ANALYSIS OF SOVIET CASH FLOWS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88B00443R001904420058-2
• Release Decision: RIPPUB
• Original Classification: T
• Document Page Count: 21
• Document Creation Date: December 22, 2016
• Document Release Date: June 23, 2011
• Sequence Number: 58
• Publication Date: March 3, 1986
• Content Type: MEMO

25X1
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TO:
EXECUTIVE SEM' ,RIAT
ROUTING SLIP
ACTION
CI
INFO DATE INITIAL
X
2 DDCI
X
3 EXDW
4 D/ICS
5 DDI
6 DDA
7 DDO
8 DDS&T
9 Chm/NIC
10 GC
11 IG
12 Compt
13 D/OLL
14 D/PAO
15 D/PERS
16 VC/NIC
17 D/SOVA/DI
18
X
19
20
21
22
SUSPENSE
18 Mar 36
Dote
Remarks
To 5: Please provide DCI feedback of discussion
with Robinson.
E4cutive Secretary
3 Mar 86
Date
3637 ,,o.en
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DIRECTOR OF CENTRAL INTEILIGENCE
R r y
66-
3 March 1986
0879
MEMORANDUM FOR: D/SOVA/DI
FROM: DCI
SUBJECT: Analysis of Soviet Cash Flows
Doug ?
Give a call and discuss
this with him. Tell him you are calling
at my suggestion.
William J. Casey
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ROUTING AND RECORD SHEET ?
SUBJECT: (Optional)
Analysis of Soviet Cash Flows ._
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c.vtgtO INIS no Now York 'NW*
NEW YORK, SUNDAY, FEBRUARY 16, 1986
The Now York naws/Jko Wilson
ambit. Hooks, executive director, left,
amnia meeting of National Association
pie, laid. address on the state of the or-
eadersidp. Page H.
tggests Decision
-aft Was 'Flawed'
arookowil Prom
?,!!There are an awful lot of people in,
'ft Of Mimtdoeni:pitActes whet
I- ere Involved In the inmstigation into
? ikeP4aRengeF ,explosios0
? meths Map-mem-
Feb0 kasieed for a
witidn Lindaya.
s- I Comeeitstisil !fhb: Hemairs
le Hr. Webbgrii; the alflunission
Lo spokesman, said it had been Mr.
1. Rogers's decision, in consultation with
.3 other panel members, to request that
a NASA e...adde from investigative
teams those involved in the deci,sion to
launch the shuttle.
A knowledgeable source, speaking on
n corbditipri of anonymity, said that ban
3 would apply to various people who
1- were involved in the "checks along the
e road" that led to the final deciSion to go
d ahead with the launching from the Ken-
n
Continued on Page Xi, Column 4
I.
RUSSIANS SOUGHT
U.S. BANKS TO GAIN
HIGH-TECH SECRETS
Plan to Buy Institutions in 70's
Was Foiled ? Gaps Seen
in Investment Statutes .
By MARTIN TOLCHIN
kedal to The New York Timms
WASHINGTON, Feb. 15 ? The
Soviet Union secretly tried to acquire
three banks in northern California and
an interest in a fourth to gain access to
advanced American technology,
United States intelligence and military
officials say.
The attempt, which was foiled by
United States intelligence agents in the
mid-1970's, was part of what American
officials have described as a broad
Soviet effort to acquire Western tech-
nology for military and commercial
purposes.
United States officials and private
lawyers familiar with the case said
Soviet agents wove a pattern of inter-
national intrigue using disguised prin-
cipals and large sums of money that
traveled a circuitous route.
C.I.A. Agent Saw Pattern
The scheme failed when an agent of
the Central Intelligence Agency no-
ticed a peculiar lending pattern by the
Singapore branch of a Soviet bank. The
case attracted little attention in the
United States, and officials and law-
yers familiar with it provided details
that have not been previously dis-
closed.
American intelligence, military and
banking officials, along with , some
members of Congress, said the scheme
raised questions about whether bank-
ing Statutes, even those that have been
i
ttt)=11
with a threat to national aecuri-
since then,' ire adequate
'
It, the Soviet Union had 'managed, to
take over a bank, the officials said, it
could have learned about the confiden-
tial finances of American high-tech-
nology compan i -s, perhaps enabling it.
to put pressure or, executives and own-
panles or even take one over.
' Takeover Plan Was Legal
The plan, which did not violate any
laws, was aborted after a $1.8 million
down payment was made on the banks:
the Peninsula National Bank in Burlin-
game, the First National Bank of
Fresno, and the Tahoe National Bank
Continyed on Page 36, Column I
MAR COS IS DEM
AQUINO SAYS 'I
REAGAN CALLS
STATEMENTOF filE VOTES CAST
AND VICE-"RESIDENT IN THE
REGION
National Assembly members examining pima president!:
President,. in Shift, ,Ficpilts 1
For Election Fraud in\Phi
By LESLIE H. GELB
Special to The New York Muss
WASHINGTON, Feb. 15? President
Reagan, in a shift of emphasis, today
directly blamed President Ferdinand
E. Marcos's party for widespread
fraud and violence in the recent Phi-
lippine presidential election.
In a statement Issued by the White
House in California, Mr. Reagan said
that while American observers' final
reports on the Philippine election are
that "evidence ket
fraud by Marcos bac'
reports, the ' OPPe?
church." r
High-ranking Adel
cials in Washington pi
statement inflected It
sion by the Reagan'i
look beyond the elect.
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mt
Soviet Mem.
Continued From Page 1
In South Lake Tahoe: In addition, the
Soviet Union:sought partial interest in
the Camino California bank in San
Francisco. Peninsula National had
made numerous loans to high-tech-
nology companies, and, alOng with the
other banks, counted employees and
executives of high-technology compa-
nies among its clients.
"I always 'viewed If as a deliberate
penetration by the K.G.B. of the Amer-
ican banking system," said Bartholo-
mew Lee, a San Francisco lawyer in-
volved in a civil case resulting the ef-
fort.
Senator Daniel Patrick Moynihan,
Democrat of New York, an intelligence
specialist, was one of the few on Capitol
Hill in the late 1970's aware of the'
Soviet effort. "It's a new form of indus-
trial espionage," he said. "It doesn't
involve people stealing blueprints;
they own the blueprints."
M. Melnikuv, deputy tea-de repre-
sentative at the Soviet Embassy here,
said he was not familiar with the take-
over attempt. "I never heard?this
story, and I don't know anyone who
has," he said. "Our relations in the
financial field in the United States are
practically nonexistent."
Similarly, officials of the Moscow
Norodny Bank, which financed the at-
tempt to buy interests in the banks,
have insisted that its loans were
strictly business transactiOns.
Foreign Investment Problems
To intelligence, military and banking
officials, and some members of Con-
gress, the Soviet scheme underscor
one of the problems in a society tha
welcomes foreign investment, in which
the highest bidder can acquire institu-
tions that have access to sensitive in-
formation. They said the incident also
highlighted the difficulty of learning
the true principals in sbme financial
transactions and of tracking money
whose source has been under layers of
transacebns.
"Them is sometimes a real conflict
betweentree trade and national securi-
ty," said Richard N. Perle, Assistant
Secretagy of Defense for international
?securitypolicy. "It seems to me in our
liational security interests not to give
the Soviets any leverage."
Mr Pecte_al so_ nut ed_t he.n.rnblemsA
sed ownership and said the laws
I be strengthened to provide in-
lion on the true nature of these
tctions. "It seems to me that at
Ty least we ought to have a con-
audit of what Is being acquired
I whom," he said. "We ought to
ehInd the immediate purchaser,
tisfy ourselves that we know who
really dealing with."
'Not a Private Affair'
itor Moynihan said: "The owner-
f banks is not a private affair. If
lye to go two or three layers into
stem to find out what's happen-
two or three layers into the sys-
_
ks can be a important source of
-)le intelligence, said Representa-
'iarles E. Schumer, a New York
:rat who is. a member of the
lg Committee. "If you wanted to
it about any aspect of American
ry, one of the most effective and
'ely cheap ways to do it is to get
a bank,' he said. "They give tin-
:), foreign powers a window into
they ought not to see."
lerick R. Dahl, associate direc-
the Federal Reserve Board's
,n of Biking Supervision and
e
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uy U.S. .Bans Seen .as Effort- o Gain Wester', secrets.
The New York Times
Representative Charles Schumer
said he believes banks offer intelli-
gence-gathering potential to "un-
friendly foreign powers."
Regulation, said: "We're really In a
public dilemma. We've always had a
tradition in this country that anyone.
could- start a bank, with the proviso
that he had some money and was repu-
table. Then you come to the question of
undesirables getting in. You try to keep
them out, but it's easier said than
done."
The Soviet attempt may not be an
Isolated one. Amos Dawe, a Singapore
businessman who served as the Rus-
sians' major intermediary in the bank
scheme, told Federal officials that the
Soviet Union had succeeded in carrying
out similar acquisitions in other parts
of the country, but he declined to
specify where or when, his lawyers
said.
Mr. Perle agreed. "If the Moscow
Norodny bank attempted to acquire
banks in Silicon Valley, you can be sure
that they made other efforts else-
where," he said.
Plan to Buy Banks:
Hiding Money's Source
A._ detailed account of the Soviet
scheme was pieced together from in-
terviews with intelligence and military
officials, private lawyers familiar with
the_ease_rova recores.earea_qtatereent _
by Mr. Dawe.
? According to court records, the Mos-
cow Norodny bank's Singapore branch
used Mr. Dawe to acquire the three',
California banks and used another in-
termediary, Y. T. Chou, a business as-I
sociate of Mr. Dawe's, to acquire a half
interest in the Camino California banll
in San Francisco.
The sbieme was aborted by United
; States intelligence officials, Who re=
leased the story to an Asian financial
newsletter. Mr. Dawe has acknowhi
, edged through his lawyers his role aS
; an intermediary. Efforts to reach Mr.
Chou, who is believed to be living in
, southeast Asia were unavailing. '
Moscow Norodny selected the bank
to be acquired, and supervised their aci
quisition, according to Mr. Dawe'S
statements.
Ephraim. Margolin, one of Mn
Dawe's attorneys in San Francisco;
said of his client, ''There is no doubt in
I my mind that he was working for the
? Russians."
Cliff Palefsky, another of Mn
Dawe's San Francisco attorneys, said
his client hoped to make money on the
deal. But he added: "There's no ques
.tion that he was reporting to the Rus;
TI
I I
shins. It w.is Mr. Dawes belief that the
Soviets were interested In gaining
some access to computer technology."
Mr. Dawe, now 51 years old, rose
from postal clerk to become one of the
richest men in Southeast Asia, He was
the principal owner of the Mosbert
Group, a holding company with inter-
ests in hotels, real estate, plantations,
finance companies, and othetproper-
ties. The Mosbert Group controlled
some 200 companies with $160; million
in assets in southeast Asia.' I
Singapore to San Francisco
According to papers filed in Federal
District Court in San Francisco, Mr.
bawe obtained a $50 million line of
credit in late 1974 from the Moscow
Norodny bank's Singapore branch for
the purpose of purchasing several
banks in northern California.
The first installment of funds to Mr.
Dawe, $3 million, traveled a circuitous
route from Moscow Norodny in Singa-
pore to the pacific Atlantic Bank in
Panama, to the Commerce Union Bank
In Nashville, Tenn., and, finally, by let-
ters of credit, to Mr. Dawe in San
Fran-
cisco.
In a brief interview with the British
Broadcasting Corporation in 1983, Mr.
Dawe recalled that Moscow Norodny
had sent him to San Francisco to study
various banks.
Upon his return to Singapore, Mr.
Dawe said in the interview, he was sur-
prised by how much Moscow Norodny
already knew about the American
banks. "I have details, they have al-
ready more details," Mr. Dawe said.
"They have more details than I could
imagine. They have done their home-
work. They have all the details of all
the banks in the big area."
Mr. Dawe negotiated the sale of the
Fresno, Tahoe and Burlingame banks,
which were owned by the Central Bank
of California.
"We had no reason to suspect that he
was not the principal," Robert L. Hag-
gen, the bank's vice president and
counsel, said in an interview. "He was
a very wealthy man with operations all
over the world."
Court records reveal that Mr. Dawe
purchased the Burlingame bank in
December 1974, for $3.05 million,
placed $300,050 in an escrow account
and financed the remainder through a
letter of credit issued by the Commerce
Union Bank of Nashville.
Mr. Dawe purchased the Fresno and
Tahoe banks in June 1975, for $7.9 mil-
lion. He placed $808,300 In escrow and
paid an installment of $685,266 in Octo-
ber 1975. lie also put the stock in the
Fresno and Tahoe banks up as collat-
eral for the sale.
It is not elear how much Mr. Chou,
who was also backed by Moscow
Norodny, paid for the half interest in
Camino California in October 1975.
'One Smart C.I A Guy:'
The Plan Falls Apart
United States officials said that an
American intelligence officer with a
banking background based. in Singa-
pore learned of the transactions. "It
was one smart C.I.A. guy who noticed a
peculiar lending pattern," Mr. Perle
said. "It didn't smell right."
American intelligence officers then
disclosed the purchases to Raymond
Sacklyn, publisher of a Hong Kong
financial newsletter, Target, according
to United States officials. Mr. Sacklyn
refused to identify the source of the ar-
ticle.
The bank deal colrapsed upon publi-
cation of the article. Moscow Norodny
withdrew its funds, leaving Mr. Dawe
financially vulnerable.
, , 1.ikitmrt
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Mr. Hag.gen said Central bank fort-
closed on its collateral and acqUirel
the stock to the three banks.
In .tuly 1977, Mr. Dawe was indicted
by a Federal grand jury in San Fran.
cisco On charges of Improper transfer
of funds IrtcOnnectien with his, pur.
chase of the three banks as well as Vv.::
use of collateral; that :was previonsl,
pledged ta other 'creditors.
In addition, a tangle! of laWsuits
ensued ai the Soviet bank tried to get,
back its money from Mr. Dawe after
the bank purchases were scuttled. :.
"The Russians wanted him," Ivir:t
Palefsky said. "Through the MoscM?e-
Norodny bank, they were able to g4'
him indicted in Hong Kong."
Hong Kong Extradition ,
Mr. Dawe, who was fighting extratt,4
tion to Hong Kong on the fraud chargril'
returned to San Francisco from Ttii:-?
!1
ca
wan to face the United States charg '?
el
"Amos me to the United State
voluntarily, with certain promises b,
the Government," Mr. Margolin, a4.
other of his attorneys. said. "Thet,
promise& that if he stood _trial, Le
would be protected and not extradit4
The promises were not kept." ?.
:.
_
Federal prosecutors denied that an
such deal had been made, although MI,
Dawe had cooperated with the C.I.0
The United States charges were de..:-
missed in February 1979, at the reque t
of the Justice Department, and he vbeS
subsequently extradited to Hong Kon32.
Robert Mueller, an assistant United
States attorney who prosecuted die
case, would not comment on whetter
charges had been dismissed at the me-
quest of the C.I.A.
In Hong Kong, Mr. Dawe was ulti-
mately convicted of fraud in connection
with the bank scheme. He began serv-
ing a five-year prison sentence in 1984.
"A number of different people have
told us that there is a basis for suspi-
cion that Hong Kong is really doing the
bidding of somebody else, perhaps
knowingly, perhaps not, the bidding of
the Soviet Union," Mr. Margolin told a
Federal judge at Mr. Dawe's extratti-
don hearing in 1979. ? . .
William Don-ward, Commissioner fur
Hong Kong and its senior representa-
tive in the United States, responded
through a spokesman, "It is so bizaue
that 1 could not even begin to coin-
ment."
Mr. Chou sold his interest in the
Camino California bank to Jack Johan-
sea ?t he..nresideut....Mr. _Chcatis_nove tile
ing in southeast Asia, Mr. Johansen
said.
The New York Times
Amos Dawe, a Singapore business-
man, negotiated the purchase of
three California banks for a
branch of Moscow Norodny Bank.
Federal Banking Laws:
New Measures Proposed
Intelligence and military officials
say the Soviet effort fit into a broader
scheme referred to last September by
Defense Secretary Caspar W. Weinbr-
ger.
"By their own estimate," Mr. Wein-
berger said, "more than 5,000 Soviet
military research projects each year
are benefiting significantly from West-
ern-acquired technology."
Although the Federal banking laws
were toughened in 1978, as a result of
several cases of domestic fraud, intelli-
gence, military and banking officip Is
contend that they remain inadequat? to
block the kind of takeover attempted
by Moscow Norodny bank.
There is no law, for example, prohib-
iting the Russians from acquiring
.United States banks, and. intelligence
officials believe that there are inade-
quate efforts to discover the true prin-
cipals of some bank transactions.
"As long as we have an Inadequate
statutory base, we're going to be vul-
nerable," Mr. Perle said.
Steven J. Weiss, Deputy Comptroller
of the Currency, said that under Fed-
eral laws, "it's tightened up a great
deal, but there are still some prob-
lems."
Mr. Weiss noted that his agency had
60 days to approve or reject a proposed
bank sale. Such sales can be rejected
on three grounds: if the purchaser fails
to provide the necessary information,
lacks financial capability or is judged
to lack integrity or competence.
"That's where we get a lot of murky
stuff," Mr. Weiss said. "We have a
standard procedure of checking with
the F.B.I. and Interpol. Those
ecks frequently produce nothing." At
?
best, he said, they produce gut reac-
iions or information that cannot pro-,
'vide the basis for rejecting a sale.
"There have been cases where the
proposal stinks, but we don't have the
statutory grounds to turn them down,"
Mr. Weiss said.
Banking Timidity Charged
But a 1984 report by the House Com-
mittee on Government Operations ac-
cused the banking agencies of timidity,
"Even when confronted with evidence
of prior misconduct or questionable in-
tegrity, the agencies rarely deny.
change of control applications," the re- ?
port said.
Representative Fernand J. St Ger-
main, the Rhode Island Democrat wild
Is chairman of the House Banking ?
Committee, noted the problems of as-
certaining the principals of some trans-
actions. 'There are many subterfuges
used to disguise ownership," he said.
But he said that many of these prob-
lems could be solved by strict enforcp-
ment of existing laws. "The control-
ler's office is wearing blinders," Mr. St
Germain said.
The problem of money laundering
has led the Reagan Administration and
members of Congress to introduce
legislation to make the process a
crime.
But some believe that there is no de-
fense against a determined, well-fi-
nanced effort. "If you're willing to
spend enough time, money and effort,
you can get away with anything," said
Quentin Breen, another of Mr. Dawe's
San Francisco lawyers.
"When you live in an open society,
you have to accept the consequences,"
Mr. Breen continued. "The question is,
can we afford to continue to be an open
society?"
DO NOT FORGET THE NEEDIEST!
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20 February 1986
MEMORANDUM FOR: Chairman, National Intelligence Council
FROM: Director of Central Intelligence
SUBJECT: Analysis of Soviet Cash Flow
1. The front page story in Sunday's Times on Soviet attempts to acquire
US banks for use in technology acquisition, together with the attached speech
by Roger Robinson suggesting that Soviet banks are managed to use their deposits
and interbank relationships in a manner which substantially enhances the currency
available to the Soviet Union, prompts me to ask for an analysis of this whole
25X1 question. The timeliness of such an analysis is further built up by
memorandum highlighting the currency difficulties the Soviets are now experiencing.
I attach a copy of that memorandum.
25X1 2. I understand that of OGI are working
problems in this area and I would like them or anyone who might be appropriate
25X1 to get together with get his further ideas, and see what information
needs to be pulled together to fully evaluate this phenomenon. It will almost
certainly become an issue when Senator Garn, as I understand he is contemplating,
pushes a somewhat revised form of his proposed legislation authorizing greater
Presidential control over international interactions with Soviet Bloc and
associated countries.
25X1
William J. Casey
RFT
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1
The Security Triad of East-West Economic Relations:
Technology Transfer, Energy Trade, and Financial Flows
Presented by
Roger W. Robinson, Jr., President of RWR, Inc.
and former Senior Director for International
Economic Affairs at the National Security
Council (1982-1985)
before the
Heritage Foundation
on February 11, 1986
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February 11, 1986
The Security Triad of East-West Economic Relations:
Technology Transfer, Energy Trade, and Financial Flows
Presented by
Roger W. Robinson, Jr.
I am delighted to have another opportunity to speak before
the Heritage Foundation on the subject of the security
dimensions of East-West economic and commercial relations in the
post-Geneva period. I would also like to convey special thanks
to those at Heritage who are dedicating their time and energy to
this crucial family of national security issues.
I think it would surprise most people were they to step back
and assess how many of the more publicized issues and challenges
which the United States faces in the world today are directly or
indirectly underpinned by the East-West economic and financial
equation. I make this assertion because, like most endeavors in
the human condition--whether it be at the individual, state, or
national level--the proverbial "bottom-line" of the ability to
get things done rests upon economics and particularly finance.
Having said that, I must confess that after a dozen years of
active involvement in this policy area, I continue to be
somewhat troubled by the lack of a more common understanding in
the Western Alliance concerning the key elements of the
strategic or security side of East-West economic and commercial
relations. I have long referred to what I believe to be the
three most important components of strategic trade with the East
as the "Triad." They are: 1) the illegal acquisition by the
Soviet Bloc of militarily-relevant Western technology;
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2
2) Western energy security--specifically, the ongoing Soviet
strategy ,to dominate Western Europe's natural gas markets; and
3) untied and non-transparent Western financial flows to the
Warsaw Pact countries. These components of the Triad are, in my
view, the principal avenues of the West's windfall contributions
to Soviet military-related innovation, the USSR's hard currency
earnings structure, and the Soviet Union's ability to maintain
and expand its costly global commitments.
For example, hasn't it struck most Western policy-makers as
odd that the Soviet Union, which has a total annual hard
currency income of only about $35 billion from all sources
(including arms sales), can sustain a global empire which can
directly rival the United States? More specifically, how does
the USSR support such a vast array of third country commitments
-- many of which must be hard currency financed -- with annual
earnings equivalent to only about 15% of total U.S. corporate
profits in 1984 or about one third of Exxon's annual revenues
for that same year? These are central questions which I believe
call for more thorough examination. Although the brevity of my
remarks today will not permit a detailed attempt to answer these
questions, I might at least offer a framework to advance the
search.
In the area of finance, I have often been curious why I've
never come across a security-oriented cash flow analysis of the
USSR -- a page divided down the middle with "sources" of hard
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? 3 ?
currency on the left side -- for example, oil and gas exports
and the sales of arms, gold, diamonds etc.--and "uses" of hard
currency on the right side--such as imports from the West,
technology theft, underwriting Cuba and other client states,
KGB/GRU operations etc. My own guess is that a detailed
security cash flow analysis of this kind would show a formidable
annual hard currency short-fall that presumably has to be
financed through Western borrowings. Declining Soviet oil
production and plummeting prices for both oil and gas --
composing approximately two-thirds of the USSR's total annual
hard currency earnings structure -- should result in an even
more active Soviet presence on the world credit markets than the
roughly $3 billion in new credits attracted in 1985. The fact
is that the level of Soviet indebtedness remained largely
unchanged during the period 1979-1984 despite the fact that the
USSR's hard currency needs apparently grew significantly. I
believe this discrepency can be, at least in part, explained by
substantial Soviet reliance on a rather hidden borrowing source
in the Eurocurrency market.
This less visible borrowing activity takes place in the vast
and amorphous interbank market where the Soviet Union has been a
major player for many years. The interbank market is formed by
the established practice among the world's banks of depositing
cash with one another to facilitate the efficient flow of funds
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Er
and to earn extra income on excess cash. The London Interbank
Offering Rate (LIBOR) serves as the benchmark rate at which
these deposits are offered to prime potential borrowers and
usually floats at roughly 1% below the U.S. prime rate.
The six Soviet-owned banks located in the West, along with
their branches, have been major beneficiaries of this global
flow of interbank funds. The largest Soviet-owned banks in the
West include Banque Commerciale pour l'Europe du Nord or
Eurobank in Paris, Moscow Narodney Bank, London (which often
serves as the coordinating point for other Soviet banking
institutions in the West), and Ost-West Handlesbank in
Frankfurt. Other 100% Soviet-owned banking institutions are
located in Luxembourg, Zurich, Vienna, Singapore and Beirut.
The Soviets go to some lengths to obscure their complete
ownership of these institutions. For example, these banks are
incorporated under the laws of the countries in which they are
domiciled, have foreign nationals in management positions, have
what appear to be a diverse group of shareholders, and even
maintain representative offices in Moscow similar to Western
banks.
These Soviet banks engage in other banking activities
outside the interbank market and even place some of their own
deposits with major western banks. This does not, however,
offset the enormous advantage to the Soviets of having access to
a large amount of hard currency at an interest rate which is
below the U.S. prime rate and which can be used at their sole
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discretiop. Access to these western deposits also permits the
Soviets to avoid more expensive and visible forms of western
financing. Afterall, why should the USSR arrange letters of
credit, bankers acceptances, or go more often to the syndicated
loan market when they can tap a largely invisible pool of
western deposits for years at a time at interest rates below
U.S. prime?
It is very difficult to estimate the precise amount of such
western funds on deposit with the Soviet Bank for Foreign
Trade, the State Bank of the USSR, and Soviet-owned banks in the
West. Nevertheless, as the Soviets maintain correspondent
banking relations with virtually every sizeable banking
institution in the world, a ballpark estimate of the aggregate
amount of western deposits with Soviet-owned banks in West would
be roughly $5 billion. I would estimate that several billion
dollars more in western deposits have been attracted directly by
the Soviet Bank for Foreign Trade and the State Bank of the
USSR.
East European banks also enjoy the same favorable
to this untied, low-cost financing source.
deposits must eventually be
represent a major reservoir
repaid, similar
of cheap money.
access
Although these
to loans, they still
I think that it
would be very illuminating for the Administration and Congress
to get a better handle on the Soviet Union's use of this kind of
oversized, non-transparent reserve checking account for the
funding of its global activities.
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Returning for a moment to the first leg of the strategic
trade Triad -- the Soviet acquisition of militarily-sensitive
technology -- we can take satisfaction in knowing that this
problem is far better understood today than ever before. The
President instructed the bureaucracy early in his first term to
redouble its efforts to stem the flow of strategic technology to
the Warsaw Pact countries. This past fall the Department of
Defense, in coordination with the CIA, released an unclassified
White Paper which made a valiant effort to quantify, where
possible, the magnitude of our technology losses. The paper
sought to identify the estimated savings achieved by the Soviet
military research and development establishment as well the
direct costs incurred by U.S. taxpayers to defend against these
Western-sponsored advances in Soviet military strength. Whether
or not one accepts the estimates in the Department of Defense
White Paper, most informed observers would have to concede that
U.S. taxpayers are penalized to the tune of billions of dollars
annually.
Concerning the second leg of the Triad -- Western energy
security, and specifically the carefully crafted Soviet gameplan
to dominate the natural gas markets of Western Europe -- again,
the President demonstrated what will be judged by history to be
impressive vision and courage when he urged his allied
counterparts, at the Ottawa Summit in July, 1981, to limit their
level of dependency on Soviet gas supplies. Subsequent to the
Ottawa meetings, he dispatched two high level U.S. delegations
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If
to Europe (the first one in the fall of 1981 and the second in
early 198) to persuade the allies to identify and develop
secure, indigenous natural gas reserves (particularly the Troll
gas field in Norway) and to halt the extension of subsidized
credits to the Soviet Bloc for energy development and other
purposes. The declaration of Martial Law in Poland in December,
1981 added urgency to these undertakings, since the Alliance
needed to send a unified signal that continued repression in
Poland would not be cost-free.
The President immediately decided to implement economic
sanctions aginst the USSR by embargoing U.S. origin oil and gas
equipment destined for the Soviet energy industry. In June,
1982, with no movement toward reconciliation in Poland and
insufficient allied unity on a response to this situation, the
President extended these sanctions to include U.S. subsidiaries
and licensees located abroad. This decision temporarily
crippled progress in the construction of the USSR's major gas
export pipeline. Intensive allied consultations were then
undertaken at the Ministerial level with a view toward achieving
the President's goal of forging a durable allied consensus on
the security dimensions of East-West trade.
The positive outcome of these Ministrial deliberations led
the President to decide in November, 1982 to lift the oil and
gas equipment sanctions but only after the allies had agreed to
undertake urgent work programs in the key strategic trade areas,
including enhanced Western energy security, which were to be
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completed by the Williamsburg Summit in May, 1983. Progress was
swift in coming. The practice of offering subsidized credits
was eliminated by an understanding achieved within the OECD. An
agreement signed by some 25 nations in the International Energy
Agency in May, 1983 also represented a major accomplishment for
the Administration. The language of that agreement effectively
deprives the USSR of major European participation in
construction of the anticipated second strand of the Siberian
gas pipeline which is presently underway or will be imminently.
If abided by, this agreement will not only block Soviet
domination of Western Europe's gas markets but will also deny
the USSR between $5-$10 billion in annual projected hard curency
earnings from the second strand in the mid to late 1990's and
beyond.
I think it is important to emphasize that the mission of the
Poland-related sanctions was not, as was so often reported in
the world press, to block the first strand of the Siberian gas
pipeline project. The Administration was aware that the first
pipeline was a fait accompli. The Administration's extension of
the Poland-related sanctions represented a last-resort, tactical
decision by the President to penalize Soviet repression in
Poland and to forge a new consensus within the Alliance on the
security aspects of East-West economic relations. All of the
security-minded objectives which the President outlined to his
counterparts in Ottawa in 1981 were achieved.
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Policy Prescriptions
I would like to use the remainder of this talk to offer some
specific policy recommendations which address each of the three
legs of the strategic trade Triad.
First, on technology transfer, I recommend the continuation
of the effort to quantify the impact on the West of what these
losses mean to our long-term security, to our taxpayers, and our
intensive efforts to reduce the U.S. budget deficit. The
potential Gramm-Rudman trigger mandating reductions in our own
defense expenditures adds urgency to this task. The
infrastructure of Cocom must be substantially bolstered from its
woefully inadequate present status and an expanded array of
incentives and disincentives should be brought to the table by
the U.S. in negotiations with the allies and neutral countries
in an effort to finally subordinate commercial benefit to our
common security. The U.S. should also continuously develop new
methods designed to assist the tracking and identification of
stolen technology so that would-be diverters will operate in an
uncertain environment.
In the area of western energy security -- The Administration
should send an early signal to the allies that despite the fall
in demand for Soviet gas, we will insist that the May, 1983
International Energy Agency agreement be strictly observed,
particularly when the Soviets begin to contact Rhurgas, Gaz de
France and others for below-market second strand gas deliveries
during a future period of increased demand. In addition, the
positive direction of the current negotiations for the
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ef
accelerated development of the Norwegian Troll gas field, as a
substitute for Soviet gas, should be politically reinforced at
the highest levels. The Administration should also do whatever
it can to defuse the dangers inherent in West Berlin becoming
100% dependent on Soviet gas stemming from an agreement signed
in 1982 and the likelihood that Turkey will become approximately
95% dependent on Soviet gas if current negotiations with the
USSR come to fruition. Also, allied willingness to provide the
West's most sophisticated oil and gas equipment and technology
to the USSR and actively assist in the extraction, processing,
and transmission of Soviet energy resources should be, in some
way, factored into allied efforts to increase emigration from
the USSR and achieve equal and verifiable reductions in nuclear
weapons. The other elements of the Triad should likewise be
considered in this context.
Finally, the Congress, in close coordination with the
Administration, can play an important role by focusing on the
practice of untied or so-called balance of payments lending to
potential adversaries and reaching a clearer understanding of
the amounts and Soviet use of interbank deposits. Certain
principals or guidelines should also be considered for voluntary
adoption by the Western banking community. Specifically, each
loan to a potential adversary should have an identified and
verifiable purpose -- be it an equipment purchase, a specific
project (with loan drawdowns calibrated to project expenditures)
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or a short-term commodity transaction such as grain. Every loan
should have a maturity that is strictly matched against the
duration of the underlying transaction. For example, a grain
transaction should be financed with a maximum loan maturity of
180 days rather than 3 years which would otherwise de facto
provide the Soviets with 2 1/2 years of cash for their
discretionary use. Finally, U.S. banks should aggregate their
interbank deposit exposure to all Soviet-owned entites and
periodically report these aggregate exposures to U.S. bank
regulators, if they are not already doing so. The same
practices should be applied to East-European entities. In this
connection, I am not arguing for the discontinuation of
interbank activity with the USSR -- only that specific
information be developed on the amounts and the proper use and
maturity of such deposits.
As these proposed principals to govern financial flows to
potential adversaries are prudent from a commercial as well as
security perspective, they will hopefully not present major
problems for the Western banking community. The Administration
should, in turn, urge our allies to adopt a similar approach.
To take an extreme example, how would we feel about even $10
million in untied Western cash being made available to Colonel
Kaddafi for his sole discretionary use? This particular issue
brings to mind the sound advice offered by John Le Carre in his
novel "The Honorable Schoolboy" which is embodied in the three
simple words "follow the money."
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In conclusion, there don't have to be any "losers" in the
policy recommendations being proposed in this paper.
Legitimate, non-strategic trade can go forward and expand; the
U.S. can continue to streamline and expedite its export
licensing procedures and trim the Cocom list, where indicated,
to ensure enhanced U.S. export competitiveness; Western loans
can continue to support specific trade transactions and
projects; and hopefully incentives for greater Soviet
geopolitical cooperation can be created through expanded
East-West economic and commercial relations. Nevertheless, we
simply cannot avert our eyes from those economic and financial
practices which are deleterious to our long-term security
interests; nor can we side-step the need to develop a more
comprehensive picture of how the Soviet Union funds itself and
its global activities.
I would hope that the U.S. security community, the Heritage
Foundation, and other like-minded organizations will dedicate
more resources and talented people to undertake further analyses
of these issues. I would also recommend that consideration be
given to the establishment, through legislation, of an Assistant
Secretary of Defense for International Economic Security
specifically to deal with the critical security aspects of trade
and energy relations, and global finance. If properly
structured, such a new position need not interfere or overlap
with existing positions or functions which are, for example,
responsible for the complex issue of technology transfer.
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0
Finally, it is imperative that we successfully come to terms
with the enormous Western contribution to the economic and
financial vitality of the Soviet Union and its client states and
formulate sensible policies accordingly.
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