time, however, Castro also risks raising in
people's minds the issue of Cuba's own debt to the USSR.)
14. A third, probably more important, audience to whom
Castro may be playing is the USSR. He may be using the debt
campaign as one among several means of encouraging Moscow to
maintain a high level of political and financial support. Castro
probably is making the claim to his Soviet patrons that the
campaign helps them because it puts the US more on the defensive
in the Western Hemisphere and increases animosity between the US
and Latin America.
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15. Several pieces of evidence point to the contrast
between Castro's leading role on the debt campaign and Moscow's
relative passivity:
-- Castro's self-proclaimed leadership on the debt issue
provoked an angry exchange with Alan Garcia, Peru's
newly-elected President, in whom the Soviets have placed
great hopes because of his promise to be more "even-
handed" toward the two superpowers than his
predecessor. Garcia called Castro's proposal
inapplicable to any Latin country other than Cuba, and
Castro sent an insulting "congratulatory" message to
Garcia on his election, attacking Peru for its high rates
of illiteracy and infant mortality and its social
inequalities. This episode suggests that the Soviets
probably were taken by surprise and could not control the
tactical moves Castro chose to use for his campaign.
-- The contrast in tone between Castro's speeches and Soviet
writings suggests that the Cuban leader is much more
committed personally to debt repudiation than the
Soviets. This is, in fact, precisely the sort of
grandstand issue on which Castro seems to thrive. His
rhetoric on the need for debt repudiation has been
punctuated with bombast and hyperbole; in contrast to his
emotional appeals--replete with allusions to the world
being in the midst of World War III because of LDCs'
massive debts--Soviet writings seem coolly analytical,
almost cold-blooded.
Castro seems more willing than Moscow would be to take
radical action to support his roll osal.
/Castro's
willingness to work for the restructuring of regional
governments stands in contrast to the Soviets' more
cautious and long-term approach.
How Would LDC Debt Repudiation Affect the USSR?
16. Economic effects. A foreign debt cancellation by all
or most major L DC de btors--or even just Latin American debtors--
could very well lead to the collapse of the international
financial order, harming not only Western economic interests but
Soviet interests as well and short-circuiting Gorbachev's
ambitious plans to improve the domestic economy. Soviet economic
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planners depend on the smooth functioning of commercial and
financial markets because they import significant quantities of
Western technology and agricultural products and rely on overseas
export markets to earn hard currency. According to Soviet and
Western data, the USSR's hard currency trade turnover has
ballooned (in nominal dollars) from $2 billion in 1960 to an
estimated $59 billion in 1984, and its hard currency debt has
grown as well; from 1971 to 1984, Soviet commercial debt rose
from $0.4 billion to $11.3 billion and government-backed debt
rose from $1.4 billion to $8.9 billion.
17. Large-scale debt repudiation could also hurt Soviet
economic interests in other ways:
It could put pressure on Moscow to step in with
alternative financing for LDCs; although the Soviets
almost certainly would resist this pressure, this would
cost them some political good will in the Third World.
-- If LDCs repudiated their past obligations, they almost
certainly would find it next to impossible to borrow
additional amounts. This would probably cause them to
significantly scale back economic activity, including the
production of export goods. Moscow could then have
trouble persuading LDCs to sign commercial agreements in
which Moscow could receive payment in commodities useful
to its economy.
-- Reduced economic capabilities among the more affluent
LDCs also could hurt Soviet efforts to establish
lucrative joint venture projects there involving third-
country partners (either Western countries or other
developing countries.)
-- If the world's financial markets were plunged into chaos,
Eastern Europe would also face serious economic problems,
forcing an increase in the level of required Soviet
economic aid.
18. In addition, Moscow must calculate the effect of
Castro's campaign on Soviet Third World client states--that is,
whether debt cancellation by non-Communist LDCs would induce
countries like Cuba, Ethiopia, and Vietnam to argue for the
annulment of their own obligations. Although Castro has
targetted his rhetoric against Latin America's debts, Soviet
economic planners could fear that a decision by many LDCs to
repudiate debts could have an impact on Soviet political
influence. Moscow probably is realistic enough to realize that
this "demonstration effect"?is quite unlikely to actually hurt
its economic interests in the foreseeable future. Most of the
clients with large debts to the USSR have negligible financial
resources, and the Kremlin almost certainly doubts that these
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countries will. ever repay these debts in full. Even without
Castro's prodding, some of Moscow's very poor clients could, in
effect, default on their debts to the USSR. Neverthless, keeping
these debts on the books may enhance Soviet political leverage
over these clients and lets them know that Moscow expects at
least partial repayment some time in the future.
19. Practically speaking, however, the Kremlin probably is
not overly concerned about the possibility of economic fallout
from Castro's proposals because it almost certainly recognizes
that the Cuban President has virtually no chance of actually
convincing the vast majority of non-Communist LDCs to cancel
their debts. Soviet economic planners probably realize that none
of these countries can afford to alienate their creditors since
that would lock them out of additional credits or rescheduling
agreements. Thus, the Soviets probably believe that the economic
risks of encouraging the Cuban campaign are minimal.
20. Furthermore, the Cubans labor under a considerable
handicap that increases Moscow's confidence that their debt
proposal probably will never succeed--namely, the widespread and
correct impression in Latin America that Castro is in no position
to give lectures-about other countries' debts. During July and
August, at the height of Castro's campaign, several Latin leaders
spoke out against the hypocrisy of Cuba advocating debt
repudiation when it receives over $4 billion annually in Soviet
economic assistance. Even though this aid permits Cuba to accrue
only modest debts to Western governments and banks, Castro has
rescheduled his Western official and commercial debts (in fact,
once again last July). And Cuba has asked for terms at least as
favorable as those the IMF grants to other Latin American
countries. Regional leaders consequently have voiced their
opposition to Castro's initiatives on these grounds. On 10
August, Venezuelan President Lusinchi said:
"I am not in agreement with [the Cuban initiative]. I
don't wish to enter into a public debate with a head of
state such as Dr. Castro, who holds to an interpretation
of this issue that I do not share . It occurs to me
to ask . . . what were the refinancing terms for Cuba's
debt with the so-called Paris Club and with the'USSR and
other socialist countries? I have my approaches to the
debt, which were expressed in [several other] Latin
American declarations. . ."
Mexico, the Third World's second
largest debtor, refused to send any delegates to Castro's 30 July
debt conference. Peru's President Garcia has opposed Castro's
proposals for the same reasons as Mexico. In late September,
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Castro tried to evade questions posed at a Havana youth meeting
and press conference about the refinancing of Cuba's own debt and
Moscow's preferential treatment of Havana.
21. Political effects. In contrast to the negative
potential economic effects of a large-scale LDC debt cancellation
on Soviet interests, the USSR probably anticipates mostly
political advantages in having Castro spout support for--but not
achieve--his plan. By agitating on the issue, Moscow and Havana
probably believe they can increase pressure on the Third World to
"stand up to" the IMF, Western banks, and Western governments.
Inflicting financial strain on the IMF and Western banks (up to a
point)--and increasing Western diplomatic defensiveness on the
LDC debt issue--are probably in Moscow's interest. Because even
moderate Latin American leaders believe the region's $360-billion
debt is unbearable, the Soviets and Cubans almost certainly see
this issue as a key to exacerbating problems between the US and
the Latin Americans and insinuating themselves with a broader
spectrum of political opinion than the radical parties that
Moscow ordinarily courts. The Kremlin probably also sees the
debt problem as a ready-made issue particularly useful to radical
parties in Latin America, including the Communists.
22. The Kremlin would welcome a movement by LDCs toward
more economic cooperation with socialist states. Financially
strapped LDCs probably would be tempted to increase their barter
trade with the socialist bloc in order to conserve scarce hard
currency reserves, even if they do not formally break with the
IMF or Western banks. Moscow probably hopes that Castro's
campaign will encourage LDCs to feel more aggrieved with the West
and to turn increasingly to them for barter and other state-to-
sta?te economic accords. In the case of Peru, for example, Moscow
has capitalized on the debt crisis by negotiating agreements for
repayment in commodities rather than cash. The USSR probably
hopes it can strengthen state sector enterprises and weaken
private concerns in economically distressed LDCs that turn to
Moscow for such help. More generally, to the extent the Soviets
can raise political sensitivities throughout Latin America about
debt and increase resentment against the 1MF, they stand to
benefit from any increased political instability that may
result.
23. At the same time, the impact so far of the Cuban
campaign has created an indirect political problem for the
Soviets--namely, the continuing isolation of Cuba, probably
Moscow's most important client in the Third World, from other
Latin American countries. Castro's rhetoric has alienated not
only Peru's new president but also the leaders of Venezuela,
Mexico, Argentina, and Brazil. Because Castro has set back his
own previous efforts to regain respectability for Cuba among its
neighbors and reintegrate the country into the Latin American
fold by expanding its diplomatic and commercial relations, the
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Soviets probably view the debt campaign in this respect as a
marginal political setback.
Conclusion and Outlook
24. Although Castro needed no convincing to begin his debt
campaign, Soviet leaders probably let the Cuban leader know he
could count on their low-key support since they recognized that
he probably would not actually succeed. They probably believed
that, on balance, the net political gains of Castro's rhetoric
far outweighed the economic risks. In late summer, however, the
Soviets undoubtedly recognized the growing rivalry between Castro
and Garcia over leadership on the debt question and realized that
Castro's posturing could only hurt their efforts to court Peru,
their largest arms customer in South America. Viewing this
prospect with concern, they probably will try to get Castro to
smooth his relations with Garcia. If so, their influence will be
severely limited by the Cuban President's egotism and his intense
personal interest in the subject.
25. In the next few months, the Soviets probably will
continue to keep a low profile, hoping to maximize the political
benefits of the campaign and make sure that the prospects for
economic fallout from Castro's propaganda blasts remain
negligible. While they may very well push for global talks on
the debt crisis in order to assert their own views, they will
almost certainly avoid embracing Castro's specific proposal.
They undoubtedly hope that Castro will realize that outbursts
such as those against Garcia hurt not only Moscow's interests in
Latin America but Havana's as well. At the same time, the
Soviets could step up their modest, behind-the-scenes support,
and aid Castro more actively if they feel that anti-debt
agitation could help spark political gains in particular Third
World countries.
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APPENDIX
Past Soviet Assessments of LDC Economic Demands
In the 1970s several Third World countries began to make
radical demands for a redistribution of global resources from the
industrialized "North" to the less developed "South"--a series of
proposals collectively known as the New International Economic
Order (NIEO). As differences between Soviet and LDC interests
began to surface, Moscow's attitudes toward NIEO have gradually
shifted away from unqualified support. Moscow has continuously
embraced the "anti-imperialist" assertions of NIEO, but has found
it harder to swallow some of the Third World's specific demands.
Although they have tried to preserve a semblance of anti-Western
unity with the Third World (by attacking multi-national
corporations and other forms of Western "imperialism"), the
Soviets have become more equivocal about NIEO because they no
longer believe that a restructuring of the global economy will
necessarily redound to their advantage.
Between 1974 and 1976 the USSR unreservedly endorsed LDC
demands for NIEO, seeing them as a way to exacerbate tensions
between the industrialized North and the industrializing South.
This was reflected in official speeches, May Day and October
Revolution slogans, and specialized articles. Soviet optimism
over channeling Third World anti-colonialism to its own purposes
faded in 1976 when the LDCs passed a UN General Assembly
resolution that held socialist and capitalist countries equally
responsible for the Third World's plight and did not address
trade discrimination in a way that could help the Soviets. The
USSR subsequently voiced official reservations about NIEO
proposals. For example, Moscow qualified its support for the
creation of a "Global Fund" to aid Third World development
because of LDC demands for contributions from all "Northern"
countries, regardless of social system. Soviet academic
specialists also began to criticize Third World demands for a
massive redistribution of global resources on the grounds that,
in the absence of substantial domestic reforms, such payments
would simply benefit corrupt elites in developing countries.
Some Soviet experts even objected to plans to raise raw material
prices or create commodity cartels similar to OPEC because of the
likelihood of economic injury to the USSR or Eastern Europe
The USSR tried to persuade LDC proponents of NIEO to start
emphasizing the evils of trade discrimination generally rather
than focus solely on North-South exploitation. To the extent
Moscow envisages radical changes in the world economy, it has
been careful to stress changes beneficial to its own economy.
Thus, the USSR and its East European allies have tried to ensure
that any restructuring of the world economy address such problems
as Western discrimination against their exports (both
discriminatory tariff structures and politically-inspired
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embargoes); unfavorable terms of trade for the East vis-a-vis the
West; the effects of Western currency devaluations; and
prohibitions against transfers of high-technology Western
goods.
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